Filing bankruptcy is a necessary step for many Canadians each year in order to write off any unsecured debts and begin a fresh financial future. Although often considered a last resort and feeling sometimes like an intimidating process, bankruptcy can sometimes be the only path forward for relief from stress, anxiety, and debt. Bankruptcy is the process of assigning any non-exempt assets over to a Licensed Insolvency Trustee in exchange for the clearance of your unsecured debt. Little do some people know that in Canada there are also 3 types of bankruptcies. It is important to understand the different types of bankruptcy and what each involves that you can make an informed decision as to whether or not bankruptcy is right for you. So, what are the 3 types of bankruptcies and what are the differences between each of them?
What are the 3 types of bankruptcies in Canada?
There are 3 types of bankruptcies in Canada:
- Personal bankruptcy.
- Small business bankruptcy.
- Corporate bankruptcy.
All of these types of bankruptcy are in line with the Bankruptcy and Insolvency Act. Each of these 3 types of bankruptcies has a slightly different way of working, so understanding the different types can save you time and ensure you are well informed. As well as the 3 types of bankruptcy, there are also bankruptcy alternatives. The most popular alternative is a consumer proposal, the process of putting forward a manageable monthly payment figure to your creditors. If they accept, your debt can be reduced by around 80%, and you just need to commit to making these monthly payments until you are cleared of your debts. The key difference between a bankruptcy and a consumer proposal is that a bankruptcy eliminates all debts, while a consumer proposal enables you to pay back a portion of your debt over an extended period of time.
How do the 3 types of bankruptcies differ?
While in the grand scheme of things, personal and small business bankruptcies are very similar provided the small business is a partnership or sole proprietorship, each of the 3 types of bankruptcies has slightly different nuances which we will cover in more detail. Before filing bankruptcy in Canada, you need a Licensed Insolvency Trustee in order to do so. They are the only professionals in Canada legally able to file all forms of debt relief. First of all, they will review your financial circumstances and assess which type of bankruptcy may be best suited to you. In order to meet the eligibility criteria for filing bankruptcy, you must:
- Be a Canadian resident
- Owe at least $1,000 to creditors
- Be insolvent, i.e. your debts are greater than the value of your assets, and you are unable to pay your bills when they are due
Here are the primary differentiators between the 3 types of bankruptcies:
Personal bankruptcy is the most common form of bankruptcy in Canada. Generally speaking, there are a few circumstances you may find yourself in that might make you consider filing personal bankruptcy:
- You have experienced a loss of income
- You cannot reduce your debt despite continuing to make payments
- You have no more borrowing capacity, and cannot secure further credit
- You rely on credit for day to day essentials
If you find yourself in this situation, you should engage an experienced Licensed Insolvency Trustee. They will work to review your financial circumstances and recommend the best path forward for financial freedom. Within personal bankruptcy, there are a couple of subcategories:
Summary Administration Bankruptcy
This comes about when if sold, your assets do not exceed $15,000. This is most common for individuals, and where your assets may include home equity and investments, but will most likely be exempt from seizure. This is also the type of bankruptcy that incorporations file, and there is no requirement to advertise your bankruptcy. The fees paid to your Licensed Insolvency Trustee are fixed by the Bankruptcy and Insolvency Act, and are based on the amount realized by your trustee rather than your trustee’s time.
Online Administration Bankruptcy
Online administration bankruptcy comes about when if sold, your assets exceed $15,000. This is more common for businesses, whereby Licensed Insolvency Trustee fees are paid from the sales of these assets. Unlike in summary administration bankruptcy, this time a trustee’s time is a factor that determines cost. There is much more work needed to file an online administration bankruptcy, and you need to advertise in a newspaper. A creditors’ meeting is also mandatory. Given the value of assets, it is a good idea to consider a consumer proposal instead.
You may be wondering what happens in bankruptcy when you are discharged. There are four types of discharge from bankruptcy:
- Absolute – the most common and best possible outcome, absolute discharge means you are released from all legal obligations to repay your debts aside from any not included in the bankruptcy, e.g. child support, secured debts.
- Conditional – in order to receive your absolute discharge, you will need to complete some conditions.
- Suspended – you will not receive an absolute discharge immediately or automatically. Instead, you will receive it in the future.
- Discharge refused – although uncommon, this can happen. If you are refused, you will need to work with your Licensed Insolvency Trustee to find a way to receive your discharge, or you may need to wait and apply again in the future.
Small business bankruptcy
Small business bankruptcies are typically very similar to personal bankruptcies, provided your business is a sole proprietorship or a partnership. In these instances, the assets and debts of a small business are considered to be the owner’s personal assets and debts in legal terms. It is a different case for incorporations, as we will come to shortly. Much like personal bankruptcies, for small business bankruptcy, when you file you will receive one of the four types of bankruptcy discharge, as well as the advantage of protection from your creditors via a stay of proceedings.
Corporate bankruptcy is a little more complex than personal and small business bankruptcies. You need to find a Licensed Insolvency Trustee to file the business bankruptcy, and usually one with plenty of experience in the field. Typically, as incorporated businesses are independent legal entities, they will offer liability protection to the business owner to protect their personal assets. Instead, on the business’ assets will be at risk.
Which of the 3 types of bankruptcies is right for me?
If you are contemplating filing bankruptcy, the best action to take is to book a free consultation with an experienced Licensed Insolvency Trustee. They will be able to advise you which of the 3 types of bankruptcies is most appropriate for you and your financial circumstances. Before filing, you will need to consider some of the disadvantages of bankruptcy, including the impact on your credit score and the potential surrender of your assets. As the only professionals legally able to file all forms of debt relief in Canada, your Licensed Insolvency Trustee will consider bankruptcy alternatives beforehand. A consumer proposal may be more suitable for you, and can allow you to reduce your debt by up to 80% while keeping your assets.
If you have further questions on the 3 types of bankruptcies, why not book a free consultation with an expert Licensed Insolvency Trustee at Spergel? We can help you to learn more about bankruptcy, as well as allow you to explore other debt relief options outside of bankruptcy. Begin your journey to financial freedom today – you owe it to yourself.