F. J. Zielski & Associates Inc offers counselling on insolvency and financial restructuring. Read our blog for insolvency myths that prevent you from growing.
Insolvency is a financial condition in which an individual or an organization cannot meet its financial commitments to its lenders. The total liabilities exceed the total assets, so the creditors’ requests are not met. Before insolvency proceedings, the person or company may get involved in informal arrangements such as substitute payment compromises with the creditors. It is important to know that being bankrupt is not the same as being insolvent. Insolvency precedes bankruptcy. Once you know you are not able to pay your bills, you can consider filing for bankruptcy.
According to the Bankruptcy & Insolvency Act, an insolvent individual is a person who owes more than $1,000 and is “unable to meet his obligations as they generally become due.”
Insolvency can be concluded in two ways. They are:
Cash Flow Insolvency
This is when a person or a company does not have enough liquid assets to pay a debt. Cash flow insolvency can be solved by negotiation.
Balance Sheet Insolvency
This is when a person or company does not have enough assets to pay its debts.
Insolvency laws play a vital role in the economy. They provide you with an option of restructuring before filing for bankruptcy. The Parliament of Canada has passed many laws that will help you understand insolvency. The Bankruptcy and Insolvency Act (BIA) helps with asset liquidation of an insolvent individual or a company by negotiation and reorganization of financial affairs.
The Companies' Creditors Arrangement Act (CCAA) provides a framework that allows debtors to organize and reach a settlement with their creditors.
7 Myths About Insolvency That You Should Know
Here are some facts and myths about insolvency that you should know:
Myth 1: Bankruptcy Is the Right Solution for Insolvency
Before filing for bankruptcy, an administrator will determine whether or not you are insolvent. The administrator will check if you can pay the debts as they become due and if your debts are larger than the assets. If you feel bankruptcy is the right solution for your financial problems, you need to talk to a trustee.
Myth 2: Insufficient Cash Flow
If you have limited monthly cash flow and if it is inadequate to make debt payments but you have equivalent assets to pay off your creditors, you are not termed as insolvent.
Myth 3: Insolvency Doesn't Give You a Choice
An insolvent individual is given a choice to make payments immediately or to seek protection from creditors. To seek protection, companies owing less than $5 million opt to file for a Division I proposal while those owing more opt for a CCAA proceeding.
Myth 4: Qualifying for Insolvency Protection Is Easy
For proceedings under the CCAA, a company is termed insolvent if it is assumed to run out of liquidity within a reasonable time as compared to the time taken for restructuring. There is no legal requirement for entering an insolvency process, but a company must be insolvent to qualify for an insolvency protection.
Myth 5: You Can't Challenge Insolvency Procedures
A creditor may challenge the insolvency procedures under various provincial laws regardless of the insolvency protection under either BIA or CCAA.
Myth 6: Insolvency Filings
The BIA needs all insolvency filings to be reported to the Office of the Superintendent of Bankruptcy Canada (OSB), which gathers and maintains data such as income and employment status. This data is used to check the overall vulnerability of Canadian households.
Myth 7: Not a Myth Bankruptcy Does give you Protection from your Creditors
You have two options after becoming insolvent. You can either file for bankruptcy or file a proposal for debt restructuring. With bankruptcy, you can liquidate your assets, but filing for bankruptcy won't protect you from your creditors. If your proposal for debt consolidation is accepted by a majority of the creditors, you are authorized to make repayments on varied terms than those mentioned in the original contracts. Restructuring of debt is preferable for all parties as an individual can continue with their normal ventures while creditors can avoid total debt write-off.
Insolvency is a result of poor money management or an increase in expenses. At F. J. Zielski & Associates Inc, our professional team can provide you with the latest updates and information on insolvency. Contact us to discuss your financing options today.
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