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Differences Between Loan Defaulting, Insolvency and Bankruptcy

September 2, 2015 by · Leave a Comment 

By Phin Upham

When someone is unable or unwilling to repay their loan, the courts may step in to enforce some form of repayment. A loan is a legal contract between two parties. It outlines the responsibilities that the borrower has to repay his loan, including the interest rate that the lender is allowed to charge. Breaching that contract turns the matter into a legal battle.


When an individual fails to repay a loan on his home or car, he essentially breaches the terms of the loan contract he set with the lender at the time of purchase. When a borrower is in default, he has the money or the means to repay and is choosing not to. It could be to prioritize other debts, or for any of a number of reasons, but the debt in question would go into default at that point.


If the borrower was unable to pay his debts, he would be said to be insolvent. This means that the borrower may have the assets on hand to repay the debts, but not in the currency the lender is requiring. One example is a home loan, where the home would satisfy most of the payback for the loan. Typically, insolvency is dealt with through negotiation and the lender occasionally takes a haircut to erase the balance from their books.


It’s important to understand that an insolvent person can become bankrupt in addition to his insolvency. Bankruptcy laws differ by country, and are far too diverse to discuss in such small detail, but is one of many legal statuses that can be assigned to an individual. It imposes court supervision over loan repayment.

About the Author: Phin Upham is an investor at a family office/ hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media and Telecom group. You may contact Phin on his Phin Upham website or LinkedIn page.

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