Legal Definitions - insolvency

Insolvency refers to a situation where a person or company cannot pay the debts they owe. For example, a company may become insolvent when it is unable to repay its creditors on time, which can lead to bankruptcy. There are two main types of insolvency:

• Balance sheet insolvency: This occurs when a person or company's liabilities (what they owe) exceed their assets (what they own). For example, if a company owes $100,000 but only has assets worth $80,000, it is balance sheet insolvent.
• Cash flow insolvency: This occurs when a person or company cannot pay their debts as they fall due. For example, if a company owes $10,000 but only has $5,000 in the bank, it is cash flow insolvent.

Insolvency can have serious consequences for a person or company, including bankruptcy and legal action from creditors. However, it is important to note that insolvency is not the same as bankruptcy. Bankruptcy is a legal process that can be used to deal with insolvency, but it is not the only option.

For example, if a person or company is balance sheet insolvent, they may be able to sell assets to pay off their debts. If they are cash flow insolvent, they may be able to negotiate payment plans with their creditors.

Insolvency can also apply to countries. When a country is unable to pay its debts, it is said to be insolvent. However, the legal and political processes for dealing with sovereign insolvency are different from those for individuals and companies.