Issue link: https://mbozikis.ufcontent.com/i/1422521
46 an otherwise eligible entity need not be insolvent in order to qualify for bankruptcy protection. 16 Notwithstanding this, the concept of insolvency does play a role in various contexts in a bankruptcy proceeding. Under Section 101(32) of the Bankruptcy Code, insolvency is defined by reference to a debtor's assets and liabilities and is sometimes referred to as a "modified" balance sheet test because it refers to the items contained in a balance sheet, yet does not follow Generally Accepted Accounting Principles (GAAP) when valuing such items. Furthermore, the test for insolvency differs depending on the type of entity at issue. For all entities other than partnerships and municipalities, an entity is insolvent when the sum of its debts is greater than the value of its property, taken at a "fair valuation." 11 U.S.C. § 101(32)(A). For purposes of this test, property transferred, concealed or removed with the intent to hinder, delay or defraud creditors and property exempted under Section 522 of the Bankruptcy Code are excluded from the calculation. Id. Although different courts have developed somewhat different tests for determining "fair valuation," in general it means the market value of an asset sold in a prudent fashion over a reasonable (neither too long nor too short) period of time. In re Durso Supermarkets, Inc., 193 B.R. 682, 701 (Bankr. S.D.N.Y. 1996). For partnerships, the test is similar, but does not exclude exempted property under Section 522 and also takes into account the excess value of each general partner's nonpartnership property (exclusive of concealed property and exempt property) over such general partner's nonpartnership debts. 11 U.S.C. § 101(32)(B). 16 As will be discussed below in Chapter IV.B.2., in the context of an involuntary bankruptcy filing, the petitioning creditor(s) must demonstrate that the alleged debtor is generally not paying its debts as they become due. Although this test is not included in the definition of "insolvent" under the Bankruptcy Code (except when referring to municipalities), bankruptcy practitioners often colloquially refer to this test as a test of insolvency. The same is also true for the undercapitalization test that appears in the context of fraudulent conveyances.