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Bankruptcy and Insolvency - What's the Difference?

bankruptcy and insolvency

If an individual or company is experiencing financial problems, the words “insolvency” or “bankruptcy” may arise. While these words may be used interchangeably, they both have different meanings. The term Insolvency is used to refer to an individual or company that is unable to meet their debt as they become due. Bankruptcy is a formal legal process for an individual or company that can no longer pay back their debts owed to creditors.

What is Insolvency?

The term insolvency is used when an individual or company has too many debts that they are unable to pay on time or in full. Per the Bankruptcy and Insolvency Act, an insolvent person means a person who is not bankrupt and resides or carries on business or has property in Canada and has liabilities of at least $1,000, and meets one of the following three conditions:

  • is for any reason unable to meet obligations as they generally became due; or

  • has ceased paying current obligations in the ordinary course of business as they generally became due; or

  • has obligations exceeding the fair value of their property.

For example, an individual may have unsecured debts of $50,000 and is only making a $300 a month payment towards these debts can be considered “insolvent.”

A person who is insolvent may file for bankruptcy, but being insolvent doesn’t automatically lead to bankruptcy. There are other options for an insolvent person.

What are Debt Relief Options Included in the Bankruptcy and Insolvency Act?


Bankruptcy is a legal process for an insolvent person to obtain relief from their creditors if they are unable to pay off their debts. To file a bankruptcy in Canada, you must use a Licensed Insolvency Trustee who will be responsible for administering your bankruptcy. This includes investigating your affairs, collecting payments, liquidating non-exempt assets, and contacting creditors.

Upon filing for bankruptcy, you must complete your duties as per the Bankruptcy and Insolvency Act, and if all are complete, then you could be discharged from 9 to 36 months, depending on your income and if you were previously bankrupt.

Consumer Proposal

A consumer proposal is a legally binding agreement between a debtor and their creditors. It is an alternative to filing for personal bankruptcy, and it offers a way to reduce debt obligations and monthly debt payments by repaying their debts over a certain period.

To file a consumer proposal, you must have less than $250,000 of debt, excluding a mortgage in a primary residence. For this option, you will need to use a Licensed Insolvency Trustee who will assess your financial situation and helps you in completing the required forms. The Trustee will then collect your payments and will distribute the proceeds to your creditors.

Division 1 Proposal

If your debts exceed $250,000, then you won’t be eligible to file a consumer proposal but can instead file for a Division 1 proposal. This option is similar to a consumer proposal and is generally only used when debts exceed $250,000.

The main difference compared to a consumer proposal is that a majority of the creditors in number and representing 75% dollar value of the votes must vote in favour of your proposal.

If the Division 1 proposal is not accepted, the debtor automatically becomes bankrupt. This differs from a consumer proposal, where only a majority in dollar value is required to become approved, and there is no automatic bankruptcy if creditors don't accept the consumer proposal.

Does Insolvency Mean Bankruptcy?

A person may be insolvent, but that doesn’t mean they are bankrupt. They must file a bankruptcy application to become bankrupt. Otherwise, they will just remain insolvent. However, if a creditor remains unpaid, they could petition the debtor into bankruptcy.

If you are experiencing financial difficulty, you may have other options to consider before choosing bankruptcy. Speak to a Licensed Insolvency Trustee at Litvack Group to review your options and find the right solution for your finances.



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