How do you know if you're insolvent?

A person may be characterized as being insolvent when their debts exceed the value of the things they own, or when they are incapable of paying their bills on time. The first condition is not uncommon. With depreciating assets, sometimes we find ourselves in a position where we owe more than the amount we would get if we sold what we own. This situation usually reverses over time as debts are paid down. Of greater concern, however, is when people find that their debts exceed the value of the assets they own, and they can no longer afford to make their monthly debt payments. For example, if you can’t afford to make the minimum payment on your credit card when it’s due, and you don’t have an asset that you can sell to pay off that debt, you are deemed to be insolvent.

What causes insolvency?

If you arrive at a point of insolvency and you’re struggling to figure out how you got there, here are some of the factors that may have contributed to it.

Unemployment or job loss

A lack of steady income or sudden job loss can result in insolvency, especially when there’s no financial cushion to fall back on. You may be unable to meet your debt obligations if your income can barely cover your living expenses or you don’t earn any income at all.

Health emergencies

If you or a family member falls ill for an extended period and had to time off work to recover, your finances may take a hit. Worse still, if the health challenge left you incapacitated and unable to return to full-time work or forced you to retire early. People who find themselves in this or related situations often end up in debt.

Lack of financial information

If you’re not exposed to reliable information to help you make informed financial decisions, you may easily find yourself in overwhelming debt. Well-researched financial information equips and guides you in the face of possible challenges. This includes information on the costs and impact of borrowing money.

Poor financial management

This is a common cause of insolvency. Financial difficulties begin to arise when you overspend, do not plan your spending, do not save for emergencies, or a combination of these factors. This can lead you to relying on credit to meet even your basic needs.

Insolvency is not bankruptcy

The terms “insolvency” and “bankruptcy” are sometimes used interchangeably but they do not mean the same thing. While insolvency is a state in which you cannot pay your debt obligations on time, bankruptcy is a legal declaration of your inability to pay your debts that provides relief from those debts. You can consider bankruptcy as a solution to insolvency but it’s not the only option - and shouldn’t be your first choice.

What happens when you file bankruptcy?

Bankruptcy is a government-regulated, legal process that can help you clear your debts and start afresh. It covers unsecured debts such as credit cards, lines of credit, payday loans, most tax debts and other unpaid bills. Once you file a bankruptcy, by law your unsecured creditors must stop all collection or legal action against you, including harassing phone calls, wage garnishments, and pending lawsuits. Bankruptcy law sets out your obligations as a bankrupt person, which may include giving up some of your assets or income to help pay something back to your creditors. In a bankruptcy, creditors do not have a right to negotiate the terms of the bankruptcy.

What are your other options?

Debt consolidation

This is a debt restructuring option wherein you take on a new loan, at a lower interest rate, to pay off your current credit card and other debts. The result is a single monthly payment that’s less than all the previous payments combined. 

Debt Management Plan, Debt Settlement

These debt solutions involve negotiating directly with your creditors for a reduction of interest, monthly payments, or the overall balance. Sometimes creditors will agree to a lower (or zero) interest rate in exchange for full payment over time, through monthly payments. Others may agree to write-off a portion of the balance if you can make a lump-sum payment. These solutions can work well if you have only a few creditors and smaller debts. However, creditors are not legally obliged to accept or continue any particular agreement and getting all of your creditors to agree to the same plan may be difficult. 

Consumer proposal

Like bankruptcy, filing a Consumer Proposal prevents your creditors from continuing any collection or legal action against you, including harassing phone calls, wage garnishments, and lawsuits. Proposals commonly involve monthly payment that are limited to a total of 5 years. No further interest is added to the debt, and in most proposals, you pay back only a percentage of the total debt. Your creditors are allowed to vote for or against the proposal offer and negotiate alternate payment terms. Not all of your creditors must vote in favour for the Consumer Proposal for it to pass. Creditors holding more that 50% of the debts carry the vote; the dissenting minority of creditors must then accept the proposal and cannot opt out.

Now that you’re insolvent, what’s next?

Life is full of twists and turns. Anybody can find themselves dealing with insolvency no matter their age or stage in life. If you’re in this situation, there’s no need to panic. You can attempt a self-led debt recovery process by cutting down your expenses, budgeting, refinancing, or increasing your income sources. If you can’t seem to manage the situation on your own, it’s important that you contact a professional.

A Licensed Insolvency Trustee (LIT) is a debt professional whose sole responsibility is to help you fix your debt situation. Licensed by the Office of the Superintendent of Bankruptcy, an LIT will review your situation and suggest the best-fit solution. And the best part? Meeting with an LIT is free.