Insolvency and negative equity are bad terms in the investment and financial management worlds, though one is far worse than the other. A business or consumer who is insolvent has no hope of paying off his debts even if he liquidates all his assets. A consumer or business with negative equity in a property may have some financial difficulty with the given property but has a far easier time digging out of debt.
Insolvency Definition
Insolvency is the condition of having more debts than assets available to pay them off. Even if you sold all your assets, including a home or car, it wouldn't be enough to eclipse the amount of money you owe to your creditors. If you file for bankruptcy, you may hear this term used when describing the state of your financial affairs. The court may also declare you insolvent because your income is unlikely to rise to a level appropriate for paying off your creditors in a reasonable amount of time.
Negative Equity Definition
Negative equity is the difference in the value of an asset, including an automobile or piece of real property, and the asset's corresponding loan. Basically, you owe more on the loan than the piece of property is worth. This phenomenon is common when you pay an inflated price for a used car and have a loan extending over several years. The value of the vehicle decreases rapidly, leaving you owing more money on the loan than the car's fair market value.
Individual Investment Values
It is possible to have negative equity in a piece of property and not be insolvent. Negative equity applies only to an individual investment and may not extend to your entire financial situation. You may earn enough money to comfortably pay your bills but got into a bad loan which you now must pay off while holding on to a worthless piece of property. Relieving negative equity may be a simple matter of getting someone to buy the property or rolling the debt into another loan tied to an asset with positive equity.
Larger Financial Problems
Insolvency is an indicator of a much larger financial crisis. In this scenario, multiple assets may have negative equity accompanied by a lack of sufficient income to meet your financial obligations. Bankruptcy may be the only option remaining for you to relieve yourself of your debt obligations and liquidate any non-exempt property. Chapter 7 bankruptcy liquidation is the most appropriate bankruptcy alternative if you're insolvent. A court will rarely approve a Chapter 13 debt restructuring since you lack adequate income.
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