Does Insolvency Require A Bankruptcy Filing?
Struggling financially, as a business or an individual, can be anxiety-inducing and complicated. When an individual or a business is unable to repay its debts, the word “insolvent” may be used to describe the individual’s or the business’s financial situation. Yet the term insolvency is also discussed often in relation to bankruptcy, and it can be confusing for debtors to understand what the relationship is between insolvency and bankruptcy, and whether insolvency necessarily requires a bankruptcy filing. In short, insolvency and bankruptcy are often linked, and insolvency does frequently lead to bankruptcy, but being insolvent does not necessarily require you or your business to file for bankruptcy. A West Palm Beach bankruptcy attorney at our firm can provide you with more information.
What Does Insolvency Mean?
What is insolvency? According to the Cornell Legal Information Institute (LII), “insolvency refers to situations where a debtor cannot pay the debts they owe.” More specifically, “there are two principal definitions of insolvency in the United States: the first, balance sheet insolvency, occurs when the debtor’s liabilities exceed its assets,” while “the second, cash flow insolvency, occurs when the debtor cannot pay its debts as they mature due to the debtor’s lack of financial liquidity.”
Yet as the LII clarifies, particularly with businesses, the legal definition of insolvency can get complicated, and it can lead to litigation in some circumstances.
Insolvency is Not the Same as Bankruptcy
Insolvency does not mean the same thing as bankruptcy. Insolvency can lead to bankruptcy, but it does not have to lead to bankruptcy.
Insolvency Can Result in a Decision to File for Bankruptcy
When does insolvency result in a decision to file for bankruptcy? Typically, when a debtor does not have options for increasing cash flow or repaying creditors and catching up on debts, the debtor may decide to file for bankruptcy. In some cases, a reorganization bankruptcy may allow an individual or a business to get caught up on payments with creditors. Reorganization bankruptcies are particularly common for businesses that may be facing insolvency but have plans to reinvigorate the business and change strategies to earn higher profits in the near future. With a reorganization bankruptcy, a business can remain open. When an insolvent individual or business does not have options or a plan for repaying debts, that debtor may turn to a liquidation bankruptcy. A liquidation bankruptcy results in a discharge of debts for individuals, and it requires a business to close its doors.
Contact Our West Palm Beach Bankruptcy Lawyers
If you are struggling financially as an individual, or if your business is having significant financial problems, you may be considering bankruptcy and wondering about your options. For many individuals and businesses, bankruptcy can allow for the reorganization of debt in certain types of bankruptcy, or it can allow a business to close or an individual to get a fresh start with a discharge of debt in a relatively short period of time with a liquidation bankruptcy. The experienced West Palm Beach bankruptcy attorneys at Kelley Kaplan & Eller can provide you with additional information, and we can begin working with you on your bankruptcy case today.
Sources:
law.cornell.edu/wex/insolvency
uscourts.gov/services-forms/bankruptcy
