Insolvency

Insolvency is a financial condition in which the total liabilities of an individual or enterprise exceed the total assets so that the claims of creditors cannot be paid. There are essentially two approaches in determining insolvency: insolvency in the equity sense and under the balance-sheet approach. Insolvency in the equity sense denotes the inability of the debtor to pay his debts as they become due in the ordinary course of business. Insolvency under the balance-sheet approach means that the total liabilities of the debtor exceed his total assets.

Insolvency is distinguished from bankruptcy in that bankruptcy denotes a particular legal status to be determined and declared by judicial decree. For an individual or a corporation to be declared bankrupt, certain additional requirements, such as committing an act of bankruptcy, for example, are necessary. Thus, insolvency, although an essential factor, is not the sole ingredient necessary in determining bankruptcy.

Links

 * Bankruptcy and Insolvency by Charles Holt Carroll, 1869 (Chapter 29 of Organization of Debt into Currency and Other Papers)
 * The Insolvency of the Fed by Philipp Bagus and Markus H. Schiml, February 2009
 * Can a Central Bank Go Broke? by David Howden, September 2009
 * Can the Fed Become Insolvent? by Robert P. Murphy, November 2010