Final answer:
A firm experiencing difficulty in paying its debts is facing a financial shortfall. This can lead to bankruptcy, where liabilities exceed assets. Factors like poor management and competition can lead to such financial distress.
Step-by-step explanation:
When a firm is unable to pay its debts, or only able to pay them with difficulty, it is experiencing what is known as a financial shortfall. This situation may indicate that the company's liabilities exceed its assets, leading to financial distress and potential bankruptcy. Bankruptcy occurs when a bank or a firm has a negative net worth, meaning that the value of its liabilities surpasses the value of its assets.
Various factors can contribute to financial shortfalls, including outdated technology, management failures, consumer preference changes, the loss of a large customer, or strong competition. It is crucial for institutions like the Federal Reserve to maintain a stable financial system to prevent widespread issues such as firms being unable to access necessary financing for daily operations, as seen during the 2008-2009 financial crisis.