1. Money
Send to a Friend via Email

Insolvent / Insolvency

By

Definition:

Insolvency is the inability of a business or person to pay debts when they are due or in the usual course of business.

A business or person is insolvent if unable to pay debts when due or in the usual course of business.

If a business or person is insolvent, it is likely that they will have to file bankruptcy or that involuntary bankruptcy may be filed for them.

Insolvency can involve cash flow insolvency, or the lack of cash flow to pay current and future business debts, or balance sheet insolvency, in which the business has negative assets (more liabilities than assets).

The Uniform Commercial Code defines "insolvent" as:
(A) having generally ceased to pay debts in the ordinary course of business other than as a result of bona fide dispute; (B) being unable to pay debts as they become due; or (C) being insolvent within the meaning of federal bankruptcy law.
. This description is of "cash flow" insolvency.

Insolvency under federal bankruptcy code means that the business debts exceed its assets ("balance sheet" insolvency).

©2014 About.com. All rights reserved.