Castle Law Office Blog | Missouri & Illinois Bankruptcy Legal Blog

Bankruptcy Terms To Know: Insolvency

What does insolvency mean? Insolvency is a state in which an entity (usually a business or city) is unable to pay its bills as they become due. Insolvency occurs when a company’s debts exceed its assets or when the company does not have the appropriate cash flow to function normally. A company can be in debt without being insolvent, but once their debts begin to affect their day-to-day business, they can be considered insolvent.

Although insolvency is similar to bankruptcy, the two states are not exactly the same. The state of insolvency often leads to bankruptcy as company owners make plans to repay their debtors, pay their employees, and remedy their financial problems. However, entities that are insolvent do not necessarily have to declare bankruptcy. It is assumed that all companies, cities, and counties that declare bankruptcy are insolvent.

Is there a bankruptcy term that you don’t understand? Contact us with your Missouri and Illinois bankruptcy questions.