Are you in debt? Find out how insolvency works

Quick Overview

Insolvency addresses situations where a debtor has multiple creditors and is unable to meet their financial obligations over the long term. Insolvency proceedings are initiated by filing an insolvency petition with the court. If the court rules that the debtor is insolvent, it will determine the next steps—bankruptcy, reorganization, or debt relief. For individuals, debt relief is the most common outcome, which, if obligations are fulfilled in good faith, can lead to discharge of the remaining debts.

• Insolvency is not merely “personal bankruptcy,” but a broader judicial proceeding.
• Both the debtor and the creditor may file a petition.
• Debt relief must be approved by the court.
• Not all debts can be discharged after the discharge process is complete.
• The sooner a debtor addresses the situation, the greater their chance of avoiding worse consequences.

If you’re unsure whether you already meet the criteria for insolvency or are worried about making a mistake in your insolvency petition, consult an attorney. In insolvency cases, timeliness and properly prepared documentation are often decisive.

What is insolvency, also known as bankruptcy?

An indebted individual or legal entity enters insolvency—often referred to as bankruptcy—when they are no longer able to meet their financial obligations on time and in full. The Insolvency Act defines insolvency in two main ways: insolvency and over-indebtedness. Insolvency occurs when a debtor has multiple creditors and fails to meet its financial obligations for more than three months past due. Over-indebtedness refers to a situation where liabilities exceed the value of assets. This applies to legal entities and business owners.

The Insolvency Act specifies that bankruptcy can be resolved in three basic ways: bankruptcy proceedings, reorganization, and debt relief. Each of these methods has its own specific characteristics, which affect the debtor in different ways.

How Insolvency Proceedings Work

Through insolvency proceedings, individuals can “get rid of” their debts. This is a legal process that allows for the resolution of bankruptcy through the courts. In this case, the insolvency court aims to ensure that creditors recover at least part of their money while also giving the debtor a chance to start with a clean slate.

1. First, an insolvency petition and application for insolvency are filed

If you need to resolve your debts and insolvency is your only possible solution, then you must file an insolvency petition. Since creditors can also file this petition, it’s best not to delay and to file it as soon as possible once you fully realize that you are unable to repay your debts. The insolvency petition must include all necessary information about you, your assets, your debts, and your creditors so that the court can make a decision based on complete information.

You can file an application for debt relief at the same time as the insolvency petition. If you need advice on filling out the documents or the specific procedure, please contact our law firm. We will help you handle all the necessary formalities and ensure that you obtain the maximum possible benefits from the process.

In our experience, people often wait too long—until they’re facing multiple enforcement proceedings, can no longer manage communication with creditors, and are afraid to open their mail. The most common mistake is an incomplete list of debts or assets. In insolvency proceedings, however, it pays to be as open as possible: both the court and the insolvency administrator evaluate not only the numbers but also the debtor’s good faith.

2. The Insolvency Court (May or May Not) Rule on Bankruptcy

After an insolvency petition is filed, the insolvency court takes over. It assesses whether the debtor is truly insolvent. If it determines that this is indeed the case, it will issue a bankruptcy ruling. This means that, as the debtor, you are officially declared bankrupt, and one of the forms of bankruptcy resolution may be initiated.

The bankruptcy order is published in the insolvency registry, which is a publicly accessible database containing all key documents related to the insolvency proceedings. Anyone can access the registry, which may affect your credibility with creditors, business partners, and employers. Therefore, if you are entering into an important business transaction, it is recommended that you check the other party in this registry.

3. The Debtor Faces Bankruptcy, Reorganization, or Debt Relief

Once the court rules that you are truly unable to repay your debts and you are officially declared insolvent, you will face one of the three main forms of insolvency resolution.

In the case of bankruptcy , your assets will be completely liquidated. In other words, you will lose all your assets, which will be sold. The proceeds from the sale will be distributed among creditors to repay at least a portion of your debts. Bankruptcy is most commonly used for companies that cannot be reorganized.

Reorganization , on the other hand, allows the debtor to continue its business operations. However, if you wish to pursue this option, there is one condition: You must fulfill a reorganization plan approved by both the court and the creditors. Such a plan typically involves debt restructuring and changes to the company’s management. Restructuring is available to businesses that have a chance of recovering from their debts and continuing operations, provided certain changes are made to their management or financing.

Debt relief, often referred to as personal bankruptcy, primarily applies to individuals (including self-employed persons). It allows the debtor to repay a portion of their debts in a reasonable manner and, under specified conditions, to be released from the remainder of their debts.

Thanks to an amendment effective as of July 2024, a debtor may have their debts discharged in as little as 3 years, provided they properly fulfill the conditions for debt relief and make every effort to satisfy their creditors. In exceptional cases, a longer period—such as 5 years—may be set if the court finds that the conditions for a shorter period have not been met. Unlike previous practice, it is no longer a requirement to repay at least 30% of the debts— the decision is based on an overall assessment of the debtor’s good faith and efforts.

Debt relief is not automatic—it must be approved by the court and is intended only for individuals who do not have business-related debts (or, in exceptional cases, do, provided the creditors agree) and who are not ineligible for debt relief, for example, due to a prior failure in insolvency proceedings.

One of our clients had several consumer loans, a rent debt, and one ongoing debt enforcement proceeding. He did not wait for further penalties to accumulate and had his eligibility for bankruptcy assessed. After the filing of the insolvency petition and the motion for debt relief, the court resolved his insolvency through debt relief. The key factors were that he documented all his income, disclosed all his creditors, and cooperated with the insolvency administrator from the outset.

How do insolvency proceedings work?

Insolvency proceedings are formally initiated by filing a petition for insolvency, but the actual insolvency proceedings do not begin until the insolvency court issues a ruling declaring insolvency. With this ruling, the court also appoints an insolvency administrator, who plays a key role throughout the process.

The insolvency administrator takes control of the debtor’s assets, determines their value, and ensures that they are used as effectively as possible to satisfy creditors’ claims. This may involve the sale of assets, their lease, or another form of liquidation—all under the supervision of the court and in accordance with the law.

The debtor is required to cooperate fully with the insolvency administrator. The debtor must provide the administrator with all necessary documents, truthful information about their assets, income, and liabilities, and comply with other obligations set forth in the Insolvency Act. From the moment the bankruptcy decision is issued, the debtor may not dispose of their assets on their own unless expressly authorized by the insolvency court—this serves to protect creditors and ensure the fair conduct of the proceedings.

Insolvency proceedings do not apply to certain debts

Once insolvency proceedings are concluded, various situations arise depending on the form of bankruptcy resolution used in the specific case. If debt relief is successful, the debtor’s remaining debts may be forgiven, allowing them to start over without the burden of debt. However, the law excludes certain debts from discharge. For example, if you owe child support or monetary penalties, you must continue to fulfill these obligations even after the insolvency proceedings end.

Summary

Insolvency is a judicial process for resolving bankruptcy under the Insolvency Act. It applies to situations where a debtor is unable to repay their obligations over the long term, has multiple creditors, or is over-indebted. Proceedings are initiated by filing an insolvency petition; the court then assesses the insolvency and decides whether it will be resolved through bankruptcy, reorganization, or debt relief. For individuals, debt relief is the most common option, which—if the legal conditions are met—can lead to discharge of the remaining debts. However, the debtor must act in good faith, cooperate with the insolvency administrator, and be prepared for the fact that certain debts—such as child support or monetary penalties—will remain even after the discharge of debts is complete.