Balance-Sheet Insolvency Law and Legal Definition

Balance-sheet insolvency refers to insolvency that is created when a debtor’s liabilities exceed its assets. Under some state laws, balance-sheet insolvency prevents a corporation from making a distribution to its shareholders. In In re Storage Technology Corp., 48 B.R. 862, 867 (Bankr. D. Colo. 1985), it was held that balance-sheet insolvency is undoubtedly more difficult to prove than equitable insolvency, thus placing a heavy burden on reclaiming sellers. It is also a standard for allowing the offset of unmatured debts against a decedent's estate, with the burden of proof on the party.