What Does It Mean To Be Insolvent?

Category: Personal Bankruptcy (5) comments

insolvencyIf you are insolvent, you either are not able to pay your obligations when they are due, or your debts are larger than your assets.

It’s important to understand that the meaning of bankrupt is not the same as insolvent, although the words are often used interchangeably. Insolvency is often a condition that precedes bankruptcy. Once you realize you are unable to pay your debts, you may consider bankruptcy.

The Bankruptcy & Insolvency Act defines an insolvent person¬†as a person that owes more than $1,000 and is “unable to meet his obligations as they generally become due.”

There are two basic tests for insolvency: cash flow, and assets:

  • If the minimum payment on your credit card is due on the 15th of the month and you don’t have the money to make the payment, you are unable to meet your obligations as they become due.
  • What happens if you have an asset that you could sell and turn into cash? If you have a car worth $20,000 and there is no loan against it, and if you owe $2,000 on your credit card, you are not insolvent. This is because you have an asset that is worth more than your debts.

It is possible that your monthly cash flow is not sufficient to make your bill payments, but if you have assets that you can sell to pay off your debts, you are not insolvent.

The asset test is based on the value of your assets in a normal sale process. For example, the value of your car is the “black book value” that would be realized if you sold it privately or to a car dealer. It is not the “inflated” value you might get if you traded it in on a new car.

Before filing bankruptcy or a consumer proposal your trustee will determine whether or not you are insolvent, by determining whether or not you can pay your debts as they become due, and whether or not your debts are larger than your assets.

If you need help deciding if you are insolvent, and if bankruptcy is the right solution for your financial problems, talk to a trustee today.

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  1. Daniel Hernandez

    I owe a trucking company I worked for $9692 I pay child support in the amount of $1000/mo that is garnished from my wages, the trucking company wants to garnish my wages not sure on the amount yet, I pay $1524/mo in rent my wife with her pay covers the bills after that I have a car payment and ins. Totaling $650/mo I get $3600/mo after tax which leaves no money for groceries and for me to eat on the road as I travel for work. My car I own is worth $500 maybe. There is no law preventing my entire pay being garnished and I have to protect my family what can I do plz help….

  2. Po

    Does cosigning on a car lease with someone who is about to declare insolvency put one on the hook for the insolvent’s other debts?

  3. Nadia

    If I own a house with my former business partner that is a rental income property and he is declaring bankruptcy. Can I be forced to sell my house?

    1. Ted Michalos

      When he declares bankruptcy then any equity he has in the house you jointly own becomes an asset that his unsecured creditors are entitled to. His trustee will ask him if he wants to pay an amount equal to his equity to keep the house, if he says no then the trustee will ask you if you want to buy his share of the equity in the house. If you say no then the trustee will want to put the house up for sale. As a part owner you will be involved in the listing and sale, and you will be entitled to your share of the net proceeds.

      I suggest you call his trustee to discuss all of this directly with them.


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