When is a financial situation considered insolvent?

A financial situation is considered insolvent when an individual's or entity's assets are less than their liabilities. In this context, insolvency means that the total value of what you owe—your debts—exceeds the total value of what you own—your assets. This situation indicates that you do not have sufficient assets to cover your debts, which can lead to severe financial difficulties, such as an inability to pay creditors.

It is important to differentiate this from other financial concerns. For instance, having lower income than expenses may indicate cash flow issues or potential financial stress, but it does not necessarily mean that one is insolvent. Similarly, a low credit score can reflect poor financial management or high debt levels, but it doesn't directly indicate insolvency. Lastly, having no savings suggests a lack of financial reserves but does not provide a full picture of one's assets versus liabilities. Each of these circumstances is related to financial health, but only the situation where assets are less than liabilities defines insolvency.