The decision to declare bankruptcy is never made lightly – if you are self-employed or own a small business, this decision can become even more complex. In most scenarios, a business will go bankrupt voluntarily. Yet, in some circumstances, a business will go bankrupt if they make a proposal to creditors that is not accepted. This can also happen if the creditors of a business push it into bankruptcy by filing a petition in court. If you are a small business owner and struggling financially, thankfully there are a number of options to consider. So, how does business bankruptcy work? How will your business assets be affected? What happens to your business? In this article, we help you to understand some of the options and key considerations to help you navigate the legalities associated with business bankruptcy. At Spergel, we offer easy to understand solutions from an experienced and compassionate perspective.
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.
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.