Under the U.S. Bankruptcy Code, insolvency generally means that a person or entity has more debts than it has assets. A visual representation of insolvency would be the financial balance sheet of a New York company that has its value in negative territory. When a private or business entity finds itself operating in the red, it may consider filing for bankruptcy to improve its struggling financial state.
In some bankruptcy situations, a business may reclaim payments it made to creditors prior to the bankruptcy filing if those payments were made while the company was insolvent. There are several different types of payments that qualify for this reclamation, and individuals with specific questions about this bankruptcy right may work with their private counsel on learning more about it. However, creditors are not always pleased to give back money that they have received from struggling businesses and in some cases may challenge those businesses to keep their payments.
One way that a creditor can challenge the reclamation of made payments from a bankrupt entity is to show that the business was solvent when it made the payments. Evidence of solvency may be established through reviewing the bankrupt business's financial statements and its cash flow information. This method of proof is sometimes called the balance sheet test and can serve as a basis for a payment reclamation challenge.
There are other ways that a creditor may challenge the reclamation of a payment that it received from a business in bankruptcy. Businesses that are facing such challenges may need help working through their legal problems. Though no outcome can be guaranteed in bankruptcy court, legal professionals who practice business bankruptcy law can help their clients understand insolvency and its role in the federal Bankruptcy Code.