Definition
A debtor whose liabilities exceed assets may be deemed insolvent, or unable to fully repay their debts.
Analysis
Insolvency is a situation that can affect businesses or individuals. It exists when the liabilities of the debtor exceed the ability to repay debt. It represents a hopeless financial situation.
Insolvency is one requirement of filing for bankruptcy. A debtor must prove that they cannot reasonably be able to repay their debts without legal intervention.
Another situation that requires insolvency is to avoid paying income taxes on forgiven debt. Otherwise, a taxpayer may have to pay income taxes on the portion of debt that is forgiven by a lender, such as through debt settlement or as a result of foreclosure proceedings. There are some exclusions that may exist, depending on the circumstances.
Debtors may avoid insolvency through the responsible use of credit. The goals of financial security require that debtors move away from insolvency by paying off debt, investing in their future and building a positive net worth.
