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What’s the Difference Between Bankruptcy vs Insolvency In Canada?

The difference between insolvency and bankruptcy in Canada is insolvency is a financial state in which a person is unable to make timely debt payments as they come due. Bankruptcy is a legal process that occurs when an individual declares that he or she is unable to repay their creditors.

In other words…

The difference between bankruptcy vs insolvency is that bankruptcy is a possible solution for not having enough money to pay your debts, and insolvency is the condition of not having enough money to make your debt payments as they come due.  

What is Insolvency?

Insolvency is a financial condition whereby if you sold your assets to convert them into funds, you could not pay off your debts—and your income is not enough to cover your bills as they come due.

If you don’t have enough money to pay your debts on time and the value of your assets is less than the total of what you owe, you are insolvent.

It’s important not to confuse insolvency with a temporary setback that causes you to make some late payments, or with a habit of forgetting payments. You can be in trouble with your creditors but not be insolvent.

Also, insolvency does not equal bankruptcy. Bankruptcy, for consumers, is a legal procedure that is entered into voluntarily (or forced by creditors) – it does not happen automatically once you become insolvent. It’s also important to remember that bankruptcy is not the only insolvency solution.

What is Bankruptcy?

Strictly speaking, bankruptcy is a legal procedure or process. You must be insolvent to file for bankruptcy. 

To start the process of filing for bankruptcy, first, you arrange to see a Licensed Insolvency Trustee (the only professional who can file your bankruptcy papers). The Trustee will determine whether you meet the requirements to file and will explain the process. Most first-time bankruptcies span either 9 or 21 months.

If You’re Insolvent, Get Help

If you are feeling financial stress and wonder if you might be insolvent (or are sure that you are), it’s time to get help. The earlier you receive professional advice, the more options you may have and the easier the process will be.

Bankruptcy is certainly the quickest insolvency solution because most first-time bankruptcies last only 9 or 21 months. Keep in mind, though, that bankruptcy may not be your only option for dealing with your insolvency. 

Insolvent individuals may alternatively qualify to file a consumer proposal. A consumer proposal is not another type of bankruptcy, but is a different legally binding procedure in which, via a Licensed Insolvency Trustee, you propose a payment schedule to your creditors, and if it is accepted you make payments for up to five years, in exchange for your eligible debts being cleared. Consumer proposals work best if you have regular income. Learn more about consumer proposals.

What’s your first step? Make an appointment to meet with a Licensed Insolvency Trustee (LIT) near you. LITs are experts in insolvency solutions and your best source of information about your options. Your first appointment is confidential, no-obligation, and free of charge. Most people are very reassured by what they hear when they meet with an LIT. Why wait? Make an appointment with a local Licensed Insolvency Trustee today.