That solvency testing is difficult is nothing new. Commentators in a 1929 Columbia Law Review article lamented that “courts have not yet developed any clear-cut principles or rules” for solvency testing.Seventy-five years later, Delaware's Court of Chancery complained that “it is not...

Insolvency often precedes default for nonpayment of debt. A firm is instantaneously insolvent whenever the market value of its assets is below the face value of its debt. Default occurs when the firm is instantaneously insolvent when the firm's debt matures. The natural log of the ratio of the...

This article proposes a simple balance-sheet solvency test for publicly-traded firms that addresses current limitations of financial-market-based solvency tests. I derive a solvency test from an elementary algebraic relation among the inputs to the balance-sheet solvency calculation for a...

Legal rules play a powerful but understudied role in security design. This article presents two new theoretical results about the design of debt contracts. The results derive from the premise that firms must avoid legal insolvency when issuing new debt because insolvency at issuance would...

An unacknowledged fact about the Bankruptcy Code's definition of "insolvent" is that it requires unmatured interest to be counted as debt. Ignored in practice, this statutory requirement makes no economic sense, but remains a trap awaiting a litigant in front of a court compelled to apply the...

It is well understood that the equity of an insolvent firm can trade for a positive price so long as there is some positive probability that the firm will become solvent at some future point. Currently, however, this insight exists in the case law in an informal sense, while its use in the...

The Altman Z Score (AZS) does not predict bankruptcy. The false positive rate of the AZS is 98%-99%. The AZS fails as a predictive model because it does not incorporate market evidence bearing on bankruptcy probability, specifically, returns, debt to an approximation of market value of assets,...