Insolvency

Insolvency is a financial condition in which a person or organization is unable to meet its debt obligations as they come due or when its liabilities exceed its assets. The term encompasses two distinct concepts: balance-sheet insolvency, where liabilities exceed assets, and cash-flow insolvency, where payments cannot be made as they fall due.

Insolvency may lead to formal proceedings, depending on the jurisdiction. Courts or regulators may appoint a licensed insolvency practitioner to administer and restructure the debtor’s affairs, or to liquidate assets for creditor repayment. Common formal mechanisms include liquidation (winding up the debtor’s affairs) and reorganization or restructuring aimed at returning the entity to viability. Personal insolvency regimes exist alongside corporate ones; they provide debt relief, repayment plans, or discharge of residual obligations.

In many jurisdictions, insolvency triggers protective measures such as an automatic stay on creditor actions and the creation of a formal plan for asset realization and distribution. Creditors are paid according to statutory priorities, and certain transfers before insolvency may be void or recoverable if they were preferential or fraudulent.

Outcomes vary: a viable debtor may emerge after restructuring; otherwise, the entity may be dissolved with remaining assets distributed to creditors. Insolvency differs from bankruptcy in that insolvency describes a financial state, while bankruptcy is a specific legal process or status that may follow that state in some jurisdictions.