While many people use “insolvency” and “bankruptcy” interchangeably, there are distinct differences you should know. When looking for debt relief, you should learn about the differences between these terms. They can help determine if filing for bankruptcy is what’s best for your financial needs. Below is a quick guide explaining these processes.

What Do You Need to Know About Insolvency & Bankruptcy?

Insolvency

If you cannot pay debts by their due dates, bankruptcy courts consider you insolvent. Insolvency comes in two main forms. The first is cash flow insolvency, which is when you do not make enough to pay rent or mortgage, credit card debts, or other outstanding balances. The other form is balance sheet insolvency, or when your debt totals are more than the amount of money you have in your account.

Individuals, families, and businesses can be insolvent, and they must find ways of resolving their debts. Some borrow money, cut costs, sell assets, or get extra jobs to pay their debts before they become delinquent. The decision to file for bankruptcy is typically the last resort for debt relief after exhausting all other options. 

Bankruptcy

When you cannot resolve insolvency with more income, borrowed money, or another means, bankruptcy is usually the next option. Filing means you legally declare you cannot pay your debts now or in the foreseeable future. There are several bankruptcy filing options, the most common being Chapter 7 bankruptcy, which liquidates your assets to pay off creditors. Assets such as your primary residence and vehicle are exempt from liquidation. Another type of filing includes Chapter 13 bankruptcy, which restructures your debt payment plans to pay creditors.

Filing for bankruptcy keeps creditors from using collection agencies and ordering repossessions of assets. It allows you to work with your creditors to find a solution that satisfies all parties. It also helps keep your credit score relatively intact to create fewer financial hardships in the future. 

If you believe you are insolvent, contact the bankruptcy lawyers at Bender & Bender to discuss debt relief options. Based in Wisconsin Rapids, WI, this law firm specializes in bankruptcy law to provide residents throughout the region with the debt relief they need. Call (715) 423-4400 today to get started or learn more about bankruptcy law services online.