Insolvency

Cash-flow insolvency is when a person or company has enough assets to pay what is owed, but does not have the appropriate form of payment.

For example, a person may own a large house and a valuable car, but not have enough liquid assets to pay a debt when it falls due.

For example, the bill collector may wait until the car is sold and the debtor agrees to pay a penalty.

Cash-flow insolvency involves a lack of liquidity to pay debts as they fall due.

Balance sheet insolvency involves having negative net assets—where liabilities exceed assets.

[2][3][4][5] The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the liquidation and elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of their business.

Implementing a business turnaround may take many forms, including keep and restructure, sale as a going concern, or wind-down and exit.

In others (like the United States with its Chapter 11 provisions), the business may continue under a declared protective arrangement while alternative options to achieve recovery are worked out.

Debt restructuring is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.

However, in most cases, debt in default is refinanced by further borrowing or monetized by issuing more currency (which typically results in inflation or hyperinflation).

If the interests of creditors are respected, insolvent companies are offered different ways to restructure their businesses, for example by implementing an 'insolvency plan' (Insolvenzplan).

For natural persons, the Verbraucherinsolvenzverfahren (literally "insolvency proceeding for individual consumers") allows discharge of all debts after three years, if certain conditions are met.

It can be a civil and even a criminal offence for directors to allow a company to continue to trade whilst insolvent.

In this process, immediately after appointment the administrator completes a pre-arranged sale of the company's business, often to its directors or owners.

If the sale was delayed, creditors would ultimately lose out because the price obtainable for the assets would be reduced.

In individual cases the bankruptcy estate is dealt by an official receiver, appointed by the court.

In some cases the file is transferred to RTLU (OR Regional Trustee Liquidator Unit) that will assess your assets and income to see if you can contribute towards paying costs of bankruptcy or even discharge part of your debts.

However, some state courts have begun to find individual corporate officers and directors liable for driving a company deeper into bankruptcy, under the legal theory of "deepening insolvency".