What does it mean to be insolvent?

To be insolvent means that a person or entity is unable to pay their debts as they become due. This financial condition can arise when liabilities exceed assets, making it impossible for the insolvent party to meet their debt obligations. The concept of insolvency is crucial in both personal and corporate finance, as it can lead to legal proceedings such as bankruptcy or reorganization.

Insolvency indicates a critical financial position that may require intervention, either through restructuring debts or undergoing bankruptcy processes to address the inability to pay creditors. Thus, the correct answer captures the essence of insolvency as a significant indicator of financial distress. Understanding this definition is essential for anyone involved in legal, financial, or business professions, especially when advising clients or handling cases related to debt and bankruptcy.