Stress Testing for Insolvency

Stress Testing for Insolvency

Frank Wolf (H. Wayne Huizenga School of Business and Entrepreneurship, Nova Southeastern, USA), Hon. Gerardo Carlo (Carlo & Lozada LLC, San Juan, PR, USA) and William M. Peters (R.J. Peters Associates, Burlington, Vermont, USA)
Copyright: © 2014 |Pages: 10
DOI: 10.4018/978-1-4666-5202-6.ch209
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Definitions

In the common use of the English language, insolvency and bankruptcy are sometimes used interchangeably, but they are not the same. Insolvency, is defined as the financial state of a person or company or municipality unable to meet its obligations when due. Oftentimes liabilities exceed current assets in those situations. Insolvency is a leading indicator for bankruptcy which in turn is defined as a successful legal procedure and declaration, seeking protection from creditors. All bankrupt debtors are in fact insolvent. (bankrupt24.co.za, 2012). In the context of this paper, stress testing includes all applicable techniques for attempting to measure extreme shock to a financial portfolio under severe but plausible conditions. The word ‘portfolio’ includes corporations and municipalities. (Jones, Hilbers, & Slack, 2004). A scenario is a plausible future state an enterprise or town may find itself in, and is usually quite different from what is expected under normal times.

Key Terms in this Chapter

Scenario: Plausible future state of an enterprise or town may find themselves in, and it is usually quite different than what is expected under normal conditions.

Chapter 9 of the US Bankruptcy Code: Pertains to municipalities, and its applicability varies by State.

Chapter 7 of the US Bankruptcy Code: Pertains to corporate cases, for which restructuring is unlikely to have success and liquidation the only option.

Chapter 11 of the US Bankruptcy Code: Pertains to corporate and personal cases for which reorganization or restructuring is a viable option.

Stress Testing: Corporations or municipalities for solvency is a quantitative and qualitative process of showing the likelihood of an organizations’ fiscal survival probability under adverse conditions.

Bankruptcy: Defined as a successful legal procedure and declaration seeking of protection from creditors. All bankrupt debtors are in fact insolvent. (bankrupt24.co.za, 2012), includes corporations and municipalities. ( Jones, Hilbers, Slack, 2004 ).

Insolvency: Defined as the financial state of a person or company or municipality unable to meet its obligations when due. Usually liabilities exceed current assets in those situations.

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