The difference between bankruptcy and insolvency

Insolvency and bankruptcy in Shreveport, Louisiana, are financial terms often used to mean the same thing. While insolvency may lead to bankruptcy, they are two different legal concepts.

Insolvency overview

Insolvency is the condition of not being able to pay debts to vendors or creditors when they become due. Even if a person or company doesn’t file bankruptcy, the business can still remain in operation. Insolvency may occur for several reasons, which include increased vendor costs, incompetent accounting personnel, divorce, and improper credit use.

One type of insolvency is cash flow, which means the person or business lacks enough cash to pay their debts. A balance sheet insolvency means the person or business has more negative net assets than liabilities.

A solution to insolvency is asking the creditor for better interest rates, a payment plan, or partial debt forgiveness. However, if the consumer asks the creditor for partial debt forgiveness, it could have tax implications.

Bankruptcy overview

Bankruptcy is a legal procedure to help an insolvent consumer discharge certain unsecured debts, such as credit cards. There are several types of bankruptcy, but most consumers choose to file Chapter 7 or Chapter 13.

Chapter 7 discharges debts by selling nonexempt property, such as vacation homes, luxury items or valuable collections, to pay creditors. If the consumer meets all the bankruptcy requirements, their debts get discharged in four to six months. The consumer also must pass a means test, which calculates if they have enough income to pay creditors.

Chapter 13 bankruptcy is a repayment plan that gives consumers up to five years to pay debts. They aren’t required to sell assets as long as they make payments, but they need sufficient income to qualify.

Insolvency doesn’t always last, but if the consumer sees no way to pay the debt, bankruptcy may be a good option. However, they should get a legal case evaluation to determine whether they should file.