Pros and Cons of Insolvency

28-Mar-2008

Often confused with bankruptcy, which is a legal declaration of inability to pay creditors, insolvency means that an entity?s assets are not greater than its liabilities. This is also called balance-sheet insolvency. Another form, called cash-flow insolvency, describes when the entity can no longer meet its debt obligations because it can no longer convert assets into cash for debt payment. However, for an individual, the difference between insolvency and bankruptcy is pretty much a wash. Becoming insolvent and declaring bankruptcy are ways to offer a debtor a clean start to his/her financial life, in regards to the money owed. Insolvency and bankruptcy, however, do not clean your credit record. In fact, most bankruptcies damage and stay on a credit history for around ten years.

Some advantages of personal insolvency by bankruptcy, as stated by the UK?s personalinsolvency.org, are that you will be protected from your creditors, you will be assigned someone to act on your behalf in financial matters, and most of your debts will be forgiven. There are, of course, more disadvantages than advantages. For example, your bankruptcy will be listed in the local paper and you may be denied future assets (as come in wills or pay raise) in order to benefit your lenders. Insolvency, via bankruptcy, actually costs money, which you, of course, do not have. Banking will become more difficult, as all financial organisations will be informed of your  bankruptcy. In addition, future employers may ask if you have ever declared insolvency, therefore even having an effect on your financial future.

There are other ways to reorganise your financial situation in order to avoid insolvency. One such option is an IVA, or individual voluntary arrangement. Under such a plan, if you are eligible, your debt may be consolidated into one monthly payment. This monthly payment would be made affordable to you now, in your present state, and your IVA would have a time limit, helping you to see the light at the end of the tunnel. In addition, interest and charges may be frozen. Debt management is another insolvency/bankruptcy alternative. There are many types of debt management, but basically, someone will come up with a repayment plan that you can handle and that will work to lower your debt.

It is extremely important to speak with a reputable financial adviser before insolvency via bankruptcy or any other debt relief action.