Insolvency is a condition in which an entity cannot pay its bills as they come due for payment. In this situation, the entity first meets with its creditors and lenders to see if the obligations coming due can be restructured. Restructuring involves delaying payment and/or reducing the amount owed. If these discussions do not resolve the issue, the entity may need to declare bankruptcy.
Insolvency can occur for a number of reasons, including the following:
Poor cash management
The sudden loss of a line of credit
Customers not paying in a timely manner
The bankruptcy of a major customer
A sudden increase in expenses
A sudden decline in revenues