If 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.