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Insolvency is a financial state of being – one that is reached when you are unable to pay off your debts on time. Bankruptcy, on the other hand, is a legal process that serves the purpose of resolving the issue of insolvency.
Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor. Technical insolvency occurs when an individual or a firm is unable to meet their financial obligations.
In legal terminology, the situation where the liabilities of a person or firm exceed its assets . In practice, however, insolvency is the situation where an entity cannot raise enough cash to meet its obligations, or to pay debts as they become due for payment.
The bankruptcy code is a one stop solution for resolving insolvencies which at present is a long process and does not offer an economically viable arrangement. A strong insolvency framework where the cost and the time incurred is minimized in attaining liquidation has been long overdue in India.
To qualify for the insolvency, you must show that all of your liabilities (debts) were more than the Fair Market Value of all of your assets immediately before the cancellation of debt. To show that you are insolvent and are excluding your canceled debt from income, you must fill out Form 982
According to the IRS, if you received a 1099-C tax notice that you had "income" from canceled or forgiven credit card debts, you may not have to pay taxes on some or all of that income. If your liabilities exceeded your assets when you settled the debt, then you were insolvent, according to the IRS.