Insolvency

Insolvency is a term frequently used by debtors who find that they are unable to fully pay off their debts on time. Typically, insolvency is applied to companies that fail to pay what is owed by the due date, although it may be used for individuals as well. Parties may become insolvent if they manage their money poorly and allow their liabilities, or cash flow out, to exceed their assets, or cash flow in.

Insolvency vs. Bankruptcy

Many people confuse insolvency with bankruptcy and assume that these two terms refer to the same thing. While similar, these two words apply to two different issues. Insolvency is the state of being unable to repay debts on time. Bankruptcy, on the other hand, refers to the action that insolvent individuals or companies take in an effort to settle their debts.

The Two Types of Insolvency

Insolvency is defined as the possession of more liabilities than assets. In general, it may be defined in two different ways, depending on how the analysis of the situation is performed:

• Cash Flow Insolvency: the debtor’s monthly cash flow out exceeds his or her cash flow in
• Balance Sheet Insolvency: on paper, the debtor has negative assets (his or her liabilities outweigh the assets)

If the debtor does not take action to resolve his or her insolvency, then he or she may face bankruptcy.

Contact Us

If you have any further questions about insolvency, do not hesitate to contact the Austin bankruptcy lawyers of Slater, Kennon & Pugh Ltd.LLP today at 512-338-1100 to speak with one of our qualified attorneys about your concerns.