The terms bankruptcy and insolvency are often used interchangeably in everyday vernacular, but while the two ideas are connected, they describe distinct financial situations. Chapter 7 and Chapter 13 bankruptcy are legal processes, while insolvency describes a general state of economic distress. Here's a closer look at the subtle but important differences between these scenarios.

What Is Bankruptcy?

When a person files for Chapter 7 bankruptcy, most of their unsecured debts are eliminated by the courts. When one files for Chapter 13 bankruptcy, their debts are structured into a long-term debt adjustment plan. In either case, a defined legal process must be followed, and the bankruptcy court issues an order that stipulates exactly how the debts will be handled.

A Chapter 7 bankruptcy stays on your credit report for up to 10 years, and a Chapter 13 bankruptcy remains for up to seven years after completion. Either type of filing will often result in an immediate dip in your credit score, which can be substantial, but you can take steps to start rebuilding credit right away after filing.  While every case is unique, most people have an improved credit score one year after a successful bankruptcy compared to their pre-bankruptcy credit score, especially if the bankruptcy clears up negative reports such as missed payments and repossessions.

How Does Insolvency Differ?

Insolvency is a state of extreme financial hardship in which a person cannot realistically repay all the debts they owe. This usually means that someone who is bankrupt is insolvent. However, someone who is insolvent is not always bankrupt. You can be insolvent without filing for legal relief via bankruptcy. Insolvency in and of itself may not impact a person's credit, so long as they are able to make minimum payments on all they owe.

An insolvent individual typically seeks other avenues to pay off their debts before pursuing bankruptcy. They realize that they do not have the income or resources to pay their outstanding balances, and they will usually begin by considering debt relief options like debt consolidation or settlement. If these efforts are unsuccessful or are too difficult to manage financially, insolvency will often lead to bankruptcy.

If you're dealing with insolvency and thinking about bankruptcy, the experienced legal team at Hurtt & Johnson LLC is here to help. Since 1977, they have been serving clients in Dalton, Calhoun, and throughout Northwest Georgia. Their lawyers offer representation in Chapter 7 and Chapter 13 bankruptcies, foreclosure defenses, credit card lawsuits, and other debt-related issues. To learn more about their services, visit them online. Call (706) 226-5425 to schedule a consultation and begin your journey toward financial freedom.