In the context of credit risk, what does insolvency mean?

Insolvency refers to a financial situation where an individual or an organization is unable to meet its debt obligations as they come due. Specifically, it means that liabilities exceed assets, indicating that the total amount owed is greater than the total value of what is owned. This can lead to bankruptcy proceedings or other forms of debt restructuring.

When a party is insolvent, it cannot pay off its debts, which is a critical concern in the context of credit risk. Creditors need to assess the likelihood of recovering amounts owed, and recognizing insolvency helps in understanding the creditworthiness of borrowers.

The other choices highlight conditions that do not apply to insolvency. For example, assets exceeding liabilities indicates financial health rather than financial distress. Paying all debts would suggest liquidity and solvency, and being unable to pay only interest does not capture the broader picture of insolvency, as the core issue is the overall inability to satisfy debt obligations.