Insolvency? Debt relief? What do these terms mean?

If you’ve been searching the web trying to figure out how to deal with debt, you probably keep coming across these terms. But really understanding what “insolvency” and “debt relief” means, requires more than a dictionary definition. You need to be able to picture how they apply in real life. 

That’s especially true if your household debt is on the rise. If it is – you are not alone.  

This year, Statistics Canada reported that household debt has reached 174.9% of disposable income. In other words, the average household now holds nearly $1.75 of debt for every dollar of after-tax income.  

In practical terms, this leaves less room for unexpected expenses and makes it more difficult for you to recover when a large cost or life change impacts your budget. 

Day-to-day, this might mean a grocery bill feels harder to absorb. A mortgage or rent payment takes up a lot of your monthly income; your credit card balance grows each month, or you’re having to draw on savings or loans to pay bills. Even borrowing that once felt temporary has now become a more permanent part of your budget.  

If you, like many Canadians, are feeling the stress of managing debt, there are solutions – like a consumer proposal or bankruptcy – that can support your financial recovery. Both options are federally regulated and administered by Licensed Insolvency Trustees – like us.   

Understanding how each solution fits your financial reality helps you choose a path that feels personal and manageable.  

What does it all mean? 

Let’s talk about insolvency.  

Insolvency is the legal term for when a person does not have enough income to pay their obligations, or their debt is greater than their assets. But not everyone experiences insolvency in the same way, for example: 

• One family might find themselves regularly relying on credit to cover groceries or gas, filling the gap between pay cheques, growing debt over time.  

• Or an individual may be meeting minimum credit card payments (but not able to tackle a growing balance) and only by moving money between accounts and by dipping into or drawing on loans/credit are they able to pay down balances.  

Facing insolvency reflects the fact that financial pressure has grown beyond what your income and obligations can balance. 

For some families, insolvency happens after months of stretching a budget that can’t stretch any further. Mortgage payments, car loans, school costs, and variable expenses all add up, and the smallest shift in income or expenses can create major financial impact and stress. 

Fortunately, there are nationally regulated legal avenues for debt relief support created for situations like these, where Licensed Insolvency Trustees explain solutions best suited for you and provide ongoing support through your debt recovery journey.  

Canada’s two – regulated – debt relief options 

When you’re at a point where your debt needs to be reorganized, there are two regulated options available that are administered by Licensed Insolvency Trustees: a consumer proposal and bankruptcy. Both are legal agreements that make repayment more manageable, and, in some cases, offer a financial reset when repayment is not possible. 

Consumer proposal 

• A consumer proposal is a legal agreement that lets you repay part of the unsecured debt you owe through one monthly payment. Many people who become insolvent explore this option when they don’t have enough income to pay their obligations, or their debt is greater than their assets.  

• Instead of juggling multiple due dates and interest rates, your consumer debt is combined into one single plan with all repayment terms set at the beginning of the process. This means financial stability because you know exactly what your payments are every month.  

Bankruptcy 

• Bankruptcy might be the better fit if you are struggling to maintain payments of any kind, even after trying to adjust your budget or reduce expenses. Bankruptcy is designed for situations where debt has grown beyond what income or savings can support, often following major life changes such as job loss, health issues, or prolonged reliance on credit to cover basic expenses. 

• This option can work when you need an entirely new financial plan rather than a rearrangement of existing payments. Bankruptcy includes clear responsibilities and timelines and is best suited when you cannot repay any portion of what you owe. 

These two solutions exist because life doesn’t always move in straight lines. Circumstances change, income shifts, unexpected costs appear, and debt can accumulate quietly over time. A consumer proposal and bankruptcy are simply two different tools within Canada’s regulated system; each suited to different financial realities. 

Figuring out your next step

Understanding insolvency and debt relief (and how a consumer proposal and bankruptcy fit into that picture) helps you make informed decisions about your debt recovery journey. 

If you have a steady income but cannot manage your obligations – you may find that a consumer proposal brings the structure and predictability you need.  

Meanwhile, if you have felt overwhelmed for a long time, with no realistic way to maintain debt payments, you may find that bankruptcy provides the stability and protection you require. 

A Licensed Insolvency Trustee can help you make sense of these choices. Their job is to explain how each solution works, what protections exist under federal law, and what each option means in practical terms for your payments, assets and long-term financial recovery.