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LSDefine
Simple English definitions for legal terms
Solvency
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A quick definition of Solvency:
Solvency refers to whether an individual or business has more money and things they own (like a house or car) than they owe to other people or companies. If they do, they are considered solvent. If they owe more than they have, they are insolvent. There are different ways to figure out if someone is solvent, like looking at how much their things are worth compared to their debts or if they have enough money to pay their debts in the future. Being solvent or insolvent can affect how much taxes someone pays and what happens if they have to declare bankruptcy.
A more thorough explanation:
Solvency refers to the financial health of an individual or business. It is determined by whether the party has more assets than debt. If a business is worth less than its debts, it is considered insolvent.
- Company A has $100,000 in assets and $50,000 in debt. This means that Company A is solvent because its assets are worth more than its debt.
- Company B has $50,000 in assets and $100,000 in debt. This means that Company B is insolvent because its debt is greater than its assets.
These examples illustrate how solvency is determined by comparing a party's assets to its debt. If the assets are greater than the debt, the party is solvent. If the debt is greater than the assets, the party is insolvent.