Legal Definitions - balance-sheet insolvency

Definition: Balance-sheet insolvency is a type of insolvency where a debtor's liabilities (what they owe) are greater than their assets (what they own).

For example, if a company owes $100,000 in debt but only has $50,000 in assets, they are balance-sheet insolvent.

This type of insolvency can prevent a corporation from making distributions to its shareholders, according to some state laws.

Example: ABC Corporation has $500,000 in debt and $400,000 in assets. They are unable to pay their debts as they fall due, making them balance-sheet insolvent. As a result, they are not allowed to make any distributions to their shareholders until they can improve their financial situation.

This example illustrates how balance-sheet insolvency occurs when a company's liabilities exceed their assets, making it difficult for them to meet their financial obligations.