Other Definitions
insolvency (dict)
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InsolvencyThe term Insolvency describes a financial condition experienced by a person or business entity when his (or its) assets no longer exceed his liabilities or when the person or entity can no longer meet its debt obligations when they come due. It is often used interchangeably, and incorrectly, with the term bankrupt. "Insolvency" is however a legal term of art, where bankruptcy is a legal finding. A similar distinction can be made between "homicide", the killing of a person, and "murder", a legal finding that a homicide was a crime. A state of insolvency generally leads to a legal finding of bankruptcy. However, because putting a person or entity into bankruptcy requires the payment of court fees, an insolvent person or entity may be insolvent and not legally bankrupt. In most jurisdictions, it is an offence under the bankruptcy laws for a corporation to continue in business once it is insolvent. It is also usually an offence to continue to pay some creditors in preference to other creditors once a state of insolvency is reached. When determining whether a gift or a payment to a creditor is an unlawful preference, the date of the insolvency, rather than the date of the bankruptcy, may usually the primary consideration; however in the UK, both are relevant. For example, if a corporation pays a large bonus to its management several months before it actually files for bankruptcy protection, the court will not look at the date of the bankruptcy filing, but at the date where the corporation's debts exceeded its liabilities in determining whether the creditors of the corporation can sue for the return of the bonuses. Although the terms bankrupt and insolvent are often used in reference to governments or government obligations, a government cannot be insolvent in the normal sense of the word. Generally, a government's debt is not secured by the assets of the government, but by it's ability to levy taxes. By the standard definition, all goverments would be in a state of insolvency unless they had assets equal to the debt they owed. If, for any reason, a goverment cannot meet its interest obligation, it is technically not insolvent but is "in default". As goverments are sovereign entities, persons who hold debt of the goverment cannot seize the assets of the goverment to re-pay the debt. However, in most cases, debt in default is refinanced by further borrowing or monetized by issuing more currency.
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