Involvency is a Serious Issue
The situation in which liabilities exceed assets is typically referred to as insolvency and can have serious negative financial effects for consumers. In some cases, liabilities exceed assets only temporarily or in a way that is not financially risky; for instance, in the early years of a mortgage, the amount owed by the owner far exceeds the equity that he or she possesses in the property.
However, because the investment in the property is paid off over a predetermined amount of time, the fact that liabilities exceed assets during this period is not regarded as a negative factor in the finances of the individual or family.
Insolvency, by contrast, exists when the liabilities of an individual exceed their assets in such a way that their creditors cannot be paid on time or, in extreme cases, at all.
What to do when Liabilities exceed Assets
In general, insolvency can be addressed in a number of ways, all of which boil down to one of both of these two basic strategies: -
- Reduce the number of liabilities
- Increase the number of assets
- Seek help
Reducing spending
Consumers can typically reduce their liabilities by lowering their monthly expenditures; eliminating cable television, expensive cellular phone plans and luxuries like dining out or attending movies can sometimes make a surprising difference in the amount of money available to pay outstanding bills.
Some unnecessary monthly bills are inevitable and some have already been purchased, for example home insurance and utility bills, could be another area in which savings can often be achieved and secured.
Electricity and water are for necessary consumption in which consumers have direct control over whether to save or waste while monthly allocations for insurance might seem costly at first; it is a much more of savings in the long run. There are even some companies that offer credit insurance where an individual or company wants security against the risks of bad debt or insolvency.
Spending for future security is a good investment indeed. While finding the cheapest insurance may be time-consuming, online insurance quote sites can often provide valuable information and assist consumers in finding the cheapest insurance available that is suited to their particular needs. Using the same company for both credit and home insurance can also be helpful in achieving the cheapest insurance rates for these necessary policies.
Increasing cash flow
Taking on a second job is one way to increase the funds available to pay off bills and can help to resolve financial difficulties over the short and long term. Most consumers will achieve the best results, however, by combining both methods and reducing spending while increasing the money available to handle financial responsibilities.
Getting outside help
A number of governmental agencies, nonprofits and private companies offer debt consolidation and other solutions for debtors facing insolvency. These organizations typically negotiate directly with creditors in order to achieve mutually beneficial solutions for both debtor and creditor.
Extensions of time to pay, reduced interest and principal and other negotiated settlements are all possible outcomes when working with these agencies and companies. Debtors should be cautious, however, as some of these companies ask for money upfront and may not deliver the results needed to improve the debtor’s financial situation.
The Fair Debt Collection Practices Act (FDCPA) provides protection for debtors and outlines the acceptable practices for creditors and collection agencies. At a minimum, debt collectors are restricted in the ways in which they can contact debtors, the times during which such contact is allowed, and the nature of the contacts made. Failure to adhere to the FDCPA can result in damages being assessed against the creditor and paid to the debtor.
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