Insolvency is a financial state where an individual or organization cannot meet their outstanding financial obligations when they come due. It typically means that liabilities exceed assets, making it impossible to pay off debts. Insolvency can lead to legal proceedings, such as bankruptcy, where an individual or company seeks relief from some or all of their debts.
There are two main types of insolvency:
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Cash Flow Insolvency: This occurs when an entity has enough assets to cover its liabilities, but lacks the liquid cash to pay its debts as they fall due.
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Balance Sheet Insolvency: This is when an individual or organization has liabilities that exceed the value of its assets, meaning they owe more than they own.
Insolvency regulations vary by country, and the implications of insolvency can include formal bankruptcy proceedings, negotiations with creditors, and potential restructuring of debt. It is important for businesses and individuals facing insolvency to consult with financial and legal professionals to understand their options and the best course of action.