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If you have an inheritance distribution or some other windfall coming in a few months, your insolvency might be temporary, but if you’ve sold your assets and your income is not going to increase, you might not have a easy way out of insolvency.
The analysis can help you decide whether to seek a debt settlement or file for bankruptcy protection.
To make things a little more complicated, insolvency comes in two flavors.
The first, called “cash-flow insolvency,” occurs when an insolvent debtor can’t make a payment because he doesn’t have the money.
Deciding what to do about this type of insolvency requires taking a cash-flow test.
The debtor needs to evaluate current and future cash flows to determine whether your income is enough to cover debt payments.
Insolvency is the inability to pay debts when they are due.
Fortunately, there are solutions for resolving insolvency, including borrowing money or increasing income so that you can pay off debt.
Usually it occurs when they’ve exhausted other ways of resolving debt.Showing that you’re insolvent is necessary for establishing a bankruptcy claim.Federal bankruptcy law defines insolvency for corporations and individuals as the “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at fair valuation.”In other words, you owe so much that selling all your assets won’t cover the bill.Failing to pay debts usually leads to debt collection efforts that force some kind of action.
For example, if you own a house and don’t pay the mortgage, you’ll go into default that can soon lead to foreclosure.
Businesses commonly use a balance sheet insolvency test to decide whether to take steps to stay afloat or file bankruptcy.