Difference Between Insolvency and Bankruptcy
You may often hear the terms “insolvency” and “bankruptcy” being used interchangeably, but they have different meanings. Insolvency is a financial state where a person cannot meet debt payments on time. Bankruptcy is a legal process that happens when the individual declares he or she can no longer pay back his or her debts to creditors.
What is Insolvency?
Though both terms deal with excessive debts, insolvency is a state that can lead to declaring bankruptcy. In very simple terms, an individual becomes insolvent when he or she is unable to pay back lenders on time.
Although filing for bankruptcy is a possible resolution for insolvency, this type of situation does not automatically lead to bankruptcy. Depending on your circumstances, you may be able to address your insolvency by other means, such as making a consumer proposal or taking out a debt consolidation loan.
What is Bankruptcy?
Bankruptcy is a legal process that provides protection and relief for individuals who are unable to pay off their debts. When you file for bankruptcy, a Licensed Insolvency Trustee will be assigned to liquidate your assets, contact your creditors, and investigate your affairs. You will also have to comply with bankruptcy duties including attending credit counseling sessions.
Once you have completed all necessary tasks, you will be released from your bankruptcy and become solvent again. The process typically takes 9 to 21 months.
Insolvency Does Not Mean Bankruptcy
Insolvency and bankruptcy may sound the same, but they are not. Insolvency is a financial state whereas bankruptcy is a legal declaration and process.
If you are insolvent, you may have other options to consider before you have to resort to bankruptcy. Talk to a Licensed Insolvency Trustee at your local MNP LTD office to review your options and find the right solution for your personal finances.