DEFINITION of 'Insolvency'

When an individual or organization can no longer meet its financial obligations with its lender or lenders as debts become due. Insolvency can lead to insolvency proceedings, in which legal action will be taken against the insolvent entity, and assets may be liquidated to pay off outstanding debts.

BREAKING DOWN 'Insolvency'

Before an insolvent company or person gets involved in insolvency proceedings, it will likely be involved in more informal arrangements with creditors, such as making alternative payment arrangements. Insolvency can arise from poor cash management, a reduction in the forecasted cash inflow or from an increase in cash expenses.

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