Generally most actions taken to recover assets in a bankruptcy case involve the need to determine the solvency of the debtor at a particular point in time (often at the time of a transfer of a debtor’s property or the incurrence of a debt by the debtor). In order to establish if the debtor is solvent or insolvent, there must be a proper solvency analysis of selected assets or the subject business. In the following sections, we first define insolvency under the Bankruptcy Code. We then discuss the three traditional tests used in solvency determination, including the evolution and limitations of these tests. We then conclude with a discussion of how and why business valuation techniques provide a better methodology for solvency determination.
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