The term insolvency can be defined as the condition of having more debts (liabilities) than total assets available to pay them, even if the assets are mortgaged or sold. The term is an important one in financial, accounting, and credit matters. Insolvency and bankruptcy are very different from each other, despite often being used interchangeably.
In the state of Arizona, a person is considered insolvent if:
▪ The sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation
▪ The debtor is generally not paying his debts as they become due
Insolvency can arise from several things:
▪ Poor cash management
▪ A reduction in the forecasted cash inflow
▪ An increase in cash expenses
Bankruptcy is a both a legal term and a legal process; insolvency is a condition. First, a debtor becomes insolvent with no chance of remedy, before opting to file for bankruptcy.
After bankruptcy proceedings, what follows is a determination by the court that the person or business cannot raise the funds to pay all of his/her debts. When that determination is made, the court will then discharge (forgive) some or all of the debts, leaving some creditors facing no prospects of getting paid.
The classic cartoon figure of the person wearing nothing but a barrel to indicate a total lack of wherewithal is not really accurate. An insolvent individual debtor, even when found to be bankrupt, is allowed certain exemptions that permit them to retain exempt assets defined by statute and certain assets given as security as long as payments are made on any loan collateralized or secured by that property.
If you would like more information about insolvency or bankruptcy, or if you need assistance from an attorney, contact Windtberg & Zdancewicz to schedule an initial consultation.