Insolvency?

Summary: This article explains what insolvency is, and how an individual may find themselves insolvent.

Simply put, Insolvency may refer to a business or an individual who owes more than their net worth, i.e. when debt outweighs any assets, and there is not enough monthly income to pay for essential expenditures after loan repayments (or vice versa).

How do I know if I am insolvent?

If an individual is struggling every month to repay debt and pay the costs of day to day living, it is possible they are insolvent. The simplest way to find out, is to calculate all monthly expenditure, including essential living costs; such as essential bills, rent or mortgage and reasonable food and household expenses, and debt repayments. If the amount is more than the total monthly income, it is an indication there is a problem. Another way to check is to calculate total asset worth, such as home equity, car and savings. If it is less than the total outstanding debt, then it again could indicate insolvency, especially if they have to juggle bills and debts each month.

What impact could insolvency have on me?

If it gets to the point that debts are not being paid and/or mortgage and bills are in arrears, it is possible that the companies involved could petition for bankruptcy. This could result in the individual being forced to sell any properties they own, as well as being placed on the insolvency register, and details being entered on the credit record, making it potentially extremely difficult to get future credit, at least for a period of time.

I am insolvent, what should I do?

If anyone feels they are struggling to repay debts, insolvent or not, it is vital to seek advice from a reputable money advisor or from one of the free services available such as the Citizens Advice Bureau (CAB). They will be able to establish if the individual is indeed insolvent, and may be able to provide a solution, such as an Individual Voluntary Arrangement (IVA) or Debt Management Plan (DMP). Even if not insolvent, they will be able to help set a budget plan to prevent the issue getting any worse.