The Difference Between Bankruptcy and Insolvency

Bankruptcy vs Insolvency

More often than not, people use the terms “bankruptcy” and “insolvency” as if both terms had the same meaning; however, that is not accurate. When people cannot make their payments on time, they end up accumulating debt and resorting to debt-relief proceedings that will alleviate their financial situation – and bankruptcy is one way of doing so. Insolvency, on the other hand, is a financial state.

This article aims to define bankruptcy and insolvency and distinguish the difference between both.

What is Bankruptcy?

Bankruptcy is one of the most common debt-relief options people seek to alleviate their financial burdens. When consulting with a Licensed Insolvency Trustee, debtors can declare bankruptcy – a legal proceeding that helps people eliminate any accumulated debt they have.

Filing for bankruptcy involves people in debt issuing a formal declaration that states their inability to pay their debts due to insufficient income. The Canadian Bankruptcy and Insolvency Act (BIA) has guidelines on how debtors, creditors and Licensed Insolvency Trustees should conduct and follow through with any bankruptcy process

The end goal of the Bankruptcy and Insolvency Act is to protect the rights of Canadian debtors and everyone involved in bankruptcy.

What is Insolvency?

Insolvency is a financial state that may lead to someone declaring bankruptcy – it does not immediately result in bankruptcy, as many believe. Put simply, a person in debt who is unable to make their payments on time is considered insolvent.

In Canada, insolvency is a temporary situation in which a person’s liabilities surpass the value of their assets. Insolvency is an involuntary circumstance, and bankruptcy can’t occur without insolvency.

An insolvency trustee is a professional, qualified to assist insolvent people with bankruptcy payments. One way to do so is by determining the value of the insolvent’s assets in order to repay some or all of their debts.

What is the Difference Between Bankruptcy and  Insolvency?

The discussion surrounding the meaning of insolvency versus bankruptcy results from confusion with each term’s definitions. While bankruptcy is a legal proceeding on someone’s inability to pay their debt, insolvency is a financial state in which someone cannot make their debt payments on time.

Here is a comparison table highlighting the distinguishing between bankruptcy and insolvency:

(Bankruptcy vs Insolvency Comparison Table)


Bankruptcy Insolvency


legal declaration of someone’s inability to pay their debts. legal state indicating that someone’s liabilities surpass their assets.


reorganisation (restructuring of payment plans) and liquidation (people sell their assets to pay for their debts). voluntary administration (administrators investigate the financial affairs of an insolvent business), winding up (a company sells their remaining assets to creditors), and receivership (creditors appoint a receiver to sell a company’s remaining assets).


reflects the legal status of someone in debt. does not influence the legal status of someone in debt.


people make debt payments through a legal process mediated by a bankruptcy and insolvency trustee.

debtors can resolve their insolvencies with consumer proposals or by declaring bankruptcy.


negatively impacts a person’s credit score, can be voluntary or involuntary and is permanent. 

does not impact credit scores, is a temporary financial state and is entirely involuntary.


insolvency. rise in someone’s liabilities or debts, payment delays, drop in sales, etc.

If You Are Considering Bankruptcy, Contact a Licensed Insolvency Trustee at Risman Zysman Today

Risman Zysman Inc. is proud of having a professional team of Licensed Insolvency Trustees who can help people and businesses navigate their debt-free journey. 

Upon reaching out to us, our trustees will analyse if bankruptcy is the best solution for your insolvency and if so, they will guide you through the process. Call us at 416-222-4600 or 844-222-6824 for a free consultation today!


What is the difference between bankruptcy and insolvency in Canada?

Insolvency is a legal, financial state of people who cannot pay their debt on time, and bankruptcy is a legal procedure to pay the debt. Insolvents can opt to declare bankruptcy as a solution for their financial burdens.

Is it possible to declare insolvency?

When someone declares insolvency in Canada, they are informing creditors that their liabilities surpass their assets, and they can use such assets to repay their debt.

Will insolvency affect my credit score?

Insolvency is a temporary and involuntary situation that does not affect someone’s credit score. What affects a debtor’s credit history is filing for bankruptcy or a consumer proposal.