Are Filing Bankruptcy and Insolvency the Same?

Bankruptcy and insolvency are very similar concepts. In many cases, being insolvent can often lead to someone filing for some form of bankruptcy. However, even though they are related, they aren’t necessarily the same, which can be confusing as both situations deal with your credit, finances and debt load.

Is Filing Bankruptcy Insolvency:

Not necessarily. Insolvency arises when the individual or business is unable to pay its bills and discharge its liabilities as they come due. This is typically due to either insufficient cash flow or insufficient assets. From a business perspective, this might mean the business is unable to cover debts, pay business expenses, or even pay employees. A person or business can be insolvent without the world knowing about it.
Personal or business bankruptcy results from the formal filing for bankruptcy, which is an order for relief or petition filed with the Bankruptcy Court declaring the business or individual to be bankrupt. Bankruptcy is a legal determination that signifies the party’s inability to pay debts owed to creditors. In Dallas chapter 7 bankruptcy, most of the debts go away by entry of the discharge, with the exception of things like taxes, student loans, etc. In chapter 13 bankruptcy, a super discharge is available, which discharges even more debts than a Plano chapter 7 bankruptcy, assuming the individual satisfies all the conditions of the repayment plan. Even in Texas chapter 11 bankruptcy, a business can restructure or even get rid of some or all of its debts.

Insolvency Leads to Bankruptcy:

In specific cases, insolvency can easily lead to bankruptcy. If the individual or business can be proven to be insolvent to the creditor, the creditor can force the individual or business into bankruptcy. In the US, the filing of the bankruptcy petition itself acts as a declaration of legal bankruptcy. There is not always a direct path that exists to transform insolvency into bankruptcy, but the inability of an insolvent individual or business to satisfy creditors or pay bills as they mature often leads to bankruptcy.  Lastly, bankruptcy is a common tool employed by an insolvent individual or business to stop collection lawsuits, garnishments or foreclosures.

To properly analyze your financial situation to determine whether your state of insolvency requires a bankruptcy filing, seek the help of a Dallas bankruptcy attorney today to discuss your options. Our office has flexible hours and offers free consultations.