Bankruptcy and insolvency are terms that are often mistakenly used interchangeably. There is, however, a big difference between the two. So what is the difference between insolvency vs bankruptcy? Insolvency is a financial circumstance. Bankruptcy, meanwhile, is a procedure that is taken in line with the Canadian’s government’s Bankruptcy and Insolvency Act by somebody who is insolvent. There are other forms of debt relief that can be taken when insolvent, like filing a consumer proposal. Below, we indicate the key differences between insolvency vs bankruptcy.
Insolvency vs bankruptcy
Insolvency is the financial state of being unable to pay debt to creditors on time. It is a term applicable to both individuals and businesses. When insolvent, there are a number of forms of debt relief you can pursue to clear your debt and begin a fresh financial future. Your best option is to speak to an experienced Licensed Insolvency Trustee to discuss your financial circumstances and the most appropriate form of debt relief for you. Common debt relief pathways for insolvency include filing bankruptcy or a consumer proposal.
Bankruptcy, on the other hand, is a legal form of debt relief. It is the process of assigning any of your non-exempt assets over to a Licensed Insolvency Trustee. They will use the assets to go towards repayment to your creditors in exchange for clearance from your remaining debt. One of the advantages of filing bankruptcy when insolvent is a ‘stay of proceedings’, which means your creditors are unable to contact you and must go through your trustee.
What is the key difference between insolvency and bankruptcy?
Ultimately, insolvency is the stressful financial state of being unable to pay your debts to creditors on time. Among other debt relief options, bankruptcy is a pathway out of insolvency as a legal process of debt clearance. Whereas insolvency is applicable to individuals, businesses, and corporations, bankruptcy is a method of debt relief primarily used by individuals and sole traders.
How can I avoid insolvency and bankruptcy?
The key to avoiding both insolvency and bankruptcy is first to understand the meaning of each term, as well as the differences between insolvency vs bankruptcy. Here are some other key pointers to help you stay away from overwhelming debt:
- Be aware of the warning signs of insolvency. This could be collection call agencies pursuing a wage garnishment against you, or persistent calls requesting money that become overwhelming.
- Budget and stay on top of your financial administration – this is key to ensure your cash flow is in check.
- Take out personal or business insurance to protect yourself against loss of income or lawsuits.
- Work with an accountant to help manage your finances and spot the warning signs of insolvency.
- If you think you are struggling with debt, book a free consultation with a Licensed Insolvency Trustee who can advise you as to the best form of debt relief for you. In most cases, this is not bankruptcy, but an alternative like filing a consumer proposal.
When to file bankruptcy
Bankruptcy is often considered a last resort form of debt relief, as it often means parting with valuable assets and remains on your credit report for some years. In the right circumstances, however, bankruptcy can provide huge relief to those facing overwhelming debt. Bankruptcy clears your debt, and prevents creditors from contacting you or pursuing a lawsuit against you. For many, it is the start of a fresh financial future. Once you are discharged from bankruptcy, you become solvent once again. Bankruptcy is not a decision to be made lightly – in fact, there are many other forms of debt relief that may be more suitable. It is best to seek advice from a Licensed Insolvency Trustee before making any decisions. At Spergel, you will receive your very own trustee to walk you through each step of the debt relief process. Learn more about when to file bankruptcy.
Does bankruptcy discharge all debt?
For many, bankruptcy is the most well known form of debt relief. It clears all unsecured debts filed by a Licensed Insolvency Trustee, and most often allows you to begin a fresh financial start. In Canada, bankruptcy can be used to clear unsecured debts including:
Bankruptcy often also covers any interest and penalties on your debts. There are some exceptions to debts covered by bankruptcy, including secured debts. Secured debts include any debts associated with an asset – e.g. mortgages and car loans. Child support payments and court fines amongst others will also not be cleared by bankruptcy. Learn more about debts covered by bankruptcy.
Alternatives to bankruptcy
If you find yourself insolvent, there are a number of ways to gain debt relief aside from bankruptcy. The first step should be to book a free consultation with a trusted Licensed Insolvency Trustee. As the only professionals legally permitted to administer both bankruptcy and consumer proposals, they are excellent authorities on the best form of debt relief for your financial circumstances. Here are some of the most common forms of debt relief for insolvency that are alternatives to bankruptcy:
- Debt consolidation – a debt consolidation loan is a new loan taken out to condense a number of other loans. Often, interest rates are more favourable, and by having one monthly payment, your debt can become much more manageable.
- Debt settlement – debt settlement is a negotiation made with your creditors by agreeing on a repayment plan or paying a lump sum in order to clear your debts.
- Consumer proposal – a legal form of debt relief that works by your Licensed Insolvency Trustee negotiating a reduced repayment plan with your creditors over a fixed number of years.
If you want to learn more about insolvency vs bankruptcy and how to avoid both of them, book a free consultation with Spergel. Our experienced Licensed Insolvency Trustees will discuss your financial circumstances with you, and help you to determine the best form of debt relief for you, from bankruptcy to debt consolidation. Reach out today – you owe it to yourself.