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 costumer
- A sudden increase in expenses
- A sudden decline in revenues