What is Insolvency?

Insolvency usually refers to a company, or business that finds itself in a position whereby its net assets are worth less than its liabilities, or they are unable to pay their debts as they become due.

Insolvency may also apply to individuals, and it is usually under the same circumstances, i.e. their assets are worth less than their liabilities, and when monthly income, after all essential expenditure, is no longer adequate to repay the monthly debt bill. It is important for an individual who believes they are in financial difficulty to understand if they are insolvent or not, as it is one of the key requirements to apply for an Individual Voluntary Agreement (IVA) or declare Bankruptcy.

Indicators of Insolvency

The most obvious indication of insolvency is the inability to pay back some or all monthly liabilities. If an individual is in arrears with any loans or credit cards, then it is likely they may be insolvent. Alternatively, if after all minimum repayments have been made in a month, there are not enough funds left over to cover essential living costs such as food, rent and utility bills, then again, it is likely that individual is insolvent.

Asset vs liability

A further indication of insolvency is to review all personal assets, such as home, car, savings and so on. If the total amount is less than the total amount of outstanding debt, then the individual may well be insolvent, and if they have also find that their monthly income does not sufficiently cover essentials and debt repayments. So an example may be where an individual owns a property worth £200,000 but their overall debt is £230,000 including a £190,000 mortgage and various other loans and credit cards, it could be that they are insolvent, especially if their overall income does not sufficiently cover monthly outgoings.


For anyone who thinks they may be insolvent, it is important that they seek advice as soon as possible to find the best solution. There are several options now available, not just bankruptcy, such as the above mentioned Individual Voluntary Agreements (IVAs), Debt Management Plans (DMPs) and Debt Relief Orders (DROs).