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.”