In recent times we often come across the term insolvency and how companies are shutting down to stay away from prison time, but what is insolvency? In legal terms, insolvency is a term used to describe a situation where the liabilities of an individual or a firm have exceeded his assets. On paper this definition is simple, however in practice, insolvency can be explained as a situation in which an entity, i.e. an individual or a firm, is unable to raise enough money to fulfill its obligations, or is unable to pay its debts. Such a situation can also occur when the value exceeds the total of its liabilities. To put it simply, it is a state of economic distress where someone is unable to provide the amount to pay their bills and such a situation can lead to legal proceedings resulting in the probability of assets being liquidated to provide the amount required to pay off the outstanding debts.
Ways To Avoid The Pitfall Of Insolvency
1. Analyse your cash flow: a thorough study on your cash flow will highlight where your problem lies. Do you have money left to be recovered from clients and customers? Do you have underused and or unnecessary stocks in the market whose values are depreciating? Are your payment dates too generous perhaps you can negotiate with your clients to provide you payment on an earlier date? Analysing can help you to understand where your money is and provide you with insight to strategize.
2. Expert advice: easily the first step you should take when you realise that you are on the brink, is to seek advises from financial and budget experts. They will provide you a better understanding as to where your money is depleting. Most experts have years of experience dealing with similar clients and can help you formulate strategies to avoid the same mistakes committed by others. They can advise on where you ought to cut expenses and manage your debt more realistic to achieve results.
3. Look for means to get money: the more effort you put in generating money for your debt, the faster you can see to paying it off. The longer the debt remains, the higher the interest and penalties will grow. This not only helps you in a quickly clearing of your debt but your creditors will be more than willing to negotiate with you if they see genuine effort in repayment. Common means of repayment of debt includes, selling your assets, getting an extra job to add in the flow of income generation etc.
4. Negotiate with your creditors: a good plan as strategized by your financial experts will convince your creditors during negotiations as they are more willing to trust someone with a solid plan on repaying their debts than someone without plan. A good plan will convince your creditors to give more time for repaying of debt, provide you with lower interest rates, and charge lesser in penalties.
5. Avoid taking additional debt: avoid taking extra debts. This does not require much explanation an additional debt will only weight you down in your efforts to avoid insolvency. Rather, invest your time in taking up extra work so that you get a better cash flow.
6. Debt management plan or proposal: if you can convince your creditors to agree, you could arrange a debt management proposal or plan, which is basically a more formalised approach into recovering debt avoiding formal procedures of insolvency without affecting your overall credit score history.
Debt can be a real pain and will take a lot of your time and health. The sooner you repay them the lesser your burdens and the risks of falling into insolvency. So, consult experts, utilise strategies and pour your efforts in being cleared of debt.
