What is Balance Sheet Insolvency?

Balance sheet insolvency, also known as technical insolvency or net-worth insolvency, is a financial situation in which an individual or an organization has a negative net worth. In other words, their liabilities (debts and financial obligations) exceed their assets (cash, investments, property, and other resources). This is an indication that the individual or organization is in a poor financial position and may struggle to meet their long-term financial obligations.

Unlike cash-flow insolvency, which focuses on an entity’s ability to meet short-term obligations, balance sheet insolvency is concerned with the overall financial health of the entity. A balance sheet insolvent entity may still be able to meet short-term obligations by borrowing, selling assets, or generating cash flow from operations. However, over time, the negative net worth suggests that the entity may face financial difficulties and may eventually become unable to service its debts, leading to potential bankruptcy or liquidation.