You may have heard the term insolvency before, especially if you have been considering different debt relief options, but what does it mean to be insolvent?
In basic terms, if a person is insolvent, it means that they are unable to meet their debt obligations or their debts far outweigh your assets.
The official definition of insolvency as outlined by The Bankruptcy and Insolvency Act, is a person that owes more than $1000 and is unable to meet their obligations as they are generally due.
Many people think that insolvent means the same as bankrupt and the two terms are often used interchangeably.
However, it’s important to know that they are not the same thing and there are some important differences between the two terms.
Insolvency usually precedes bankruptcy, and when you realise that you are insolvent, then you may consider debt relief options, like bankruptcy.
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How Do You Know If You Are Insolvent?
Many people ask, what does it mean to be insolvent, but they also want to know whether they are considered insolvent.
When trying to determine if a person is insolvent, there are two main factors to consider; cash flow and assets.
If the minimum payment on a debt, like a credit card, is due soon and you do not have the money to pay it, you are unable to meet your obligations as they are due.
However, this does not necessarily mean that you are insolvent.
Say, for example, that you have an asset like a car that is worth $15,000 and there is no loan to pay on it.
If your debt totals $5,000, you are not considered insolvent because your car is worth more than the debt, and if you need to, you can sell the car and meet your obligations.
However, you would be considered insolvent if your total debt was $20,000 because, even if you sold your assets, you would not be able to cover the debt.
In some cases, your monthly cash flow may not cover your debts but if your assets can, you are not insolvent.
When assets are considered as part of an insolvency test, the value is based on the normal sales process.
For example, the value of a car if it was sold to a private dealer will be used, rather than the value if you traded it in to buy a new car.
Insolvency tells you whether you are able to pay your debts or not, but it is not the same as bankruptcy.
Bankruptcy is a legal process that allows an insolvent person to clear their debts and start over.
Although many people that are insolvent will declare bankruptcy, it’s important to note that they are not the same thing and there are alternatives to bankruptcy if you are insolvent.
What Should You Do If You Are Insolvent?
If you suspect that you may be insolvent, we can advise you.
If you get in touch, we will be able to determine whether you are insolvent or not and help you with your next steps.
If you are insolvent, it is important that you consider your options for debt relief.
In many cases, bankruptcy is the best option for people that are insolvent, but there are other paths to consider.
A consumer proposal, for example, can help you to eliminate a portion of your debt and clear the rest.
Debt consolidation is an effective option for some people as well because it allows you to combine your debts, reduce the interest that you pay, and pay off your debts in full.
This is a better option than bankruptcy or consumer proposals because it will be easier to repair your credit score afterwards.
Choosing the right debt relief option is important because most solutions will have an impact on your credit score, but some will have more of an effect than others.
You should always try to avoid bankruptcy if possible, which is why it’s important that you know what it means to be insolvent and whether there are ways that you can use your assets and adjust your finances to clear debts without declaring bankruptcy or opting for a consumer proposal.
If you are unsure about your financial situation and you don’t know whether you are insolvent or not, we can help you to assess your position.
If you are insolvent, we will be able to help you with different debt relief options, so get in touch today.
You can reach us by phone or fill out an evaluation form and we will get back to you.
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
How to Amend a Consumer Proposal
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
Consumer Proposal Eligibility
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
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?
