Insolvency is the legal term describing the situation of a debtor who is unable to pay his, her, or its debts. There are two primary types of insolvency: cash flow and balance sheet.
In cash flow insolvency, the debtor suffers from a lack of financial liquidity making it impossible to pay debts as they fall due. This is the type of insolvency most individuals experience prior to filing for bankruptcy.
Balance sheet insolvency, on the other hand, involves having negative net assets, where one's liabilities exceed their assets. This is the form of insolvency normally described by corporate entities prior to filing for bankruptcy.
Notably, insolvency is not the same as bankruptcy. For example, a business be cash flow insolvent but balance sheet solvent and, as a result, would likely be unable to qualify for bankruptcy protection. Indeed, many businesses have negative net assets (i.e., they are balance sheet insolvent) but remain cash flow solvent as their ongoing operations meet their regular debt obligations, helping them avoid default. This is usually the period prior to a company being "in the black," as it is commonly described.
Under the Uniform Commercial Code, a person is considered to be insolvent when they have stopped paying their debts or cannot pay their debts as they become due. A number of federal laws exist to protect insolvent persons or businesses, including the bankruptcy code. However, a recent trend has put the focus onto individual corporate officers and directors if it is shown that they have intentionally or negligently driven a company into the ground, possibly for the purpose of seeking bankruptcy relief.
The resources below will provide you with more information regarding insolvency laws, and the tab, above, labeled "Law Firms" will help you find an attorney in your jurisdiction that can help answer your insolvency and bankruptcy questions.
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