When a person experiences financial trouble, it’s common to hear the terms insolvency and bankruptcy used interchangeably. However, bankruptcy law defines them with two distinct meanings. In the event you’re struggling with debt and looking to regain control of your finances, it’s important to understand the difference so you can determine which one applies to your situation. Here’s an overview of both.

What Is Insolvency? 

Bankruptcy law describes insolvency as the financial state wherein an individual doesn’t have the means to pay their debts off on time. Thus, their cash flow isn’t sufficient to meet their financial obligations. Those facing insolvency generally look for ways to resolve their debts without filing for bankruptcy. Oftentimes, this is done by minimizing expenses, negotiating repayment terms with creditors, or generating more income. Being declared insolvent allows debtors to exclude reduced or canceled debts from the taxable income reported on their tax return. 

What Is Bankruptcy?

In contrast, bankruptcy is the actual process a person takes to declare themselves insolvent. This requires a legal proceeding and involves filing a petition with the court to seek government help in dealing with creditors. Bankruptcy law allows debtors to either discharge their debts completely or reorganize them into a more affordable repayment plan. As such, bankruptcy is technically one kind of solution an individual may use for insolvency.

If you’re considering filing for bankruptcy, turn to Donna C. Crooks Attorney At Law in Daleville, AL, for help deciding if it will provide the best solution for reaching your financial goals. Backed by more than 25 years of experience, she’s well versed in bankruptcy law and can offer sound advice and guidance on achieving debt relief. With her assistance, numerous residents throughout Dale County have been able to obtain a fresh economic start successfully. Call (334) 598-9534 to schedule a free consultation, or visit her website for more information on her services.