How can I tell if I am solvent?
In these recessionary times, many of us encounter financial difficulties. We struggle along from month to month and wonder if we understand the extent of our difficulties. Should we be more worried than we are? Should we be less worried? Now, that would be nice. There are two tests which can help to determine if you are solvent or not.
These tests can actually be applied to companies as well as to individuals. The ‘balance sheet test’ asks the question: ‘do your assets exceed your liabilities?’ The cash flow test asks the question: ‘are you able to pay your debts as they fall due?’If you can answer ‘yes’ to both questions, then you are solvent. If you answer ‘no’ to both questions, then you are insolvent. If your answer is ‘yes’ to the first question and ‘no’ to the second question then you may be solvent – it could be said that you are solvent according to the balance sheet test. If you need help to establish your solvency or otherwise, then any reputable insolvency services firm can usually determine the answer for you. You may seek to enter into a DMP whether you are insolvent or not but you may only enter into an IVA if you are insolvent.
Assets exceed liabilities
In calculating how much assets you have, it is normal to use the current achievable sales value of your assets, taking into account the cost of sales. Don’t forget that costs such as legal fees, auctioneer’s fees, advertising, stamp duty, capital gains tax and so on all have to be allowed for in calculating the value of your property, assuming that is your principal asset.
If you have a mortgage, don’t forget that that will have to be cleared as well as any early redemption penalty that might apply. It must also be possible for you to obtain the equity in your property by way of sale or re-mortgage. You may have a spouse or family who may not agree to your disposing or remortgaging your property and they may have legal rights empowering them to so disagree.
The time factor must also be taken into account. It may take a considerable length of time for you to realize the equity in your property, particularly if you want to sell it. Even if you are solvent under the heading of ‘assets exceeding liabilities’ it may be that you are nevertheless insolvent, if you are ‘unable to pay your debts as they fall due’. This is sometimes referred to as a state of being ‘asset rich but cash poor’.
How to find out
See an insolvency practitioner (IP) and discuss your financial difficulties. Most IPs provide initial advice without strings attached and it should be possible to establish the status of your solvency fairly quickly in such an initial free consultation provided you have a good handle on your income (pay-slips, pension, benefits) your living expenses (and that of your family), your debts, the re-payments of your debts and the essential information relating to your assets (mortgage statement, property valuation, etc). So, gather up the necessary documents and make an appointment to see an IP for a free initial consultation. If you are in fact insolvent, you can establish what your options are. If you are solvent, then happy days and you can set your mind at rest.