Personal insolvency: watch out for these red flags

By Sarah Li Cain

Reviewed by Jill Cornfield

May 09, 2024

Read time: 4 min

Worried single mother analyzing and calculating her home finances, while her baby boy sitting in her lap

Key takeaways:

  • Personal insolvency is when you don’t have any money to pay back what you owe.

  • Warning signs of insolvency include using debt to pay other debts, regularly asking friends and family for loans, and being underwater on a loan. 

  • You may be able to speak with creditors yourself or work with a debt resolution company to negotiate for less than what you owe. 

If you’re worried that your finances may be heading for troubled waters, it’s not too late to course correct. Take a breath and take a closer look for early warning signs of personal insolvency. These red flags could give you the opportunity to make changes now, so you can get the relief and peace of mind you deserve. It’s okay to seek help—that’s the first step towards moving your finances in a better direction.

You may be insolvent if your liabilities (your debts and financial obligations) are bigger than your assets (the things you own that have value). Being insolvent doesn’t necessarily mean you’re in crisis. But it could be an indication that you need a revamped financial plan so that you can get ahead. 

Here are 5 red flags that you could be heading toward personal insolvency. 

1. You’re underwater on a loan

Being underwater means you have a secured loan and you owe more than the collateral is worth. The collateral is the thing that guarantees the loan. On a secured debt, if you don’t repay the loan, the lender can take your collateral. This is how mortgages work. “Underwater” is a term commonly used to describe a mortgage on a home whose value has dipped below the balance owed. 

It’s not difficult to understand how a person could find themselves underwater. 

Say you really needed a car to drive a long distance to and from work. You buy a car with a 10-year auto loan. Unfortunately, the vehicle dies on you in year eight. The car may not be worth much, but you’re still on the hook for two more years of payments. 

You’re underwater on an asset—in this case, your car.

Being underwater on one loan isn’t a clear sign you’re insolvent, but it could be a big red flag. 

2. You’re using debt to pay other debts

Most of us borrow money for something at some point in our lives. For instance, you might use a personal loan to cover a large medical bill. Or you might decide that a debt consolidation loan is the right tool to help you streamline your debts and reach your goals. Those are examples of situations where borrowing responsibly could make your financial situation better.

But if you’re borrowing money to make your debt payments because you can’t afford them, you could have a bigger problem. 

Engaging in juggling acts with your debt could lead you to believe you have money to pay back what you owe. In fact, you could be racking up more in debt with no end in sight, leading to insolvency.

Leave debt behind, so you can move forward

Get rid of your debt and free up your cash flow without a loan or great credit.

3. You regularly ask friends and family to borrow money

Having friends and family to ask for help is a wonderful feeling, especially if you’ve fallen on hard times. Those who have the means may be willing to give or lend you money for diapers or groceries, so you and your family won’t be in need. But there comes a point when regularly asking for help is a sign that you’re struggling to manage your finances.

Read more: How much debt is too much?

4. Your credit cards are maxed out 

If heading to the grocery store feels stressful for you because you don’t know if your credit card will get declined, you may have overwhelming debt

Not having enough money in your checking account consistently and maxing out your credit cards could be a sign that you rely on debt too much to get by. If you can’t pay for small items, it's a red flag that there may be bigger problems.

5. You’re getting regular collections calls

If debt collectors won’t leave you alone, it could be a sign you're really struggling and possibly insolvent.

You are not alone. Everybody has financial ups and downs. There is a solution for every debt problem. 

If you genuinely can’t afford to repay your debts, you may be a candidate for debt resolution. Resolving debts means getting your creditors to agree to accept less than the full amount you owe but consider the debt satisfied. You could try negotiating with your creditors on your own if you’re comfortable doing so. Or you could choose to work with a professional debt resolution company that has the experience to help and guide you.

If you’re worried that you may be insolvent, or you’re at risk of becoming insolvent, it’s better to act sooner rather than later. Financial problems tend to become worse when ignored. If you’re not sure where to start, reach out to a debt expert who can help you understand your options.

Sarah Li Cain

Sarah is a contributing writer for Achieve. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a writer for other Fortune 500 publications.

Jill Cornfield

Jill is a personal finance editor at Achieve. For more than 10 years, she has been writing and editing helpful content on everything that touches a person’s finances, from Medicare to retirement plan rollovers to creating a spending budget.

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