Liquidity & Insolvency

When does a firm typically default? When they run out of liquidity. True, some firms voluntarily file for bankruptcy when they see that their assets are worth less than their liabilities, and don’t see any way out. Some firms are forced to file for bankruptcy when they trip a debt covenant. But most firms that find their net worth slouching into, or slouching deeper into negativity don’t file for bankruptcy. They play for time.