Many mistakenly assume that insolvency and bankruptcy are the same when in fact, they're quite different. While both terms involve the inability to pay your debts, filing bankruptcy was designed as a solution for insolvency. Learn more about the two terms, as well as their differences, in the guide below. 

Insolvency

There are two forms of insolvency, balance sheet insolvency, and cash flow insolvency.  Cash flow insolvency typically relates to an individual's inability to pay down their debt due to a lack of funds. Balance sheet insolvency is more commonly associated with businesses, and occurs when a company's debts outweigh their assets.

The realization that you’re insolvent typically requires some form of action, such as finding a new source of income, borrowing money, or entering into a payment plan with your creditors. For those who are still unable to pay down their debt, filing bankruptcy is commonly the next step.

Bankruptcy

Bankruptcy is a legal process designed to help individuals and businesses get a fresh financial start by selling off assets in order to repay extensive debts. This process can also allow you to enter into a payment arrangement to pay down unmanageable debt.

Bankruptcy can also be used by companies to liquidate their assets in an orderly way. Typically, those entering into bankruptcy proceedings hope for what is called a "discharge," meaning a federal court has permanently prohibited creditors from attempting to collect debts against you.

While permanent, not all debts can be discharged. This includes tax debt, student loans, spousal support, and child support payments, as they are protected under federal law. Typically, a payment arrangement must be entered through your bankruptcy filings to repay these debts over time.

There are six types of bankruptcy, known as chapters. Chapter Seven covers individual liquidation, Chapter 13 bankruptcy deals with repayment plans, and Chapter 11 represents large company reorganizations. Additionally, Chapter 12 benefits bankrupt farmers, Chapter 15 is used in foreign cases, and Chapter 9 helps municipalities that file for bankruptcy.

For insolvency proceedings, or help filing bankruptcy, contact the professionals at Sippel Law Firm PLLC in Kingman, AZ. For over 35 years, their skilled and knowledgeable team have worked with individuals and businesses to discharge old debt and start on the road to financial recovery. Contact them today at (928) 753-2889 to schedule a consultation, or visit them online to learn more about their services.