Insolvency is the legal term describing the situation of a debtor who is unable to pay his, her, or its debts. There are two primary types of insolvency: cash flow and balance sheet.
In cash flow insolvency, the debtor suffers from a lack of financial liquidity making it impossible to pay debts as they fall due. This is the type of insolvency most individuals experience prior to filing for bankruptcy.
Balance sheet insolvency, on the other hand, involves having negative net assets, where one's liabilities exceed their assets. This is the form of insolvency normally described by corporate entities prior to filing for bankruptcy.
Notably, insolvency is not the same as bankruptcy. For example, a business be cash flow insolvent but balance sheet solvent and, as a result, would likely be unable to qualify for bankruptcy protection. Indeed, many businesses have negative net assets (i.e., they are balance sheet insolvent) but remain cash flow solvent as their ongoing operations meet their regular debt obligations, helping them avoid default. This is usually the period prior to a company being "in the black," as it is commonly described.
Under the Uniform Commercial Code, a person is considered to be insolvent when they have stopped paying their debts or cannot pay their debts as they become due. A number of federal laws exist to protect insolvent persons or businesses, including the bankruptcy code. However, a recent trend has put the focus onto individual corporate officers and directors if it is shown that they have intentionally or negligently driven a company into the ground, possibly for the purpose of seeking bankruptcy relief.
The resources below will provide you with more information regarding insolvency laws, and the tab, above, labeled "Law Firms" will help you find an attorney in your jurisdiction that can help answer your insolvency and bankruptcy questions.
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- What Is the Fair Debt Collection Act?The Fair Debt Collection Practices Act was enacted in 1977 in order to curtail abuses by debt collection companies. The act provides protections to consumers against harassing tactics, empty threats, telephone contact and dissemination of credit information by third-party debt collection companies. It also provides remedies to individuals who have had their rights violated regarding these matters.
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Insolvency Law - US
- ABA - Bankruptcy and Insolvency Litigation
The Section of Litigation, the largest specialty section of the American Bar Association, is dedicated to helping litigators become more effective advocates for their clients. The Section is a legal publisher, a provider of CLE programming, a source of news and analysis, and a strong national voice in discussions concerning the profession. Simply put, the Section helps lawyers be better lawyers.
- Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq., is a United States statute added in 1978 as Title VIII of the Consumer Credit Protection Act. Its purposes are to eliminate abusive practices in the collection of consumer debts, to promote fair debt collection, and to provide consumers with an avenue for disputing and obtaining validation of debt information in order to ensure the information's accuracy. The Act creates guidelines under which debt collectors may conduct business, defines rights of consumers involved with debt collectors, and prescribes penalties and remedies for violations of the Act.
- Insolvency - Definition
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts. Business insolvency is defined in two different ways: Cash flow insolvency Unable to pay debts as they fall due. Balance sheet insolvency Having negative net assets – in other words, liabilities exceed assets.
- Model Law on Cross-Border Insolvency - Chapter 15 of the US Bankruptcy Code
Chapter 15 is a new chapter added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It is the U.S. domestic adoption of the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law ("UNCITRAL") in 1997, and it replaces section 304 of the Bankruptcy Code. Because of the UNCITRAL source for chapter 15, the U.S. interpretation must be coordinated with the interpretation given by other countries that have adopted it as internal law to promote a uniform and coordinated legal regime for cross-border insolvency cases.
- Uniform Commercial Code - Insolvency
Under the Uniform Commercial Code, a person is considered to be insolvent when the party has ceased to pay its debts in the ordinary course of business, or cannot pay its debts as they become due, or is insolvent within the meaning of the Bankruptcy Code. This is important because certain rights under the code may be invoked against an insolvent party which are otherwise unavailable.
- United States Federal Courts - Bankruptcy
Bankruptcy laws help people who can no longer pay their creditors get a fresh start – by liquidating assets to pay their debts or by creating a repayment plan. Bankruptcy laws also protect troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation.
Organizations Related to Insolvency Law
- American Bankruptcy Institute
The American Bankruptcy Institute is the largest multi-disciplinary, non-partisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues.
- Association of Insolvency and Restructuring Advisors
AIRA is a nationwide not-for-profit organization serving the needs of business turnaround, restructuring and bankruptcy practitioners, recognized as the leading organization in its field. Membership consists of accountants, financial advisors, attorneys, workout consultants, trustees, and others involved in insolvency, and bankruptcy matters. The AIRA seeks to foster an understanding of the insolvency, reorganization and business turnaround practice, ato sponsor relevant education programs and to administer the Certified Insolvency and Restructuring Advisor (CIRA) and the Certification in Distressed Business Valuation (CDBV) programs in order to recognize professionals for their excellence in specialized services.
- FTC - Bureau of Consumer Protection
The Federal Trade Commission is the nation's consumer protection agency. The FTC's Bureau of Consumer Protection works For The Consumer to prevent fraud, deception, and unfair business practices in the marketplace. The Bureau: * Enhances consumer confidence by enforcing federal laws that protect consumers * Empowers consumers with free information to help them exercise their rights and spot and avoid fraud and deception * Wants to hear from consumers who want to get information or file a complaint about fraud or identity theft.
- Global Insolvency
Global Insolvency is a joint project of the American Bankruptcy Institute and INSOL International. It serves as a comprehensive source of information both on current issues in international insolvency and restructuring law and on the legal framework for insolvency and restructuring around the world. The site features daily news headlines on insolvency developments around the globe. From current commentary and recent filings to international protocols and bankruptcy statutes to advice on cross-border lending, the GLOBAL INSOLvency site offers a range of information for insolvency practitioners, judges, accountants, trustees and others.
- International Association of Insolvency Regulators (IAIR) - US Division
The International Association of Insolvency Regulators (IAIR) is an international body that brings together the collective experiences and expertise of government insolvency regulators from jurisdictions around the world. IAIR members have a unique perspective given the role that they play in insolvency systems.
- International Association of Restructuring, Insolvency and Bankruptcy Professionals
INSOL International is a world-wide federation of national associations for accountants and lawyers who specialise in turnaround and insolvency. There are currently 40 Member Associations world-wide with over 10,000 professionals participating as Members of INSOL International.
- National Association of Credit Management
NACM® was founded in 1896 to promote good laws for sound credit, protect businesses against fraudulent debtors, improve the interchange of credit information, develop better credit practices and methods, and establish a code of ethics.
Publications Related to Insolvency Law
- ABI Guide to Cross-border Insolvency in the United States
This Guide is a must-read for any practitioner involved in international insolvency issues. The authors address the history of the UNCITRAL Model Law on Cross-border Insolvency, which the United Nations Commission on International Trade Law adopted in 1997 after five years of meetings and discussion. Thirteen states have now adopted this law, which includes the United States' adoption of chapter 15 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. For those involved in the evolving new world of chapter 15 law, this publication provides the necessary overview to understanding the law in practice.
- ABI Journal
The ABI Journal is the flagship publication of the American Bankruptcy Institute. This periodical is published 10 times a year, with combined issues for July/August and December/January. Established in 1982, the Journal covers the entire range of insolvency issues, featuring timely articles written by some of the most knowledgeable professionals in the field.
- US Treasury - Principles and Guidelines for Effective Insolvency and Creditor Rights Systems
An effective insolvency system, applied in a predictable manner, is important to the health of a country and the functioning of its financial system, serving to make the risks and consequences of a failure of a corporate entity easier to quantify for all parties involved. By introducing a measure of certainty into insolvency outcomes, effective insolvency regimes enable lenders to more accurately assess risk.