Future Business Leaders of America (FBLA) Entrepreneurship Practice Test

What usually occurs when a business becomes insolvent?

1. Acquisition

2. Merger

3. Bankruptcy

4. Divestiture

The correct answer is: Bankruptcy

When a business becomes insolvent, it means that it cannot pay its debts as they come due or its liabilities exceed its assets. In this situation, bankruptcy typically follows as a legal process that allows the insolvent business to either restructure its debts or liquidate its assets to pay creditors. Bankruptcy provides the business with protection from creditors while it resolves its financial distress. This process is essential for addressing insolvency because it aims to ensure equitable treatment of creditors and gives the business a chance to reorganize and emerge back into stable operations, or, in some cases, it leads to the dissolution of the business through liquidation. The other options—acquisition, merger, and divestiture—are strategic actions that a business might take or undergo when seeking growth or realignment, rather than being direct consequences of insolvency. They don't necessarily address the immediate financial challenges posed by being unable to meet debt obligations.