Insolvency

Written By
Paul Tracy
Updated November 4, 2020

What is Insolvency?

In most usages, insolvency is the inability of a company or individual to meet its financial obligations as they come due. In the legal sense of the word, an entity is considered insolvent if its total liabilities exceed its total assets.

How does Insolvency work?

Entities most commonly become insolvent by taking on too much debt. For example, a company with a heavy debt load may find itself unable to cover its debt liabilities should its business slow.

In this case, the company must raise capital to pay its obligations via selling assets, borrowing, or somehow raising capital and/or reducing expenses.

If a company cannot meet its obligations, it may be forced to file for bankruptcy.

Why does Insolvency matter?

Insolvency in public companies may continue to trade while restoring their financial health, but represent some of the riskiest investments on the market. Insolvency is a red flag for investors since it can lead to bankruptcy or the evation of assets in order to meet debt payments.

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