Insolvency

What does Insolvency mean?

Like the term "bankrupt," the term insolvency is not legally defined within bankruptcy law. It is a general accounting term that is used in the bankruptcy proceedings where anyone filing a bankruptcy case is considered to be bankrupt. Although this term is often used for bankrupt individuals, this term most often describes the financial condition of business bankruptcies.

If the liabilities of a company are greater than the sum total value of its assets, at that particular point in time, the company is said to be insolvent. If there is not enough cash flow coming in or potential for cash flow to come into a company is insufficient, then the company is in insolvency. The financial condition of insolvency is very similar to the financial condition of being bankrupt.

If there is a real difference in the two terms of insolvency or bankruptcy, the difference comes in bankruptcy law where a debtor is not legally considered bankrupt until he or she files for bankruptcy protection. One does not normally file for insolvency protection nor, when they are insolvent, do they file for protection in an insolvency court. Simply put, the two words are similar in meaning, but the semantics of usage varies.

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