Insolvency Law and Legal Definition

Insolvency is the condition of having more debts than available assets which might be used to pay them, even if the assets were mortgaged or sold. It is the inability of an individual or entity to pay its debts as and when they fall due.

Insolvency may also refer to a determination by a bankruptcy court that a person or business cannot raise the funds to pay all of his/her debts. The court will then "discharge" (excuse) some or all of the debts, so that the creditors owed only receive a fraction of what is owed or are unable to collect at all. An insolvent individual debtor who is declared bankrupt is allowed certain exemptions, which permit him/her to retain a car, business equipment, personal property and often a home as long as he/she continues to make payments on a loan secured by the property.