Insolvency vs Bankruptcy
Many people use the words ‘insolvency’ and ‘bankruptcy’ interchangeably when talking about a person or business that can no longer meet their debt obligations.
While both terms pertain to serious debt challenges, they are actually two different conditions, which we’ll review in detail below.
What Is Insolvency?
To file for bankruptcy in Canada, you must be insolvent first.
The Bankruptcy and Insolvency Act describes insolvency as being unable to pay your debts as they come due.
You could be experiencing cash flow problems that prevent you from paying your bills on time, or simply owe more than you can repay after your living needs have been met.
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How Do You Know If You Are Insolvent?
Below are some indicators of insolvency:
- You owe more money than you can repay.
- You are constantly behind on all of your debt payments.
- At the end of each month, you don’t have enough cash to meet your reasonable living expenses and have to incur more debt.
- Your debt total exceeds the value of your assets
It is important to note that being delinquent on your loans and credit card bills is not the same as being insolvent.
For example, if you lose your job and miss your mortgage payments for two months, you are not automatically insolvent, although that could eventually result if you fail to find new employment.
What Is Bankruptcy?
Bankruptcy is a legal process that allows indebted individuals and businesses to surrender property in exchange for relief from their debts.
You can file for bankruptcy in Canada if you are insolvent and your debts exceed $1,000.
What Is The Bankruptcy Process?
When you file for bankruptcy, the process begins by meeting with a bankruptcy trustee.
The trustee will require the following information from you:
- Your name, address, and date of birth;
- A list of all your creditors;
- A list of your assets.
Using these details, your trustee will prepare the bankruptcy paperwork and make sure you understand your upcoming responsibilities, which include:
- Surrendering any assets that are not protected by a bankruptcy exemption;
- Submitting a monthly income statement;
- Attending two credit counselling sessions;
- Advising your trustee of any changes to your financial circumstances.
Once you sign the document, your bankruptcy officially begins.
Your trustee will send a copy of the paperwork to your creditors, so they can file their claims.
If any of them were calling you, garnishing your wages, or preparing to sue you, these actions are immediately stopped.
There is a remote chance that you will have to attend a meeting of creditors to answer questions about your finances, although this generally happens only if you have a lot of tax debt.
You could also be called to the Official Receiver’s office to answer questions under oath, although this is a rare occurrence.
How Long Does Bankruptcy Last?
If you have never been bankrupt before and you complete all required duties, you will automatically receive your discharge in nine months unless it is opposed by the trustee, one of your creditors, or the Superintendent of Bankruptcy.
If your surplus income after all bills and expenses have been paid exceeds $200 per month, your bankruptcy will be extended to 21 months.
Bankruptcy can be an effective means of overcoming insolvency.
You will get relief from your debt burden, learn how to manage your money, and have a chance to rebuild your credit.
All of this can set you up for future success.
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