Stay in Business: How to handle small business debt

*Based on a real client – for privacy, some details have been altered.

From devastation to recovery: how Spergel helped the Thompson family rebuild after wildfires

Last summer, a devastating wildfire swept through British Columbia, leaving a trail of destruction in its wake. Among those affected was the Thompson family, who had lived in their home for over 15 years. The wildfire not only destroyed their house but also ravaged their small business – a local bakery that had been the family’s main source of income. The Thompsons are a hard-working family with deep roots in their community. They had put all their savings into their home and business, believing they were well-prepared for the future. However, the wildfire was an unforeseen disaster that left them with nothing but a pile of ashes. Their home was uninsured, and the bakery’s insurance covered only a fraction of the loss. Faced with mounting bills and no income, the family quickly found themselves drowning in debt.

To protect our client’s privacy, aspects of this case study have been altered.

Client Background

The Thompson family had long been a pillar of their community in British Columbia. For over 15 years, they had built a stable and fulfilling life, running a beloved local bakery and living in a home filled with cherished memories. Known for their hard work and dedication, the Thompsons were deeply invested in their community, both financially and emotionally. They had always been diligent about their finances, ensuring their home and business were well-maintained and supported. However, the unforeseen wildfire of 2023 upended their lives, leaving them with devastating losses and mounting debts that threatened their financial stability.

The Challenge

The wildfire left the Thompson family in an unimaginable situation. With their home reduced to ashes and their bakery – once the heart of their livelihood – completely destroyed, they were suddenly burdened with overwhelming financial obligations. Their insurance provided minimal relief, and the bills quickly piled up. They faced a mortgage on a home that no longer existed, business loans that they could not repay, and mounting credit card debt. The family, who had always managed their finances responsibly, now found themselves on the brink of insolvency, with no clear path forward. Overwhelmed and uncertain, they knew they needed expert help to navigate this crisis and save their future.

Solution

Recognizing the severity of the Thompson family’s situation, Spergel immediately provided a comprehensive and compassionate approach to their financial crisis. A Licensed Insolvency Trustee (LIT) was assigned to work closely with the family, thoroughly assessing their financial landscape and exploring all available options. After careful deliberation, the LIT recommended a consumer proposal as the most viable solution. This allowed the Thompsons to negotiate with their creditors, significantly reducing their debt while avoiding the long-term impact of bankruptcy. The proposal was crafted to be both fair and sustainable, giving the family a manageable repayment plan and the breathing room they needed to begin rebuilding their lives.

Implementation

Once the consumer proposal was agreed upon, Spergel swiftly moved to implement the plan with meticulous attention to detail. The Licensed Insolvency Trustee engaged in rigorous negotiations with the Thompsons’ creditors, successfully reducing their total debt from $250,000 to just $75,000 – an astonishing 70% reduction. This significant relief was life-changing for the family, allowing them to focus on rebuilding without the crushing weight of insurmountable debt. Their LIT established a manageable repayment plan, with the Thompsons agreeing to pay $500 per month over five years. Spergel also provided ongoing financial counselling and connected the family with local resources to secure temporary housing and support for relaunching their bakery. The effective implementation of the consumer proposal not only stabilized the family’s finances but also gave them a clear and attainable path to recovery.

Results

The results of Spergel’s intervention were transformative for the Thompson family. The drastic reduction in debt from $250,000 to $75,000, along with a manageable repayment plan, lifted an immense burden off their shoulders. With their finances stabilized, the Thompsons could focus on rebuilding their lives and business. Within months, they secured a new home and reopened their bakery in a different location, thanks to the community’s support and the financial breathing room provided by the consumer proposal. The family is now on track to complete their repayment plan ahead of schedule and is thriving in both their personal and professional lives. The successful outcome not only saved the Thompsons from insolvency but also restored their hope for the future.

Conclusion

The Thompson family’s journey from devastation to recovery is a powerful testament to the impact of timely, expert financial guidance. Thanks to Spergel’s personalized approach and strategic debt reduction, the Thompsons were able to overcome the severe challenges posed by the wildfire. Today, they are rebuilding their lives with confidence, free from the overwhelming burden of debt. Their story exemplifies how Spergel’s commitment to helping clients navigate financial crises can lead to renewed stability and a brighter future.

Client Testimonial

“When the wildfire destroyed our home and business, we were at a complete loss – both emotionally and financially. We had always been careful with our finances, but this disaster left us with nowhere to turn. That’s when we found Spergel. From the very first meeting, they treated us with such compassion and respect, helping us see that there was a way forward. Their team worked tirelessly to reduce our debt by 70%, giving us a manageable plan to repay what we owed. Thanks to Spergel, we didn’t just survive this crisis – we’re thriving again. We’ve rebuilt our bakery, found a new home, and, most importantly, regained our hope for the future. We couldn’t have done it without them.”

— Mr. Thompson, British Columbia

Are you also struggling in the Tompson’s situation?

If this feels close to home, there are lots of ways we can help:

• Debt Consolidation and Management
• Budgeting
• Credit Counselling
• Debt Help

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]]> https://www.spergel.ca/learning-centre/what-is-business-insolvency/ Thu, 08 Feb 2024 22:04:00 +0000 https://www.spergel.ca/learning-centre/what-is-business-insolvency/ Business insolvency – or corporate insolvency – has been making headlines in Canada this month given the shocking statistics that reveal that business insolvencies shot up by more than 41% last year, as pandemic debts mount. But what exactly is a business insolvency? And why is it a concern for many businesses operating in Canada, each requiring a nuanced understanding of the country’s financial landscape and regulatory framework. In this article, we explore what a business insolvency actually means in Canada, its causes, and practical insights for Canadian businesses to avoid insolvency and financial turmoil.

What is business insolvency?

In Canada, business insolvency occurs when a company is unable to meet its financial obligations and pay its debts as they become due. It is also when the sale of the business’ assets are insufficient to pay all of its obligations. The country’s legal system provides specific frameworks, such as the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA), to address insolvency issues and facilitate the restructuring of financially distressed businesses. When a business in Canada faces insolvency or financial distress, one of the debt relief options available is corporate bankruptcy – either voluntary or involuntary. Yet bankruptcy is not the only solution by any means. The earlier a business owner can seek advice from a reputable Licensed Insolvency Trustee, the more options that may be available.

What are the causes of business insolvency in Canada?

Here are some of the most common causes of business insolvency in Canada:

• Cash flow management challenges – businesses that face inadequate cash flow management, including delays in accounts receivable and challenges in monitoring operational expenses, can contribute to insolvency.
• Excessive debt – Canadian businesses grappling with high levels of debt, especially in the face of economic downturns, might find it challenging to meet their financial obligations on time.
• Economic uncertainties – economic fluctuations and uncertainties are part of life, and can impact businesses by affecting demand, pricing, and overall market conditions.
• Failure to adapt to regulatory changes – an inability to adapt to evolving regulatory requirements, tax changes, or shifts in government policies can pose risks to a company’s financial stability.
• Cost of living – the increasing cost of groceries, rent, vehicles, and utilities does not just impact consumer insolvencies, but also businesses. Wages are affecting the increase in business insolvencies as employees are asking for better salaries and businesses struggle to balance the increases.
• CEBA deadline – as the CEBA loan deadline has been and gone (January 18, 2024), and no further extensions, further strain has been placed on many Canadian businesses to repay hefty sums of money along with the pressure of a deadline.

How to avoid business insolvency

Given the many challenges businesses in Canada are facing right now, and a steady increase in the amount of business insolvencies being filed, you are likely wondering how best to avoid business insolvency. Here are some tips.

• Strategic financial planning – by implementing rigorous financial planning practices, including regular budget reviews, forecasting, and scenario analysis, businesses can better navigate the economic uncertainties that Canada is facing.
• Debt restructuring and consolidation – Canadian businesses facing debt challenges should explore their debt relief options, as well as debt consolidation strategies in order to manage their liabilities effectively. For some, corporate bankruptcy is an effective option whereby a Licensed Insolvency Trustee offers consultancy and helps to administer a fresh financial future.
• Legal framework compliance – it is so important to ensure compliance with Canadian insolvency laws, including understanding the processes outlined in the Bankruptcy and Insolvency Act to facilitate a smooth resolution in case of financial distress.
• Diversification of revenue streams – diversifying your business’ revenue streams reduces your reliance on specific markets or clients, enabling businesses to better withstand economic downturns.
• Government Assistance Programs – you should stay informed of government assistance programs in Canada, particularly during economic crises, to leverage the available support for businesses facing financial difficulties. Over the years, we have seen the likes of CEBA and CERB, the Government of Canada’s response to the COVID-19 pandemic.
• Professional advice and support – if you are concerned about facing business insolvency, engage an experienced Licensed Insolvency Trustee that is familiar with Canadian insolvency for tailored guidance that is compliant with the relevant regulations.

Business insolvency – FAQs

Here are some of the most commonly asked questions about business insolvency in Canada.

What are the rules for insolvency in Canada?

In Canada, business insolvency is governed by specific rules and legislation designed to provide a framework for the resolution of financial challenges faced by companies. The two primary statutes that outline the rules for business insolvency in Canada are the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA):

1. Bankruptcy and Insolvency Act (BIA) – sets out the rules and procedures for businesses and individuals dealing with insolvency and bankruptcy in Canada.
2. Companies’ Creditors Arrangement Act (CCAA) – the CCAA is another federal statute that specifically addresses the restructuring of large corporations and businesses facing financial difficulties.
3. Super-Priority for Debtor-in-Possession (DIP) Financing – both the BIA and CCAA provide for super-priority status for debtor-in-possession (DIP) financing. This allows a company in financial distress to secure new financing that takes priority over existing debts, facilitating the restructuring process.
4. Stay of proceedings – upon the filing of a proposal under the BIA or an initial application under the CCAA, an automatic stay of proceedings is triggered. This prevents creditors from taking legal action to collect debts during the restructuring process, providing the company with a temporary reprieve.

Understanding and adhering to these rules and statutes is crucial for businesses navigating insolvency in Canada. Engaging a Licensed Insolvency Trustee is necessary to ensure compliance and navigate the complexities of the restructuring or bankruptcy process effectively.

How does insolvency work in Canada?

In Canada, business insolvency is governed by the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA). When a business faces financial distress, it may opt for a formal proposal under the BIA, allowing it to negotiate a plan for debt repayment or restructuring with creditors. The filing triggers an automatic stay of proceedings, providing a temporary reprieve from creditor actions. If a viable proposal is unattainable, the business may declare bankruptcy, leading to asset liquidation and distribution among creditors. Larger corporations may choose the CCAA, initiating a court-supervised restructuring process. Creditor committees may be formed, and the proposed plan requires court approval. Throughout the process, a Licensed Insolvency Trustee oversees proceedings to ensure compliance.

How long does insolvency last in Canada?

The time taken for business insolvency proceedings in Canada can vary widely and is influenced by factors such as the complexity of the case, the chosen avenue for resolution (BIA or CCAA), and the efficiency of the restructuring process. Here are some general timelines for the two primary insolvency options in Canada:

1. Bankruptcy and Insolvency Act (BIA):
   • Filing a proposal: when a business files a proposal under the BIA, it typically has a maximum of 6 months to negotiate and obtain creditor approval for the proposal. However, this period can be extended with the consent of creditors or the court.
   • Bankruptcy proceedings: if a viable proposal is not reached and the business declares bankruptcy, the bankruptcy process may take several months to complete. The distribution of assets to creditors occurs during this period.
2. Companies’ Creditors Arrangement Act (CCAA):
   • Initial application: for larger corporations opting for the CCAA, the initial application triggers a stay of proceedings, allowing the company to develop a plan for restructuring. The court supervises this process.
   • Restructuring process: the restructuring process under the CCAA can extend over a year, especially for complex cases. The court may grant extensions as needed, depending on the circumstances and progress made.

It is important to note that these timelines are approximate, and the actual duration can vary based on the specifics of each case. Additionally, the involvement of creditor committees, negotiations, court approvals, and other factors can influence the overall timeframe. The goal of business insolvency proceedings is to reach a fair and effective resolution, whether through restructuring, a successful proposal, or bankruptcy, and the timeline may be adjusted to accommodate the complexities involved in achieving this outcome. Engaging with an experienced Licensed Insolvency Trustee can help your business to navigate the insolvency process efficiently.

Does insolvency write off debt?

Business insolvency in Canada, whether through the Bankruptcy and Insolvency Act (BIA) or the Companies’ Creditors Arrangement Act (CCAA), does not automatically write off debt. Instead, it provides a structured process for debt restructuring or orderly asset distribution to creditors. The outcome depends on the creditor approval of proposed plans, with secured creditors having priority in asset distribution. Certain types of debts may not be discharged, and personal liabilities or guarantees may exist even after the business insolvency process. The primary goal is a fair and legal resolution of financial challenges, rather than an outright debt write-off.

Business insolvency can happen for various reasons, from poor management to major changes within an industry, or an economic downturn. When a company is facing insolvency, it is important to reach out to a Licensed Insolvency Trustee immediately to discuss the available options. The earlier you reach out, the more options there will be. To mitigate risks and seek professional advice, book a free consultation with a reputable Licensed Insolvency Trustee at Spergel, the ‘get rid of debt’ people.

What to read next

• Business bankruptcy: options for debt help
• Small business debt relief
• How do you know if you are insolvent?
• Insolvencies on the rise – what should you do if you think you may be insolvent?
• What to bring to a Licensed Insolvency Trustee meeting

What is receivership?

In the context of a personal bankruptcy, the receiver is the individual or entity that takes possession of a debtor’s assets and liquidates or distributes them to the creditors in accordance with the Bankruptcy and Insolvency Act. Receivership also involves tasks including submitting tax returns on behalf of the debtor. Receivership is not applicable to every personal bankruptcy. In fact, it is only relevant when there are secured debts to be handled. These secured debts will need to be liquidated so that they can be distributed to creditors – for instance, a car. While receivership is sometimes necessary for bankruptcy, it is not typically a part of the process of filing a consumer proposal. This is because generally speaking, consumer proposals will allow you to keep your assets while reducing your debt by up to 80%. Although there is sometimes confusion by individuals perceiving bankruptcy and receivership to be the same thing, receivership is an important part of the bankruptcy process.

Who do receivers work for?

During personal bankruptcy, the receiver is typically your Licensed Insolvency Trustee – the only professionals in Canada legally able to file all forms of debt relief. They work for both the debtor and creditor. This means that they are tasked with getting the best result for both you and your creditors. Licensed Insolvency Trustees will deal with your assets through bankruptcy, and will often also be managing your bankruptcy too. In some instances, receivers are appointed by the court. Privately appointed receivers will be appointed by creditors to liquidate some assets which will have been used as collateral against a debt. This can happen outside of a bankruptcy – perhaps because the debt has not been paid. The receiver can then collect the asset in order to help resolve the debt. Usually, however, in bankruptcy a receiver will be appointed by the court to begin the bankruptcy process.

What do receivers do?

Receivers essentially carry out the following tasks as part of their role:

• Taking control of property and assets
• Monitor liquidation proceedings
• Distribute the proceeds to creditors in order of priority

For many Canadians, bankruptcy is the ideal form of debt relief to resolve debt. Sometimes, it will involve receivership. Essentially it is just part of the bankruptcy process and a task for your Licensed Insolvency Trustee. If you have further questions about receivership and how bankruptcy works, book a free consultation with a Licensed Insolvency Trustee at Spergel today. We have been helping Canadians gain financial freedom for over thirty years.

Small business bankruptcy: partnerships and sole proprietorships

By Canadian law, the people who own partnerships – or sole proprietors – are considered to be the business itself. In this sense, the owners are a single entity. This means that all of the assets of the business are personal property of the partners or sole proprietor. Under the Bankruptcy and Insolvency Act, the process for filing bankruptcy is the same as it is for personal bankruptcy. A small business bankruptcy therefore has a very similar effect on its owners as a personal bankruptcy has on an individual. This has a number of impacts:

• The owner’s assets are included in the bankruptcy and could be sold to solve business debts
• The bankruptcy will appear on the owner’s credit report and have the same effect as a personal bankruptcy

If your business is a two-person partnership and one of you files bankruptcy, the partnership can no longer exist. If there are more than two partners in the partnership and one files bankruptcy, the partnership can continue if the partners enter an agreement. When it comes to surrendering assets, for small business bankruptcies the sole proprietor or partner may keep some assets that are exempt, like a vehicle under a certain value.

Corporation bankruptcy

Corporations differ from sole proprietorships and partnerships because corporations exist as legal entities, separate from their owners. This means that a corporation is responsible for its own debt, assets, and legal suits. The responsibility of any directors, shareholders, employees, etc of the corporation is therefore limited. This means that these employees cannot be held responsible personally for the debts of the corporation. This makes business bankruptcy a little different for corporations. A corporation can go bankrupt without involving your own personal assets unless:

• You have guaranteed a loan
• You are a director and the corporation has not made payments to a government department, including GST, HST, and Retail Sales Tax

A corporation is bankrupt according to the Bankruptcy and Insolvency Act when it has made an assignment into bankruptcy, or if a bankruptcy order has been made against it. It is considered insolvent if it cannot make its obligations as they are due; it has stopped paying obligations as they are due; and the corporation’s property is insufficient to allow payment of all obligations. Much like personal bankruptcy, no assets are exempt – a corporation has to surrender all of its assets to the Licensed Insolvency Trustee. Learn more about assets and bankruptcy. A corporation cannot choose to voluntarily dissolve if it is bankrupt, has a trustee under a consumer proposal, or if it has an interim receiver under the Bankruptcy and Insolvency Act.

What is the process of business bankruptcy?

The process for filing bankruptcy under the Bankruptcy and Insolvency Act is the same for both individuals and businesses. This process is as follows:

• The small business or corporation voluntarily files bankruptcy, or is forced into bankruptcy
• All of the business assets are surrendered to the Licensed Insolvency Trustee
• The Licensed Insolvency Trustee sells the assets and gives the proceeds to the creditors

• There are a few subtle differences, as small business owners and individuals filing bankruptcy may keep some of their income to sustain a reasonable standard of living, in line with the rules set by the Office of the Superintendent of Bankruptcy (OSB). Any surplus income has to be paid to the Licensed Insolvency Trustee. Corporations, on the other hand, have to pay all their income to the Licensed Insolvency Trustee. All individual bankruptcies will be discharged from bankruptcy, usually after nine months. In contrast, business bankruptcies will not experience the same fresh financial start that personal bankruptcies are given. A business bankruptcy cannot apply for a discharge until it has met all of the claims of its creditors. Learn more about life after bankruptcy.

How to file for business bankruptcy

Similar steps are required when filing for business bankruptcy as with those filing for personal bankruptcy:

• Find an experienced Licensed Insolvency Trustee at a reputable bankruptcy firm
• Have them review your financial situation and explore your debt relief options – they will advise you on your best option
• If the best form of debt relief is to voluntarily file bankruptcy, the Licensed Insolvency Trustee will file the paperwork and notify your creditors
• Any business assets will be surrendered to the Licensed Insolvency Trustee – they will be sold and the proceeds will be given to creditors
• Some creditors may have priority claims to other creditors which the Licensed Insolvency Trustee will handle
• Creditors may request further information about the bankruptcy and the OSB may request more details on the circumstances
• The business may be discharged from bankruptcy if all terms have been met

The order in which the proceeds of a bankruptcy are distributed is as follows:

• Funeral expenses, in the case of a deceased bankrupt (not applicable for corporate bankruptcies)
• Costs of administration
• Levy owed to the OSB
• Employee wages for six months prior to the bankruptcy
• Municipal taxes for two years before the bankruptcy
• Arrears of rent to landlords for three months prior to the bankruptcy
• Costs for asset seizure incurred by a creditor for seizures already underway at the date of filing bankruptcy

Business bankruptcy alternatives

In light of the impact on small business owners and self-employed individuals, business bankruptcy is not always the best option. At Spergel, we also offer consumer proposals as an alternative to bankruptcy, depending upon your personal situation. Consumer proposals are simply an offer to your creditors to repay a portion of your debt over a maximum of five years. Consumer proposals can reduce your debt by up to 80%, and at Spergel, all consumer proposals we file have an acceptance rate of 99%. If accepted by your creditors, a consumer proposal stops all interest charges and lawsuits brought against you via a stay of proceedings. It also allows you to focus on the repayment of all or a portion of your debt. It is better than bankruptcy for your credit score and does not impact your ability to be a director of an incorporated business. For small business owners, this also means that business assets will remain unaffected and credit may still be available. Spergel can help you find the best option for you and your small business.

If you are a small business owner or self-employed individual considering business bankruptcy, contact the debt professionals at Spergel. At Spergel, our experienced Licensed Insolvency Trustees will outline the options available to you and help you deal with your debts in a way that right for both you and your business. Book a free consultation with us today – you owe it to yourself.