Insolvency occurs if the debts and liabilities a company owes are greater than the company's assets or cash flow.
If this happens a company is unable to meet their financial obligations and must take action to increase their cash flow or work with their creditors to renegotiate their debts. Filing Chapter 11 Bankruptcy and restructuring debt payments is a common solution for some companies who are insolvent. Insolvency can be a temporary condition, however, and if the proper steps are taken a company may be able to increase their cash flow without seeking legal protection through bankruptcy. Companies who have filed bankruptcy are all considered insolvent.
Insolvency forces a company to take immediate steps to decrease their liabilities. Common ways to do this may include selling assets to raise immediate cash for debt payments or borrowing more money. Borrowing additional funds, although generating immediate cash, is less appealing because it also creates more debt liability which must be paid. Acquisition by another company may also be another way to stave off insolvency.
Debtors who file bankruptcy protection can also be considered insolvent. Depending on the type of bankruptcy filed, a discharge for certain debts may be given (Chapter 7 Bankruptcy) or the debtor may be required to repay a portion of their debts (Chapter 13 Bankruptcy). Insolvent individuals who file bankruptcy are allowed certain bankruptcy exemptions (car, trade equipment, equity in a home) to make a fresh financial start.
More Help on Insolvency
- Chapter 11 Bankruptcy - Unlike Chapter 7 Bankruptcy which liquidates the debtors non-exempt assets, Chapter 11 Bankruptcy allows the Debtor (which is generally a corporation or partnership) to restructure their debt obligations and continue to operate their business (although the business is supervised by the bankruptcy court and should be managed and operated for the benefit of the creditors). - read more
- Chapter 7 Bankruptcy - Chapter 7 Bankruptcy is a liquidation or \"straight\" bankruptcy. It is the quickest, easiest and least expensive type of bankruptcy method to discharge debts. - read more
- Discharge of Debt - Bankruptcy provides a federal process for receiving protection against one\'s creditors and at its completion may allow the debtor to be released from certain types of \"dischargeable\" debt. - read more
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