Many people do not understand that insolvency is different from bankruptcy. Insolvency means that a person or business is no longer able to pay their bills--it does not imply that legal actions are taking place to relieve existing debts. However, insolvency is often cited as the main reasons that businesses choose to file for bankruptcy.
There are two kinds of insolvency. The first is termed "cash flow insolvency" because there is not enough income coming in at any given time to make payments on debts. Businesses with this type of insolvency can sometimes recover quickly if their cash flow situation changes. Businesses with "balance sheet insolvency" may have a more difficult time with recovery. This term usually means that there are "negative assets," meaning there is no money available to make necessary payments.
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If this form of financial difficulty occurs for a period of time, actions will have to be taken. Depending on the amount of debt and the current situation of the company, debt negotiation or bankruptcy may be necessary.
Debt negotiations may result in "business turnaround" or "business recovery." These are terms associated with a business that is able to successfully overcome their financial problems and make payments while avoiding bankruptcy. However, for other businesses, bankruptcy is by far the best option. Many businesses will recover from bankruptcy and after a period of time, they may see their business blooming instead of collapsing.
Since the laws regarding debt negotiation and bankruptcy are complicated, it is important to speak with an experienced attorney to determine what the best options are for your business.
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