Insolvency vs Bankruptcy in Canada: What’s the Difference?

Are you Bankrupt if you’re insolvent? The answer is no. You must be insolvent to file for Bankruptcy, but you don’t need to file for Bankruptcy if you’re insolvent. Understanding the difference between insolvency and Bankruptcy will help you feel more confident in choosing the right debt relief options for your situation. Let’s dive in!

How Insolvency and Bankruptcy Differ

What is insolvency? Insolvency is a financial state. If you’re insolvent, you can’t pay your debts as they come due. It’s not a matter of missing payments because you forget.

When you’re insolvent, you simply don’t have enough money to make your payments and cover your living costs. Credit payments and bills may become overdue, ending up in collections. In order to avoid falling behind on your debt, you might try to cut back on necessary expenses, such as food, to make your payments.

Carrying an overwhelming amount of debt can increase your stress levels, cause emotional distress and affect your relationships. In 2025 (January-December), 140,547 Canadians sought debt relief to deal with their insolvency by filing for Bankruptcy or filing a Consumer Proposal. This was a 2.3% increase from 2024.

What is Bankruptcy?

Bankruptcy is a legal process that will eliminate your unsecured consumer debt with some exceptions. In order to start the process of a bankruptcy, you must file for Bankruptcy through the services of a Licensed Insolvency Trustee (LIT).

Insolvency vs. Bankruptcy

You can be insolvent without taking any action. While you’re insolvent, you’ll have different debt relief options you can explore to deal with your insolvency. Some you might consider are:

• Review your budget to see if you can reduce spending to put extra money towards debt repayment.
• Selling assets you don’t need to pay down your debt.
• Earning additional income to put towards your payments.
• Enrolling in a debt management plan.
• Filing a Consumer Proposal.
• Filing for Bankruptcy.

Filing for Bankruptcy means you have committed to a debt relief solution, eliminating other options to manage your debt.

What happens when you file for Bankruptcy?

You might be afraid to consider Bankruptcy because you believe you’ll lose everything. You might also believe everyone will know about your Bankruptcy.  These myths may have been true at one time, but they aren’t anymore, so you can feel secure about seeking help.

Here’s what really happens if you file for Bankruptcy:

• Your LIT files for Bankruptcy on your behalf by submitting the paperwork to the Office of the Superintendent for Bankruptcy.
• Once filed, a “stay of proceedings” is granted.
• Your creditors can’t contact you, garnish your wages, or proceed with legal action.
• Any assets above your provincial limits will be sold and the proceeds given to your creditors.
• A first Bankruptcy will be complete in as little as nine months, eliminating your debts.
• You’ll receive a discharge of Bankruptcy that completes the process and ends your obligations.

How to file for Bankruptcy

Bankruptcy is one of two legally binding debt relief options available to insolvent debtors. It’s reserved for those with severe debt problems who meet specific eligibility criteria,and an inability to pay. Understanding these requirements can help you determine if Bankruptcy is suitable for your situation.

Here’s how to file for Bankruptcy:

1. Book a meeting with a Licensed Insolvency Trustee. The first consultation is free.
2. Bring all your paperwork, including documentation of your income, assets, and debts.
3. Fulfill the conditions of Bankruptcy.

Conditions of Bankruptcy

Another condition of Bankruptcy is that you must fulfill certain obligations before your Bankruptcy is discharged.  These conditions are:

• Your debts must be at least $1,000.
• You must surrender certain assets (each province differs) and your credit cards to your trustee.
• You’ll have a payment to make each month until you complete your Bankruptcy.
• You must provide your LIT with monthly income statements during the process.
• You have to attend two financial counselling sessions with an insolvency counsellor.

Insolvency isn’t discharged. It’s a financial situation that can improve or worsen, depending on the actions you take and your circumstances.

Bankruptcy addresses your insolvency. It’s the process to help your insolvency. It’s a permanent debt solution that will give you a fresh start, but it’s not the only option.
A Consumer Proposal also offers insolvent borrowers debt relief and may be a better choice in some circumstances.

Consumer Proposal

A Consumer Proposal has some similarities to filing for Bankruptcy. Both are legally binding, and each requires the services of a LIT. Once your LIT files a Consumer Proposal, your creditors must cease all legal action, contact, and wage garnishment.

Both insolvency solutions address unsecured debt, including credit cards, lines of credit, payday loans, personal loans, and tax debt. Once you complete your Consumer Proposal, your debts are eliminated.

The key differences are:

• A Consumer Proposal can reduce your debt by up to 80%, but you still repay some of it.
• The maximum debt is $250,000, but Bankruptcies don’t have a maximum.
• You’ll make monthly payments for up to five years to repay the remaining balance.
• You can keep most of your assets.
• You don’t need to report your monthly income to your LIT.
• It does not affect your credit rating as severely as a Bankruptcy.

Both options will impact your credit score. Knowing how each affects your credit can help you plan your financial recovery and future borrowing needs.

If you’re having a hard time repaying your debts, you might be insolvent. Getting help with your debt from a Licensed Insolvency Trustee can give you confidence and a sense of relief. LITs are the only debt professionals who offer legally binding solutions to put your debts behind you.

Where to Find Debt Help

You don’t need to struggle alone. When it comes to insolvency and Bankruptcy, Canada offers ways to address it. If you are unable to make your payments, contact our office to schedule an appointment online or by calling 1-888-371-8900. Our LITs have been helping people through insolvency and debt problems for over 40 years. We’ll work with you to find the best solution for your needs so you can put your debts behind you.