What Is 'Asset Deficiency'

Asset deficiency is a situation where a company's liabilities exceed its assets. Asset deficiency is a sign of financial distress and indicates that a company may default on its obligations to creditors and may be headed for bankruptcy.

Asset deficiency can also cause a publicly traded company to be delisted from a stock exchange. A company may be involuntarily delisted for failing to meet minimum financial standards. When a company no longer meets listing requirements, the listing exchange will issue a warning of noncompliance. If noncompliance continues, the company's stock may be delisted.

BREAKING DOWN 'Asset Deficiency'

A company that has a chance at recovering financially may file for Chapter 11 bankruptcy, under which the company is restructured, continues to operate and attempts to regain profitability. As part of a Chapter 11 reorganization plan, a company may choose to downsize its business operations to reduce expenses, as well as renegotiate its debts.

In a worst-case scenario, asset deficiency may force a company to liquidate as a means to pay off its creditors and bondholders. The company would file for Chapter 7 bankruptcy and go completely out of business. In this situation, shareholders are the last to be repaid, and they may not receive any money at all.

If a company succeeds with its restructuring in Chapter 11, it will typically continue operating in an efficient manner under its new debt structure. If it is not successful, then the company will likely file for Chapter 7 and liquidate.

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