Insolvency is a financial state whereby an individual or a business cannot meet its financial obligations on time, typically due to an imbalance between debts and assets. In Canada, as in most other countries, the insolvency process is ruled by specific laws and regulations. Recognizing the signs of insolvency is really important for individuals and businesses to address their financial difficulties as soon as possible, and to make informed decisions to regain financial stability. Insolvency, however, must be differentiated from debt issues. Understanding the gravity of your financial situation will help you to take the appropriate action to gain debt relief. You might just behind on your bill payments, or you may be taking out multiple payday loans because your debt has simply become unmanageable. In this article, we share the signs that you may be insolvent, and the debt relief action you can take to eliminate your debts. So, how do you know if you are insolvent?
What is insolvency in Canada?
Many individuals and businesses in Canada can find themselves facing insolvency for a number of different reasons. Generally speaking, there are two definitions of insolvency:
- When the amount of your debt is more than the value of your assets; or
- You are unable to pay your debts when they are due because of poor income or cash flow
You may find yourself insolvent if you have had a job loss, an economic downturn, unexpected expenses like medical bills or a divorce, mismanagement of finances, or a change in the market conditions. Typically, there are two primary debt relief solutions when it comes to insolvency – filing bankruptcy or filing a consumer proposal. Bankruptcy means surrendering any non-exempt assets you may have to repay your creditors, while a consumer proposal is a legal debt settlement that enables you to repay a small portion of your debt over an agreed period of time. You need to be insolvent in order to file either of these options. We will explore these options in more detail later on in this article.
How do you know if you are insolvent?
Being insolvent is not always obvious. Below, we have outlined a few of the key signs that you may be facing insolvency:
- Overwhelming debt – if your debts total much more than the value of your assets and income, you may well be insolvent
- Your debt increases each month – especially if you are using debt to pay for everyday expenses, or relying on cash advances on one credit card to pay off another
- Late payments – if you are regularly missing payments on bills, credit card debts, or loans, you are likely facing financial distress
- Making minimum payments – if you are only making the minimum payments on all your debts, your balances will never reduce
- Creditor calls – if you are receiving frequent collection calls or letters from creditors and collection agencies demanding payment, you may be insolvent
- Using credit to pay debts – if you rely on credit cards or loans to make the minimum payments on your debt, your financial situation may be deteriorating
- Reduced savings – you may find that any savings you have are fast depleting, implying financial instability
- Decline in income – if your income has taken a substantial decrease or you are unemployed, it can be increasingly difficult to pay your bills
- Legal action – if you are being threatened with legal action like a wage garnishment or a lien on your property, you may be in trouble financially and need help
- Using payday loans – if your credit cards are maxed and you are considering taking on high interest loans like payday loans, you may be insolvent
What to do if you are insolvent
If you feel that your debt is not substantial and you can manage it, you may wish to create a budget to try and improve your cash flow and work on repaying your debts across a fixed period of time. If, however, you need support or are experiencing any of the signs listed above, it may be time to speak to a Licensed Insolvency Trustee. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief, making them well placed to review your finances and share your options. If you are insolvent, there are two debt relief solutions available through a Licensed Insolvency Trustee. Here is the typical process if you are insolvent:
- Review your situation. Create a comprehensive list of your income, outgoings, assets, and debts to understand the gravity of your debts and financial situation
- Book a free consultation with a Licensed Insolvency Trustee. At Spergel, unlike other bankruptcy firms, you are assigned a Licensed Insolvency Trustee from the beginning of your debt relief journey right through to the end. We will review your finances and help you understand your debt relief options.
- Consider a consumer proposal. If you have a steady income and want to avoid bankruptcy while reducing your debts by up to 80%, a consumer proposal might be a good option for you. It is a legal form of debt settlement, whereby you suggest an affordable monthly repayment figure. If accepted by your creditors, you only need to commit to your monthly payment, and can keep your assets. At Spergel, we have a 99% acceptance rate on any consumer proposals we file.
- Consider filing bankruptcy. If you are simply in need of a fresh financial future, filing bankruptcy may be best for you. Bankruptcy is the process of surrendering any non-exempt assets you may have in exchange for clearance of your unsecured debts. Although many Canadians think that bankruptcy leaves you with nothing, this is not the case – you can keep assets like a vehicle provided the value is within your province’s threshold.
- Create a plan for your finances. Whether through bankruptcy or a consumer proposal, develop a realistic budget to manage your finances effectively moving forward.
- Attend credit counselling sessions. Completing credit counselling courses is often a requirement during the insolvency process. These courses offer valuable financial management skills that will set you up well for a fresh financial future.
Still unclear on ‘how do you know if you are insolvent?’ If you do not know if your debt issues are serious enough for a bankruptcy or consumer proposal, book a free consultation with an experienced Licensed Insolvency Trustee at Spergel. We will review your financial circumstances and walk you through your options for debt relief. Taking proactive steps to resolve your financial situation can make a real difference to getting bank on track.
