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Simple English definitions for legal terms
balance-sheet insolvency
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A quick definition of balance-sheet insolvency:
Balance-sheet insolvency is when a person or company owes more money than they have in assets. This means they cannot pay their debts and bills. It is different from equity insolvency, which is when a person or company cannot pay their bills as they come due. In some states, balance-sheet insolvency stops a company from giving money to its shareholders.
A more thorough explanation:
Definition: Balance-sheet insolvency is a type of insolvency where a debtor's liabilities (what they owe) are greater than their assets (what they own).
For example, if a company owes $100,000 in debt but only has $50,000 in assets, they are balance-sheet insolvent.
This type of insolvency can prevent a corporation from making distributions to its shareholders, according to some state laws.
Example: ABC Corporation has $500,000 in debt and $400,000 in assets. They are unable to pay their debts as they fall due, making them balance-sheet insolvent. As a result, they are not allowed to make any distributions to their shareholders until they can improve their financial situation.
This example illustrates how balance-sheet insolvency occurs when a company's liabilities exceed their assets, making it difficult for them to meet their financial obligations.