The term insolvent refers to a person or firm that is unable to pay debts when they are due.

Insolvency is often associated with bankruptcy, though the two are not synonymous. In fact, a person that is insolvent may not be bankrupt and has enough assets to cover the debt, but is having temporary problems liquidating those assets to pay the debt on time. Once the assets are liquidated, the person can pay of the debts and becomes solvent once again.

On the other hand, a person who is bankrupt is definitely insolvent. Furthermore, even if the assets of the bankrupt person are liquidated, it will not be enough to cover all of that person’s debts. It is important to remember, however, that prolonged and/or repeated insolvency can lead to bankruptcy.

The most common reason a person and/or family becomes insolvent is excessive spending. Another major reason is debt, especially credit card debt. Even if a person suddenly stops spending too much money, if that person made bad financial decisions in the past, the debt (due to interest and penalties) can be to big to handle.

If you become insolvent, here’s what you should do:

1. Cut expenses to the bare necessities.
2. Find a way to generate more income.
3. Ask debtors to restructure loans to get reduced monthly payments as well as defer some loans.
4. Pay debts on time.

If all else fails, you can always file for bankruptcy.