Technical Bankruptcy

Technical bankruptcy, also known as balance sheet insolvency, is a financial situation where a company's liabilities exceed its assets, but the company may still be able to continue operations because it still has enough cash flow to pay its bills. This term is used primarily to illustrate that, on paper, the company is insolvent, but in practical terms, it can still function as a business.

In other words, even though the value of the company's assets isn't enough to cover its debts, the company can continue operating as long as it can keep up with its current debt payments.

The primary risk of technical bankruptcy is that creditors may still force a company into legal bankruptcy if they feel they are unlikely to be repaid. If a company's balance sheet remains insolvent for a prolonged period, it may find it challenging to raise additional funds or may face higher interest costs from lenders.

An example of technical bankruptcy would be a company that has taken on significant debt to finance growth or acquisitions. The company's balance sheet may show that liabilities exceed assets, but as long as the company can service its debt and pay its bills, it can continue to operate and potentially improve its financial situation over time. However, it's crucial for the company to turn its financial situation around to regain financial health and credibility in the eyes of investors, creditors, and other stakeholders.