insolvent

Insolvent describes a state where an individual or organization cannot repay debts as they become due, or where the entity's liabilities exceed its assets. There are two commonly discussed forms: cash-flow insolvency (inability to meet debts as they come due) and balance-sheet insolvency (liabilities exceed assets). Insolvent status does not by itself determine the legality or outcome; it may trigger formal proceedings.

When insolvency is established, creditors may bring actions for repayment; businesses may attempt restructuring, asset sales, or preservation; some jurisdictions provide protective mechanisms to avoid aggressive creditor actions. For businesses, insolvency can lead to administration or liquidation. Individual insolvency may lead to bankruptcy or debtor relief.

Legal frameworks vary by country. In the United States, bankruptcy law provides chapters for liquidation (Chapter 7) and reorganization (Chapter 11 for businesses, Chapter 13 for individuals). In the United Kingdom and many Commonwealth countries, procedures include administration, liquidation, and restructuring arrangements such as company voluntary arrangements. Other jurisdictions use similar processes under insolvency or bankruptcy laws.

Insolvent status is a financial condition, whereas bankruptcy is a legal process that may follow. Some jurisdictions allow out-of-court settlements or restructurings. Insolvency practitioners, trustees, or administrators may oversee proceedings, aiming to maximize returns to creditors while balancing debtor rights.