Browse terms
The bankruptcy process
Insolvent
Owing more in debts than all of your property is worth at a fair valuation. 1
Talk to a lawyerHow it works
The Bankruptcy Code's test for a person is a balance sheet test: add up the debts and compare them with the fair value of the property. Two kinds of property are left out of the count: property that was transferred, concealed or removed to hinder, delay or defraud creditors, and property that can be claimed as exempt. 1
You do not have to be insolvent to file. Subject to the means test for individuals, Chapter 7 is available whatever the amount of the debts and whether the debtor is solvent or insolvent. 2
Insolvency matters most when a trustee tries to undo a payment made before the case as a preference. One condition is that the debtor was insolvent when the payment was made, and the law presumes the debtor was insolvent during the 90 days before the filing. 3
The word also appears in tax rules. The IRS says canceled debt is in general taxable, but debt canceled in a bankruptcy case, and debt canceled to the extent you are insolvent, are excluded from income. Ask a tax professional how those rules apply to you. 4
Common questions
Do I have to prove I am insolvent to file bankruptcy?
No. Chapter 7 relief is available whether the debtor is solvent or insolvent, subject to the means test for individuals. 2
Does exempt property count when working out insolvency?
Not under the Bankruptcy Code's definition. Property that may be exempted is left out, and so is property hidden or moved to defraud creditors. 1
Sources
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