What is Insolvency?

Insolvency refers to a term for when an organization or individual cannot meet its obligation to pay debts as they become due. Under the US Bankruptcy code and the Internal Revenue Code, insolvency is generally when one’s debts exceed their assets.

Just because a business has debts that exceed it’s assets does not mean that it is in financial trouble. Many growth-based businesses are technically insolvent. Insolvency generally leads to financial distress when the business is unable to acquire or secure funds to pay its debt obligations as they become due. In such a situation, the business may consider filing for bankruptcy protection.