It is relatively common for people to assume insolvency and bankruptcy are one and the same, but there are many notable differences. In simple terms, insolvency relates to an inability to pay debts on time whereas bankruptcy is the legal process undertaken as a means of resolving the issue of insolvency.
What Is Insolvency?
If you are unable to pay your debts, you can be described as insolvent. Insolvency can relate to:

• Cash flow: when you suffer from a lack of financial liquidity, which means you are unable to pay debts on time. Cash flow insolvency is normally what you experience before filing for bankruptcy.


• Balance sheet: This happens when you have negative net assets; in other words, your assets are exceeded by your liabilities. Balance sheet insolvency normally happens to corporate entities before they file for bankruptcy.

Insolvency and bankruptcy are not the same. For example, your business could be balance sheet solvent but cash flow insolvent, which means you would probably not be able to file for bankruptcy. It is common for businesses to have negative net assets while remaining cash flow solvent because they meet their debt obligations and avoid default. This is described as being in the black.
You are considered to be insolvent when you no longer pay your debts or are unable to pay them on time. The bankruptcy code is one of numerous federal laws put in place to protect insolvent organizations or individuals. Obviously, there is an emphasis on uncovering company directors who deliberately run a business into the ground to obtain financial relief.
What Is Bankruptcy?
This is a method of dealing with debts when it becomes apparent that you canâEUR(TM)t make the repayments. It is usually a last resort and may involve the selling of some or all of your assets. The most common forms of bankruptcy in Arizona are:

• Chapter 7: This is liquidation and involves a trustee collecting your assets and selling non-exempt assets. The net proceeds of the liquidation are distributed among your creditors. Debts such as alimony, student loans, child support, and others cannot be cleared using Chapter 7 bankruptcy.


• Chapter 13: You propose a three- to five-year repayment plan and offer to pay off all or some of the debt. This form of bankruptcy is commonly used to avoid a home foreclosure and can also be used to pay back taxes or make up missed car or mortgage repayments.

A Chapter 13 bankruptcy is your only choice if you are behind on mortgage, car loans or other secured payments and you wish to keep your property. If your annual income is above the state median level, you may be ineligible for Chapter 7 bankruptcy. Discussing your specific situation and having an attorney run an analysis to determine what your options are is well worth the cost.
Hopefully, you now understand much more about the differences between insolvency and bankruptcy. If you are struggling with debt and are unable to make your repayments, you may be eligible to file for bankruptcy to ease your financial burden. If you are insolvent, you may not necessarily be allowed to use a bankruptcy filing to assist you. Contact an experienced attorney who works in the field today for more information on your options.