What is meant by insolvency in financial terms?

In financial terms, insolvency refers to a situation where an individual or entity cannot meet their financial obligations as they come due. This means that even if they might have assets, they do not have sufficient liquid assets or cash flow to pay off current debts. This condition can lead to bankruptcy if the situation is not resolved, but being insolvent does not necessarily mean that bankruptcy has been filed or declared.

Choosing the option regarding the inability to pay debts when they are due accurately captures the essence of insolvency. It emphasizes the immediate financial challenge faced by the person or business and indicates that they are struggling to manage their liabilities effectively. Understanding insolvency is crucial for recognizing when individuals or businesses may need to seek financial relief or restructure their debts.

Other options describe characteristics or situations that may relate to insolvency, but they do not define it accurately. For instance, having a significantly high net worth does not denote insolvency; rather, it implies financial stability. Similarly, being in a state of bankruptcy refers to a legal process initiated when insolvency is severe enough to warrant it, but not all insolvencies lead to bankruptcy. Lastly, while having debts that exceed fair market value can indicate a financial strain, it doesn't specifically define the inability to pay debts when they