Insolvency occurs when an individual or an organization is no longer able to meet financial obligations. Insolvency can lead to repercussions such as insolvency proceedings. This is where legal action is taken against the insolvent party wherein their assets are liquidated to pay off debts.
When a person or company is declared legally insolvent, there may also be unexpected implications. For instance, another party may be able to claim certain rights against a party that is insolvent. Also, in some jurisdictions, a business can’t continue operations while it is legally insolvent.
Are There Different Types of Insolvency?
The above definition of insolvency is also known as "technical insolvency." There are other types of insolvency, including:
- Cash flow insolvency: Lack of "liquidity" to pay off debts
- Accounting insolvency: When total liabilities exceed total assets (i.e., "negative net worth")
- Balance sheet insolvency: When liabilities exceed assets (i.e., having "negative net assets")
Is Insolvency the Same as Bankruptcy?
While the terms are often used interchangeably, insolvency is definitely not the same thing as bankruptcy. Bankruptcy is a legal proceeding in which the courts aim to:
- Determine whether a company is insolvent and
- Determine means to help resolve that insolvency
So, bankruptcy is one way that an individual or a company can deal with the problem of being insolvent. For many entities, such as small businesses, bankruptcy filings can be costly. Alternatives to bankruptcy may help a person or business approach insolvency issues.
For instance, debt restructuring may be available to help the insolvent party renegotiate certain loans or to obtain a discharge of debt directly from lenders. Or, refinancing can occur before the entity experiences too much debt, as a means of avoiding insolvency in the first place. Regardless of the approach, insolvency is often a complicated situation that requires the guidance of experts and professionals.
Do I Need a Lawyer for Help with Insolvency Issues?
Insolvency can create many problems for both individuals and businesses. You may need to hire a bankruptcy lawyer in your area if you need help with any insolvency issues. Your attorney can provide you with legal advice and guidance to help you deal with the situation. Also, if you need to file with the court or make any court appearances, your attorney can help represent you.