If you are having trouble with keeping up with your debt, it might be a good idea to learn more about insolvency and credit protection as they pertain to protecting yourself from long-term financial harm.
At its basis, insolvency is when you are unable to pay the debts that are due. This means having to pay out more each month of your debts, than money coming in. Insolvency comes in two forms, cash flow insolvency and balance sheet insolvency.
In the case of cash insolvency, you are having difficulty paying debts as they are coming in, and may be having difficulty selling assets to settle these debts as well; also known as illiquidity. As for balance sheet insolvency, this happens when your total liabilities exceed your total assets. Even if you sold off everything, you would still be unable to pay off your debt.
In Canada there are several laws that cover insolvency, the mains ones being The Bankrupt and Insolvency Act (“BIA”), The Companies’ Creditors Arrangement Act (“CCAA”), The Farm Debt Mediation Act, the Wage Earner Protection Program Act, and the Winding-Up and Restructuring Act. These laws cover the process of dealing with insolvency, from bankruptcies, to financial restructuring.
As a consumer, if you are running into debt problems, you have a couple main options. First you can file for bankruptcy or choose a consumer proposal. Both have a negative effect on your credit rating, but with consumer proposals, if you can still pay a minimum agreed upon debt repayment every month, you can keep your assets.
Debt consolidation services may be something you go with as well; combining all your debts into a single payment, and having a service negotiate lower payments, or lower amount to pay back. Creditors can often be negotiated with, because if you have to file for bankruptcy, they will get far less per dollar of debt.
Credit protection comes in many forms. Credit monitoring and alerts, and identity theft protection are great at protecting your credit rating from malicious people. Purchase protection comes with some credit cards to give insurance for expensive items you buy. Credit insurance, however, is important when it comes to insolvency. With credit insurance, you pay a monthly fee like any insurance, and it helps cover debts due to reasons out of your control, such a job loss, or a disability.
Protecting Against Insolvency
Ultimately, good spending habits are going to be the best way to protect yourself from insolvency. But, credit protection can help cover costs of debts in the case of situations out of your control. If you find yourself with financial issues, consult an accredited financial advisor to discover your options. Insolvency doesn’t have to be the end of your financial future.
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