Insolvency vs. Bankruptcy

Insolvency is a term that can be used to describe having more debts than assets or not being able to pay debts when they are due. Insolvency takes on a slightly different meaning when discussing taxes. When a person has had a debt canceled and still has more debts versus assets, they are considered insolvent if they don’t have the money to pay even the income tax on the cancelled debt. Bankruptcy on the other hand is a debt protection afforded by the law for people unable to repay their debts. We can see how it would be easy for someone to say “I’m bankrupt” or “I’m insolvent” and believe that they mean the same thing. Even though it is easy for individuals get these two terms mixed up, one way to remember the difference is that insolvency is a state of being and bankruptcy is an actual process.

Insolvency vs. Bankruptcy

What would be more accurate to say is “Insolvency leads to bankruptcy”. Only by submitting bankruptcy filings to the appropriate court and having those approved does one “become bankrupt”. The bankruptcy process does differ slight among the six basic types of bankruptcy cases, however these are generally accepted as the first steps. Another thing to keep in mind about filing bankruptcy is that you must have had attended a court approved credit counseling course within the last 180 days of filing for bankruptcy courts and cannot have a previous bankruptcy within a certain period (depending on which type you are trying to file).

Alternatively, being insolvent doesn’t necessarily mean that you have to declare bankruptcy. The term is often used when talking about businesses that can no longer meet their debt obligations. Whether you own a business or are in personal debt, you owe it to yourself to consult a Houston bankruptcy attorney about your insolvency. A debt relief professional, such as a bankruptcy lawyer, will be able to guide you in the right direction and offer different alternatives to fixing your debt problems.