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What is the Difference Between Insolvency and Bankruptcy?

June 13, 2022

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3 Minute Read

RightRide

Did you know that insolvency and bankruptcy have different meanings? Even though these two terms are closely related and often used interchangeably, they are very distinct! Read on to learn the difference between insolvency and bankruptcy.

On one hand, insolvency is a financial state where an individual is unable to make his/her debt payments on time. When a person is insolvent, the amount of their debt is greater than the total value of their assets. On the other hand, bankruptcy is a legal process to help achieve debt relief when experiencing insolvency. Filing bankruptcy offers many benefits including protection from creditors and a fresh financial start after discharge.

Bankruptcy 101

There are several options to get financial relief when experiencing insolvency some of the most common forms are filing a consumer proposal or bankruptcy. In Canada, bankruptcy is filed with the help of a Licensed Insolvency Trustee (LIT). However, the first step before filing for bankruptcy is determining whether you are actually insolvent.

Here are some frequent signs of insolvency that can be used as an initial test before consulting an LIT:

maxed out credit cards
total value of debts greater than after-tax income plus basic expenses
use of cash advances to pay off credit card debt
no assets that can be sold to pay off debts
debt keeps increasing because debt is being used to pay everyday living costs

Another frequent question people ask is: “What happens to my assets when I file for bankruptcy?” Some assets are sold to help pay off your debt.

However, some assets can be kept according to the requirements in your province:

your home if equity is less than $10,000
personal belongings
your vehicle (depending on provincial limit)
equipment used for work including laptops, other electronics and tools

Couple receiving bankruptcy consultation from a insolvency trustee.

What happens after bankruptcy?

The bankruptcy process usually lasts around 9 months, when all obligations (including attending credit counseling sessions) are completed in a timely manner but could also last for 2 to 3 years, if bankruptcy offenses are committed and when obligations are not completed.

After all the debts are cleared, you will be discharged from bankruptcy and become solvent again! Once an individual is discharged from bankruptcy, this means that they can apply for credit and start rebuilding their credit score by repaying credit or loans on time. Note that in Canada, bankruptcy will remain on your credit report for 6 to 7 years. So if you are looking to get a car loan after being discharged from bankruptcy, it is recommended to go with a specialist lending company that offers special finance rates for individuals that have recently gone through bankruptcy. At RightRide, our special finance programs offer more flexible rates, payment terms, and loan options designed to meet the needs of customers who aren’t buying through a traditional bank or lender. Our specialized Personal Finance Consultants have experience with all credit situations. We help individuals get approved for an auto loan and find reliable vehicle financing regardless of credit history.

So if you are looking to get a car loan after being discharged from bankruptcy, it is recommended to go with a specialist lending company that offers special finance rates for individuals that have recently gone through bankruptcy.