In a recent blog entry, I discussed the misleading concept that some debtors think of themselves as "judgment proof". However a recent question from a client about insolvency as an "alternative" to bankruptcy indicated that another article on the topic might be warranted.
There are two types of insolvency: (1) cash flow insolvency, where you cannot pay your debts as they come due; and (2) balance sheet insolvency, where the debts exceed the value of your assets. Insolvency might make a bill collector's job more difficult, it is NOT as a legal defense to the nonpayment of debts and cannot protect you from a lawsuit for unpaid bills.
You cannot be "declared" insolvent nor can you "claim" insolvency except perhaps when dealing with debt forgiveness income on your tax return. If a debtor settles a creditor card debt for less than the full amount owed, they will send out a 1099 to the debtor and the IRS. If the debtor meets the definition in the Internal Revenue Code for insolvency, the debt forgiveness might not be counted as taxable income. However, the creditor is free to file a lawsuit and get a judgment to garnish the debtor's wages.
Insolvency by itself is not an alternative to bankruptcy. It is a bit like trying to hide assets or doing nothing in the hope that creditors won't find anything. It is also like running and hiding from a bully. Sometimes you need to confront the bully.
If you are in Southern California and are tired of running from your creditors and the harassing phone calls, please call me today and (619) 448-2129 for a free consultation.
About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar, the San Diego County Bar Association and the National Association of Consumer Bankruptcy Attorneys. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.