insolvency
Definition
Insolvency is the financial state where a person or business cannot pay their debts as they come due, or where their total debts outweigh the total value of everything they own. It is not the same as bankruptcy, but it is often what leads a business down that road. Think of it as the danger zone your finances enter before things get legally serious.
Example
If your business owes $50,000 in bills due this month but only has $8,000 in the bank and no way to cover the gap, your business is insolvent. Creditors may start taking legal action to collect what you owe them.
Watch Out
Once you recognize your business may be insolvent, you should talk to a lawyer immediately because continuing to take on new debt or pay certain creditors over others can create serious personal legal liability for you.
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This definition is for informational purposes only and does not constitute legal advice. Please consult with a licensed attorney for legal guidance.