What term describes a situation where a person cannot pay their debts when they are due?

The most accurate term for a situation where a person cannot pay their debts when they are due is insolvency. Insolvency specifically refers to the financial state in which an individual or organization is unable to meet their obligations to creditors as they come due, indicating a lack of sufficient assets to cover liabilities.

While bankruptcy is a legal process that follows insolvency, it is not synonymous with the state of being unable to pay debts; rather, it represents the formal declaration and process that follows such a situation. Liquidation pertains to the process of selling off assets to settle debts and is usually a step that may occur after insolvency has been declared. Default refers to failing to meet the legal obligations or conditions of a loan, which can occur due to insolvency but does not encompass the broader financial condition of being unable to pay all debts.

Understanding these distinctions highlights why insolvency is the correct term to describe the inability to pay debts as they become due, making it essential for grasping concepts in financial situations and obligations.