insolvency theory

Insolvency theory examines the financial condition of individuals or organizations that cannot meet their debt obligations. It distinguishes between two types: cash-flow insolvency, where an entity cannot pay debts as they come due, and balance-sheet insolvency, where liabilities exceed assets. Understanding insolvency helps in analyzing bankruptcy processes, creditor rights, and the impact on the economy. It also guides policymakers in creating frameworks for debt restructuring and protection of stakeholders. Ultimately, insolvency theory aims to provide insight into how financial distress can be managed and resolved efficiently.