Solvency

• A solvent company generates enough money to stay in business. In other words, the company earns enough money to cover its financial obligations. However, the justification of any business is to make enough to earn a profit. In contrast, a company that is insolvent is not earning enough money to cover its expenses. Such a situation cannot last too long. Eventually the company goes out of business.
  
  

Liquidation

• Liquidating a company means selling off its assets to pay creditors. A visual example is the store with a sign that reads "Going Out Of Business Sale." In this case, the business sells all of its merchandise, usually at discounted prices to the all-too-happy customers who benefit.
  
  

Bankruptcy

• A Chapter 7 bankruptcy involves total liquidation of a company's assets to settle claims against those assets. The company is essentially out of business. The company receives an automatic stay of protection from creditors when it files for bankruptcy. The court receives a list of assets and liabilities to assess to the solvency of the business. In general, too many liabilities versus assets signify that the company can no longer sustain itself. As such, the court appoints a trustee to oversee liquidation of the company's assets. The proceeds of the sale go toward paying off the company's creditors. A small company may only have a few creditors. However, larger companies may have hundreds of creditors. It is not uncommon for a creditor to receive nothing in a liquidation sale, particularly if it is an unsecured creditor.
  
  

Priority of Claims

• There is a priority of claimants to the company's assets in a Chapter 7 bankruptcy. Secured lenders such as bondholders receive first priority followed by employee salaries and benefits, federal and state tax liabilities, and any unsecured customer deposits. Shareholders usually receive nothing for their shares because there is usually no money left after liquidation.