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The term insolvency is generally used in business. Insolvency could be defined as the inability to pay one's debt. Insolvency is of two types: cash flow insolvency and balance sheet insolvency. A business would be declared as cash flow insolvent when it is unable to pay debts as and when it becomes due for payment. In case of balance sheet insolvency, the business should have negative net assets i.e. liabilities exceed assets. It is possible that a business could be cash flow insolvent but balance sheet solvent. In such a case, business must be holding illiquid assets, particularly against short term debts. The reverse is also possible. A business could be balance sheet insolvent but cash flow solvent. A business showing negative net assets on their balance sheet could be cash flow solvent if ongoing revenue earnings is able to meet debt obligations and avoid default because of holding long term debts. One thing should be very clear. Insolvency does not necessarily mean bankruptcy. The status of bankruptcy for any business is determined only in a court of law against a case of insolvency and the corresponding legal orders are intended to help the business to overcome the problem of insolvency. The present day laws that have been formulated to handle cases of insolvency are no longer meant only to liquidate and then eliminate the insolvent entity, but to provide help in remodeling the financial and organizational structure of the businesses that are experiencing financial distress so that it could be rehabilitated and continue doing business. In some countries, it is an offence for a business to continue working after it has become insolvent. But, in many other companies, such businesses are allowed to function while some protective schemes are being run so that the business could recover and become healthy again. Increasingly, more and more legislations are being enacted for rehabilitation of the business rather than winding it up. However, it might be considered for a civil action, or even an offence, in case the business pays some creditors in preference to other creditors after it has turned insolvent. To overcome insolvency, restructuring of the debt burden out-of-court, which is also known as workout, is becoming more common all over the world. Such debt restructuring plans are generally handled by professional insolvency and restructuring consultants. Such a procedure is much less expensive and is being considered as a preferred alternative to bankruptcy. In case, a business is facing cash flow problem and/or financial distress, the process of debt restructuring would allow it to reduce and renegotiate its outstanding debt burden so as to help the business to improve or restore liquidity and financial health.
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