Is There A Difference Between Insolvency And Bankruptcy?

The short answer to this question is “Yes, there is a significant difference between bankruptcy and insolvency”.

You’ve most likely heard these words, and there is a good chance you’ve heard them used interchangeably, but, although both of these terms deal with excessive debt, they do not mean the same thing.

Although there is much that could be said about both bankruptcy and insolvency, here is a quick and simplified definition for each of them:

Bankruptcy is a legal process by which you may be discharged from most of your debts.

Insolvency is the inability of a debtor to pay off their debt as it becomes due, or by liquidating all their property.

While it is true that you must be insolvent to file for bankruptcy, it’s also true that you may be insolvent and not need to declare bankruptcy. This fact highlights the relationship between the two. Bankruptcy is a legal process, whereas insolvency is the financial state of an individual.

This may raise another question: “I’m having difficulties financially. Does this put me in a state of insolvency?”

Maybe, but maybe not. It is important to understand, that, although it may be frustrating to miss payments on your credit card or default on a loan, it does not make you insolvent. It’s a common thing for people to miss payments, some because of financial strain, and some because of simple mistakes. The difficulty to keep up with these payments does not make you insolvent and does not always make you a candidate for bankruptcy. You may be having difficulty with your finances, or you may find yourself missing payments on your bills, but if you are seen to have enough money or assets to pay your debts, you are legally not allowed to file for bankruptcy.

The legislation that deals with bankruptcy law in Canada is called the Bankruptcy & Insolvency Act. These laws lay out the courses of action available for you if you have found yourself to be insolvent. Interpreting and understanding these laws can be difficult and overwhelming at times, and this is where a Licensed Insolvency Trustee (“LIT”) is able to help. Depending on your individual circumstances, a LIT can make different recommendations based on your specific situation.

Find yourself in a state of insolvency

The legislation lays out two definitive options for you if you find yourself in a state of insolvency. With the help of a Licensed Insolvency Trustee, you may either create a Consumer Proposal or declare bankruptcy. Before either of these choices are presented to you, though, you will need to show that you are truly in a state of insolvency. Some of the questions to be asked will include:

• Are you able to buy your groceries and pay for your basic needs without using a credit card?
• Does the end of the month routinely find you short on cash with bills still to be paid?
• Do you pay off debts with another form of debt?
• Are you finding yourself consistently late on loans or bill payments?
• Are you finding that the amount of debt you owe seems to be increasing rather than decreasing?
• Is the amount of money you owe more than you will ever be able to pay?

Decide whether you are an Insolvency or Bankruptcy

Once you’ve considered and answered these questions, you will be able to decide whether you are actually in a state of insolvency or not. If you answered “yes” to several of them, then a good next step would be to make an appointment with a Licensed Insolvency Trustee to discuss the most beneficial course of action for your individual circumstance.

Yes, filing for bankruptcy is a non-punitive method of clearing most of your existing debts and giving you a new financial start, but it is also a long, legal process, and some may find that it can be quite costly. This is why a Licensed Insolvency Trustee may recommend that you make a consumer proposal as a way to deal with your state of insolvency, rather than begin a bankruptcy process.