Bankruptcy vs Insolvency – What’s the Difference and Does it Matter?

Bankruptcy vs Insolvency

Navigating the different terms when trying to understand which debt management options are available can be tricky.

When it seems as if there is a lot of jargon to deal with, it’s not always easy to get familiar with all of the important terms.

Two key terms that you will often see in the same context are bankruptcy and insolvency.

These terms are often used interchangeably, but they do not have the same legal meaning.

They have different definitions, which are important to understand if you are looking for debt management solutions.

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What is Insolvency?

Insolvency is when you are in a situation of financial distress.

You are unable to meet your debt obligations as they are due.

This may mean that you have more debts than assets or that your outgoings are larger than your income.

However, you are not insolvent just because you miss a payment or two.

Many people do this on occasion due to various reasons, so failing to pay a debt on time isn’t necessarily a sign that you are insolvent.

You cannot be insolvent if you have the money or assets to pay your bills, even if you might sometimes be a little late paying them.

Insolvency is necessary if you want to file for bankruptcy.

In Canadian law, you must owe at least $1,000 and be insolvent to be eligible to file for bankruptcy.

However, if you are insolvent, bankruptcy is not your only option.

You might also consider other debt management options to make it easier to manage your debts.

What Is Bankruptcy?

Bankruptcy is the process that allows you to eliminate your unsecured debts.

It might mean selling or surrendering some of your assets, and also requires you to fulfill a number of duties after you have filed for bankruptcy.

Filing for bankruptcy allows you to clear unsecured debts, such as personal credit card debt and personal loans.

However, it doesn’t remove secured debts, such as mortgages and car loans, any fines or payments charged by the government or courts, or student loans if you left school less than seven years ago.

There are a number of steps involved in filing for bankruptcy.

They include:


  • Consulting with a Licensed Insolvency Trustee;
  • Filing paperwork;
  • Selling any assets that you might be required to sell – you will be allowed to keep certain necessities as determined by your provincial or territorial government;
  • Getting in touch with your creditors and potentially meeting with them;
  • Attending credit counselling meetings;
  • Having your debts cleared (discharged), releasing you from the obligation to pay your debts – this is when you become solvent again.


When you file for bankruptcy, it will remain on your credit report for a number of years.

Depending on the credit reporting agency and whether it is your first bankruptcy, this could be between six years and 14 years.

Filing for bankruptcy is not a decision that should be made lightly.

It’s important to receive the correct advice before deciding whether it is the right move for you to make.

A Licensed Insolvency Trustee can answer any questions that you have about filing for bankruptcy.

They can explain any duties that you have when you file for bankruptcy, including turning over any assets that you are required to and attending credit counselling sessions.

The Difference Between Bankruptcy and Insolvency: Why It Matters

It’s important to understand what the difference is between insolvency and bankruptcy because they have different legal meanings.

It is necessary to be insolvent if you want to file for bankruptcy, but being insolvent does not necessarily mean that you must file for bankruptcy.

Insolvency is a state that you are in financially, whereas bankruptcy is something that you need to file for (or, rarely, can be forced into by your creditors).

Insolvency does not mean bankruptcy, which is why it is important to understand the difference between the two terms.

If you are insolvent, you may wish to consider other options aside from bankruptcy to ensure you choose the best debt management path for your needs.

Our debt relief services are here to help you deal with issues surrounding bankruptcy, insolvency, and more.

If you want to learn more or receive advice about managing your debts, you can contact us by phone or email, by filling out our evaluation form.

We can help you to find a Licensed Insolvency Trustee local to you so that you can explore your options.

Canadian Bankruptcies

How to File for Bankruptcy
What is Bankruptcy?
Bankruptcy FAQs
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?

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