The Difference Between Insolvency and Bankruptcy in Pipestone, MN

In the U.S., filing for bankruptcy is a process for individuals and businesses alike. Of the six different chapters in the bankruptcy code, the most commonly filed individual consumer cases are Chapter 7 and Chapter 13. Chapter 7 bankruptcy works to sell the filer’s non-exempt assets in exchange for the discharge of their debts. Chapter 13, on the other hand, works to reorganize the filer’s debts into a three- to five-year repayment plan suited to their income and reasonable living expenses. If you’re struggling to make debt payments on time and your financial obligations are severely compromising your quality of life, you’re not alone. Every year, thousands of Americans use bankruptcy to resolve debts for long-term financial stability. At Behm Law Group, Ltd., we work with clients in many different circumstances to help them file a successful petition for Chapter 7 or Chapter 13 bankruptcy in Pipestone, MN and the surrounding communities.

The words bankruptcy and insolvency are often equated and sometimes used interchangeably. Legally speaking, however, they are different situations. An individual or business becomes insolvent as soon as they’re unable to repay their debts, but they do not become bankrupt until they start the legal process of filing a bankruptcy petition.

There are two types of insolvency:

  • Cash-flow insolvency: This kind of insolvency is a scenario where a debtor, individual or business, cannot pay debts with their income or saved cash. They may have assets that have value but don’t have the required cash flow/income to repay creditors. The value of their assets, if they were sold, could still be enough to pay off their debts but then they would have very few assets to continue their business operations or reorganize and rehabilitate their personal financial situations. Essentially, they don’t have the necessary liquid assets, aka, cash. Often a cash-flow insolvent party can work with their creditors to negotiate timelines, interest, penalties, or other resolutions that allow them to resolve the debt when their cash flow has increased.
  • Balance-Sheet Insolvency: A balance-sheet insolvent party doesn’t have the asset value to pay their debts. They might have a short-term cash flow that allows them to make upcoming payments, but they don’t have enough cash or sufficient assets to sell to bring them out of debt. Those in this situation can find relief through various debt repayment agreements with their creditors or a third-party debt settlement provider. Filing for bankruptcy, however, is by far the most effective method of resolution.

When an insolvent party faces the consequences of their situation and chooses to permanently resolve their situation through the bankruptcy process, they meet the legal definition of being bankrupt.

If you are facing cash-flow or balance-sheet insolvency and want to begin the process of filing for bankruptcy in Pipestone, MN and the local region, Behm Law Group, Ltd. can help you put together a successful petition and avoid complications. To learn more, contact us today at (507) 387-7200 or stephen@mankatobankruptcy.com.