What does it mean to be insolvent?

What does it mean to be insolvent?

• A. When assets exceed liabilities.
• B. When cash flow is positive.
• C. When a person owes more than they own and has a negative net worth.
• D. When liabilities are zero.

Answer: (C)

Insolvency is a balance-sheet issue: it happens when your total liabilities exceed your total assets, leaving you with negative net worth. That means, if you sold everything you owned and paid off what you owe, you still wouldn’t have enough to cover all your debts. That’s why the best description is owing more than you own and having a negative net worth. The other ideas describe liquidity or debt levels rather than insolvency. Positive cash flow means money is coming in faster than it goes out in a period, which doesn’t by itself prove you can cover all debts long-term. Assets exceeding liabilities means you’re solvent, not insolvent. Having zero liabilities means you have no debt, which is certainly not insolvency.

Insolvency is a balance-sheet issue: it happens when your total liabilities exceed your total assets, leaving you with negative net worth. That means, if you sold everything you owned and paid off what you owe, you still wouldn’t have enough to cover all your debts. That’s why the best description is owing more than you own and having a negative net worth.

The other ideas describe liquidity or debt levels rather than insolvency. Positive cash flow means money is coming in faster than it goes out in a period, which doesn’t by itself prove you can cover all debts long-term. Assets exceeding liabilities means you’re solvent, not insolvent. Having zero liabilities means you have no debt, which is certainly not insolvency.