To be insolvent is not the same as being bankrupt. With careful financial planning and restructuring by financial advisors and legal experts it is possible to get out of insolvency and return to business as usual. Simply speaking, insolvency is when your liabilities exceed your assets so you cannot pay your bills.
What happens when you become insolvent?
When you become insolvent you should make a claim of insolvency to the Internal Revenue Service (IRS). You have to fill out the forms 1099-C and 982 and send it to the IRS where it will be reviewed and determined. IRS will determine the amount of discharged indebtedness (forgiven debt) that can be excluded from gross income.
In brief, this is what happens when you submit a insolvency claim to IRS:
If your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt to the IRS on your tax return on the same year the cancellation occured.
Once the IRS accepts your claim for insolvency there are different options available going forward. The most common options are IVA or bankruptcy.
Individual Voluntary Arrangement
An IVA is an alternative to bankruptcy and allows you to take control of your debt by proposing a settlement to your creditors which, if agreed, is legally binding. You still have to pay back your debt but it will be reduced and paid back over a period of time.
An IVA must be set up by a qualified practitioner such as a solicitor or accountant. That person will manage your debts throughout your IVA. The qualified practitioner will work with you to create a repayment plan, this can be a lump sum, instalment payments or a mixture of both.
If you owe someone £5000 or more and you have no way of paying it back either you or the person the money is owed to can apply for your bankruptcy. Bankruptcy is a chance to make a fresh start.
Once bankruptcy is declared all your assets will be controlled by a trustee in bankruptcy. They will supervise the sale of your assets that aren’t exempt for example everyday household items, tools you need to do your job, a car if you need it to get to work. The money raised will go towards paying back your creditors. Bankruptcy will end after one year, unless the trustee in bankruptcy is granted an extension by the courts or it will end once all the debt is paid back, whichever is achieved first.
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