From David J. Cook, Insolvency Explained, Introduction (2017), at 1-6. © 2017 American Bar Association. Reprinted with permission.
Insolvency is a general term for any legal proceeding or business arrangement that enables a failed or troubled business to seek to liquidate its assets, pay its creditors, and terminate or reorganize its business operation. A legal proceeding establishes a court appointed trustee, or even a debtor in possession, who has a brand new set of legal rights and powers that can vacate or nullify state court judgments; void key contract provisions; stay enforcement of valid liens, levies, and judgments; and claw back valid liens and payments. A “legal proceeding” means a statutory (or common law) legal process established by the Congress (i.e., the bankruptcy code) or the state legislatures (probates; receiverships; and, in some states, assignments). A business arrangement is an agreement to sell or dispose of assets and pay creditors (bulk sales; workouts; arrangements; and, in some states, assignments). A business arrangement is called an insolvency process, as opposed to an insolvency proceeding, which is established by law.