Area of Law: Credit, Debt and Bankruptcy
Answer Number: 257
What is the difference between insolvency and bankruptcy?Region: Ontario Answer Number: 257
Insolvency and bankruptcy are two terms that are often closely associated when talking about debt. However, they have very different meanings. Insolvency refers to a financial state, while bankruptcy is a legal procedure. The Bankruptcy and Insolvency Act (BIA) is the law regulating insolvency and bankruptcy in Canada.
What is insolvency?
People are considered to be insolvent when they are unable to pay the debts they owe to lenders on time. If you become insolvent, you may choose to file for bankruptcy, or you could deal with your debts through other options such as a consumer proposal or debt consolidation.
What is bankruptcy?
Filing for bankruptcy is a legal process that allows a person facing overwhelming financial difficulties to clear their debts and start fresh.
Filing for bankruptcy is a process that involves many steps, including:
- meeting with a Licensed Insolvency Trustee, or LIT (formerly known as a Trustee in Bankruptcy),
- filing paperwork,
- selling your assets if required,
- contacting your creditors and meeting with them if requested,
- attending credit counselling services, and
- having your debts cleared, or discharged, buy the Federal Government’s Office of the Superintendent of Bankruptcy (OSB).
Once you have been discharged from bankruptcy, it means you are released from the obligation to repay the debts you owed when you filed for bankruptcy, and you become solvent again.
Insolvency and filing for bankruptcy are serious issues. Before deciding to file for bankruptcy, or to discuss other options, it is advisable to meet with a Licensed Insolvency Trustee or bankruptcy lawyer to review your situation.
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