Understanding Personal Bankruptcy for Canadian Business Owners
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By Bromwich+Smith Staff | 1469 words | Reading Time: 7 minutes| Date: 2023/07/18
We know- the word bankruptcy is one of the last things anyone wants to think about, let alone a small business owner. However, it really is an important topic for Canadian business owners to be aware of, as it can have significant implications for their financial well-being. Lets go over personal bankruptcy in Canada, covering key concepts, processes, and considerations that business owners should keep in mind when facing financial difficulties.
What is Personal Bankruptcy in Canada
Personal bankruptcy is a legal process governed by the Bankruptcy and Insolvency Act (BIA) in Canada. Its primary purpose is to provide individuals who are unable to meet their financial obligations with a fresh start by forgiving their debts. The Office of the Superintendent of Bankruptcy (OSB) oversees the administration of personal bankruptcy cases.
Key Participants in the Bankruptcy Process
Licensed Insolvency Trustees (LITs) are licensed professionals who administer bankruptcies and consumer proposals on behalf of the individuals and their creditors. Creditors are who the money is owed to while the individual is the party who is unable to repay their debts. The court also plays a role in supervising the bankruptcy process and resolving any legal disputes that may arise.
Types of Personal Bankruptcy in Canada
Chapter 7 Bankruptcy (Liquidation)
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is the most common type of personal bankruptcy in Canada. In this process, the individuals non-exempt assets are liquidated to repay creditors, and remaining qualifying debts are discharged.
Consumer Proposal (Repayment Plan)
A consumer proposal is a powerful alternative to filing a bankruptcy that allows the individual to negotiate a repayment plan with their creditors. It is a formal arrangement that is filed with the LIT and must be approved by the creditors. A consumer proposal can offer benefits such as debt consolidation, reduced interest rates, and extended repayment terms.
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Personal vs. Business Debts in Bankruptcy
It is critical for business owners to understand the differences between their personal and business debts when considering bankruptcy. In the case of sole proprietorships and partnerships, the business owner is personally responsible for the business debts. In contrast, incorporation and limited liability protect the business owner's personal assets from business debts, making them separate entities.
Personal Guarantees and Business Debt
Business owners often provide personal guarantees for business loans or credit lines, which can have implications in personal bankruptcy. If a business debt is guaranteed personally, it becomes a personal debt and can be included in the bankruptcy process. However, discharging business debts in personal bankruptcy depends on the legal structure of the business and the nature of the debt.
The Bankruptcy Process for Canadian Business Owners
Pre-Bankruptcy Considerations
Before filing for personal bankruptcy, business owners should seek professional advice from an LIT to explore alternatives to bankruptcy. It is essential to carefully evaluate the financial situation, consider other debt relief options and understand the potential consequences of bankruptcy on both personal and business interests. Bankruptcy is not the only debt relief program available and typically is viewed as the last option when it comes to setting your debt.
Filing for Personal Bankruptcy
To initiate the personal bankruptcy process, you will need to gather all documentation, including income statements, a list of assets and liabilities, and tax returns. Your LIT will review the documents and begin the bankruptcy proceedings.
The Role of the Licensed Insolvency Trustee
A Licensed Insolvency Trustee is the only professional that is authorized to govern consumer proposals and bankruptcies. They can reduce your debt owing to a fraction of the original amount. A LIT will work with you and your creditors to build a consumer proposal (or bankruptcy if that is deemed to be the best option) that is fair for both parties. A LIT will also put a stop to ALL collections activity as soon as you enter into an agreement. That means no more harassing calls and no more letters!
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Duties and Obligations
Throughout the bankruptcy process, there are certain duties and obligations to fulfill. These include providing accurate and complete financial information to the LIT, attending debt counseling sessions, and cooperating with the trustee in the administration of the bankruptcy estate.
Impact of Personal Bankruptcy on Canadian Business Owners
Effects on Business Operations
Personal bankruptcy can have huge implications on business operations. Business owners must assess the impact of bankruptcy on their ability to continue running the business. Depending on the circumstances, options may include restructuring the business, seeking new financing, or you may need to consider closing the business.
Rebuilding Credit after Bankruptcy
Rebuilding credit is an important step for business owners after bankruptcy. It is possible to obtain new credit during your bankruptcy although it will likely be with higher interest rates and stricter terms initially. You will learn how to rebuild your credit during and after bankruptcy during your debt counselling sessions and through guidance of your LIT.
Personal Bankruptcy Exemptions for Canadian Business Owners
Exempt Assets in Bankruptcy
Certain assets may be exempt from the bankruptcy process, meaning they can not be liquidated to repay creditors. Primary residence and equity, as well as necessary personal property, fall under exempt assets. The specific exemptions vary by province or territory in Canada and it is best to discuss these with your LIT.
Non-Exempt Assets and Liquidation
Non-exempt assets, including business assets, inventory, investments, and non-essential property, may be subject to liquidation in bankruptcy to satisfy creditors' claims.
Canadian business owners facing financial challenges should have a solid understanding of personal bankruptcy and its implications. It is crucial to separate personal and business debts, explore alternatives to bankruptcy, and seek professional advice from a licensed insolvency trustee.
Bromwich+Smith has a team of specialists who are ready to talk to you about your debt relief options. Reach out today for a free, confidential, non judgemental consultation to see if you qualify for debt relief programs. Bromwich+Smith’s Debt Relief Specialists are available by phone at 1.855.884.9243, or request a call back at contact us page.
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FAQs Related to Personal Bankruptcy for Canadian Business Owners
1: Can I continue running my business during personal bankruptcy?
Yes, you can generally continue running your business during personal bankruptcy. However, the impact on your business operations will depend on the legal structure of your business and the nature of your debts. It is crucial to assess the implications carefully and consider options such as business restructuring or seeking new financing.
2: What happens to my business debts if I file for personal bankruptcy?
If you are personally responsible for your business debts, such as in sole proprietorships or partnerships, they can be included in your personal bankruptcy. However, debts protected by incorporation or limited liability are typically considered separate from personal bankruptcy.
3: How does personal bankruptcy affect my ability to start a new business?
Personal bankruptcy can affect your ability to start a new business, as it may impact your credit score and financial standing. While it is not impossible to start a new business after bankruptcy, it may be challenging to obtain financing with favorable terms initially.
4: Can I discharge tax debts through personal bankruptcy as a business owner?
Yes, you may be able to discharge certain tax debts through personal bankruptcy. However, there are specific criteria that must be met, and not all tax debts are dischargeable. It is essential to consult with a licensed insolvency trustee for personalized advice.
5: Will personal bankruptcy affect my personal and business credit scores?
Yes, personal bankruptcy will affect both your personal and business credit scores. It will remain on your credit report for a certain period, making it challenging to obtain credit with favorable terms. However, with time and responsible financial behavior, you can rebuild your credit scores.
6: What are the alternatives to personal bankruptcy for Canadian business owners?
Canadian business owners facing financial difficulties have alternatives to personal bankruptcy, such as a consumer proposal. A consumer proposal allows you to negotiate a repayment plan with your creditors and may offer benefits like debt consolidation and reduced interest rates.
7: Can I keep my business if I file for personal bankruptcy?
Whether you can keep your business during personal bankruptcy depends on the legal structure of your business and the nature of your debts. Business assets protected by incorporation or limited liability may be safeguarded, but others might be subject to liquidation.
8: How long does personal bankruptcy stay on my credit report in Canada?
Personal bankruptcy stays on your credit report in Canada for six to seven years, depending on the province or territory. During this time, it can negatively impact your ability to obtain credit at favorable terms.
9: Can personal bankruptcy lead to the closure of my business?
Personal bankruptcy may lead to the closure of your business if it heavily relies on your personal finances and assets. The impact on your business will vary based on its legal structure and financial situation.
10: How can I rebuild my personal and business credit after bankruptcy?
Rebuilding credit after bankruptcy involves responsible financial practices such as paying bills on time, using secured credit cards, and maintaining a low credit utilization ratio. Working with a licensed insolvency trustee can provide guidance and support during this process.