Insolvency is that sad state of affairs when one can no longer pay off their debt in time, along with other bills etc. A company or a person may become insolvent if their debt or expenditure is more than their earnings. Where insolvency is not bankruptcy, it may eventually lead to it if the entity in question does not remedy its earning and expenditure pattern. Bankruptcy is a more formal and a legal term.
It is alarming news that the number of people who have declared themselves insolvent has been increasing rapidly just recently. What is even sadder is that most people are becoming insolvent due to their own judgment, and not by any professional advice.
The current credit crunch is one of the major reasons that have led many people to become insolvent. The prices of everyday commodities have risen so much that in just getting by, a common man accumulates quite a lot of credit. Just trying to make the ends meet has become quite a challenge with the prices of utilities like petrol, electricity and groceries skyrocketing. To get by, a person borrows and then becomes caught up in the race to pay back these debts along with hefty interests.
The number would increase even further after the Christmas season, when shopping for Christmas gifts plunges many deeper into debt, as people can not quite afford but still buy objects of affection for their loved ones.
Also, the credit crunch has made creditors and other firms more cautious in their approach. They have now established tighter conditions for credit and so, debt refinancing and reduced interest rates are not an option for the consumers. An increasing number of people turning towards Individual Voluntary Arrangement (IVA) are also a culprit (to an extent) for the increasing number of insolvencies.
Another reason for increasing insolvencies is the increasing unemployment rate. As the prices of raw materials have increased and demand for products has decreased, most employers are going into safe mode and cutting down on their expenditures. This leads to many people finding themselves without jobs. In the already slow economy, they may not be able to find another job easily. So, as a result, these people borrow to survive and then as debt crushes them, they are forced to declare themselves insolvent.
Subprime lenders may also have caused this marked increase. As real estate prices fell to new lows in the recent past, more people wanted to mortgage and own homes. Since banks do not lend to just anybody, the subprimers came in. People borrowed from them and paid insanely inflated interests in the process. Since the interest rates are not often pre-fixed in such conditions, increasing market insecurity forced the subprime creditors to further increase the amount of interest. Since a person’s means do not often increase accordingly, most people are no longer able to pay off these huge debts. The situation might go on until an individual is forced to declare himself insolvent.
