What happens when you claim insolvency in Canada?

Discover your options when you claim insolvency in Canada under the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act
What happens when you claim insolvency in Canada?

Insolvency might be a term that has a negative connotation, but insolvency really offers advantages for financially challenged individuals and businesses to get back on their feet. One reason for the hesitation in using legal insolvency is the misconception of its process or proceedings. This article will simplify what happens when you claim insolvency in Canada. 

What is insolvency in Canada? 

We need to define first what insolvency is or when can you consider yourself as an “insolvent”. These laws outline when you claim insolvency in Canada: 

  • Bankruptcy and Insolvency Act (BIA): describes the process of declaring bankruptcy and the different options available to an insolvent individual and their creditors 
  • Companies' Creditors Arrangement Act (CCAA): describes the process of coming up with a compromise or arrangement between the insolvent business and its creditors 
  • Winding-up and Restructuring Act (WURA): covers the winding-up or liquidation of certain corporations and financial institutions (e.g., banks, insurance companies, loan companies, etc.). 

Insolvency happens when you cannot pay off your debts on time. In claiming for insolvency in Canada, you must satisfy certain qualifications to become legally insolvent.  

Watch this video to know what the difference is between insolvency and bankruptcy in Canada

If you’d like to learn more, talk to an insolvency lawyer in your area. If you live in Halifax, for example, contact an insolvency and financial restructuring legal expert in Nova Scotia

Under the BIA, you will be considered an insolvent person (section 2, BIA) –  

  • if you’re not bankrupt yet (bankruptcy and insolvency are different in the legal sense);  
  • if your debts amount to more than C$1,000; and 
  • when you cannot pay off your debts or other financial obligations as they become due; or  
  • when you stopped paying off your debts after they have become due; or 
  • when your assets or properties cannot satisfy all your debts (both due and not yet due) if sold at a sale after a fair valuation 

Your business will be considered insolvent (section 3, WURA) –  

  • when it cannot pay off its debts as they become due and demandable, either through a statement which shows this inability or through the company’s own admission; 
  • when it calls for a meeting with its creditors for the purpose of coming up with a different agreement regarding its debts; or 
  • when it sells, assigns, removes, or executes a levy on its properties and assets (including stocks), or attempts to do any of these acts, with the intent to defraud its creditors. 

What is the process of insolvency in Canada? 

When you or your business is considered insolvent, you may claim insolvency and avail of the remedies and reliefs granted by the BIA and the CCAA, such as: 

  • Commercial or Corporate Proposal or Division I Proposal (Division I, Part III, BIA) 
  • Consumer Proposal or Division II Proposal (Division II, Part III, BIA) 
  • CCAA Filing or Proceeding (Section 3 (1), CCAA) 

1. Commercial or Corporate Proposal or Division I Proposal 

A Division 1 Proposal may be filed by an individual or a business or company whose unsecured debts amount to more than C$250,000. What happens when you claim insolvency under a Division 1 Proposal is that a proposal will be filed by your Licensed Insolvency Trustee (LIT) before the Office of the Superintendent of Bankruptcy (OSB).  


The proposal will contain your plans for paying off your debts to your creditors, subject to their approval (and the court in some cases). Through this proposal, you may suggest paying your creditors only a percentage of your debt and/or extending the payment. 

After submitting the proposal to the OSB, you may stop paying your debts to the creditors who are included in the proposal. You may also retain your assets and properties. Court action against you will also be stayed for the meantime.  

Notices of intention will then be sent to your creditors to call for a creditors’ meeting. In a Division 1 Proposal, secured creditors also have the option to be included in this proposal. 

Creditors’ Meeting 

Next, a creditors’ meeting will be held by your LIT, where your proposal will be put to a vote. A majority vote must be reached for your proposal to proceed with its implementation as part of your claim for insolvency.  

If the proposal is rejected, you will automatically be placed under bankruptcy through a court application of a Bankruptcy Order and Assignment (Part II, BIA). 


When claiming for insolvency in Canada, it is important to follow the terms of the approved proposal for you to be considered discharged of the debts. Should you violate any of its terms, your proposal will be cancelled and your creditor or your LIT may apply for a court order to declare your bankruptcy. 

2. Consumer Proposal or Division II Proposal 

A Division 2 Proposal, also called a Consumer Proposal, may be filed by an individual whose unsecured debts are more than C$1,000 but less than C$250,000. This will follow the same process when you claim insolvency through a Division 1 Proposal, but with certain differences. In a Consumer Proposal, you are not automatically declared bankrupt if your proposal is rejected. You are given the chance to amend the proposal and have it approved again by your creditors. 

3. CCAA Filing or Proceeding 

When you claim insolvency in Canada through a CCAA Filing or Proceeding, your business or company will be protected under the CCAA, allowing you to continue your operations, restructure your business and do other necessary action, while negotiating with your creditors on how to pay off your debts. A CCAA protection is only applicable when your business has different claims which must be more than C$5,000,000. 

Initial Order and Comeback Hearing 

Claiming for insolvency under the CCAA is initiated by filing an initial order with the court. It will then order for a comeback hearing to formally inform your creditors of your initial order. During the hearing, your creditors may challenge your initial order or ask for other relief from the court. 

Compromise Agreement 

After negotiating with your creditors on your proposed plan or compromise agreement to pay off your debts, you may then ask the court to order a creditors’ meeting. At this meeting, your compromise plan or agreement will be put to a vote. If accepted, you would have to pay your creditors according to the plan or agreement; if it is rejected, you will not automatically be declared bankrupt, but your creditors may ask the court for your company to be put into receivership or bankruptcy. 

Interested to find out more on what happens when you claim insolvency in Canada? Post your questions below or ask any of the Lexpert-ranked best insolvency and financial restructuring lawyers in Canada