Insolvency facts for kids

Insolvency means that a person or organisation does not have enough money to pay all of the people who they owe money. Different countries have different definitions of exactly what insolvency means, but usually it means either that:

• a person cannot pay their debts as they fall due (which is sometimes called cash flow insolvency); or
• the total amount of a person's liabilities is larger than the total amount of their assets (which is called balance sheet insolvency).

When a person or a business is insolvent, then people whom they owe money to may apply to court to put then into bankruptcy.

Insolvency and bankruptcy

People often confuse the terms bankruptcy and insolvency, and sometimes they use one word when they really mean the other. Insolvency usually just means that a someone does not have enough money to pay their debts or (sometimes) that the total amount of their debts is worth more than the total amount of their assets. Bankruptcy is a formal legal process in front of the courts. Although the two terms are connected, just because a person is insolvent does not necessarily mean that they will go into bankruptcy.

Consequences of insolvency

Apart from being put into bankruptcy there are other risks to being insolvent. Many countries have laws to protect the public which means that the directors of a company who continue to trade whilst the company is insolvent may have to pay compensation to creditors, and in some cases may even be convicted of a crime.

See also

In Spanish: Insolvencia para niños