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You’ve had a few strong years running your business as a sole proprietor. But you’ve recently lost a few long-term clients due to budget cuts, and your income has dropped significantly. While you’re hustling to find new work, you’ve had to turn to your credit cards and line of credit to cover your business and personal expenses. Now your credit is maxed out, and you’re struggling to make the minimum payments. Your debt situation is starting to feel out of control, and you’re trying to decide if Bankruptcy might be the right option for you. Sound familiar?
Here we explain what Bankruptcy in Canada is, how filing can affect your business, and what debt relief alternatives are available when it comes to Bankruptcy and self-employment.
Bankruptcy in Canada
Bankruptcy is a legal process in Canada that helps individuals who are struggling to pay their debts. If you owe more money than you can afford to pay, Bankruptcy can provide relief and a path forward. At the end of the process, most of your unsecured debts are cleared, so you can begin rebuilding your finances.
A Licensed Insolvency Trustee (LIT) is the only professional in Canada who can administer a Bankruptcy proceeding.
Personal vs Business Bankruptcy
As a sole proprietor, there is no separation between your business and personal finances. This means your business debts are your personal debts, and your business income is your personal income. If you file for Bankruptcy as a sole proprietor, you are filing for personal Bankruptcy that includes your business and personal obligations.
Business Bankruptcy is for corporations. When your business is incorporated, it is a separate legal entity from you. In this case, your business can go bankrupt on its own, and your personal finances are often protected.
Impact of a Bankruptcy on Your Business
If you decide to file for Bankruptcy as a sole proprietor, you can include all eligible business and personal debts. In many cases, you can keep running your business through the Bankruptcy process, and even after.
However, there are consequences to consider when filing for Bankruptcy in Canada:
Drop in credit rating
Filing for Bankruptcy will drop your credit score to the lowest rating (R9 rating). This will stay on your credit report for up to seven years after discharge for a first time Bankruptcy.
This can make it difficult to borrow money in the future, including getting loans or credit cards to help fund your business. Even if you find a lender who is willing to extend you money, you will likely face higher rates and stricter conditions.
Sale of assets
Your LIT may have to sell some of your eligible assets, with the proceeds going to repay your creditors. This can include personal and business assets. But you won’t lose everything, as certain assets are exempted by federal and provincial laws.
Some examples of common assets that are typically protected in Bankruptcy include:
- Work tools. Equipment or tools you need to do your work, up to a provincial or territorial maximum.
- Vehicle. Up to your provincial or territorial maximum.
- Home. Up to your provincial or territorial maximum.
- Income. Up to a maximum amount, and then you have to make surplus income payments.
- Personal property. Items like furniture and clothing are typically protected, up to a provincial or territorial maximum.
- Medical aids. Medical equipment that is required for you or your dependents.
Surplus income payments
Your LIT will assess your average income, and if you earn above a certain level as set by the OSB, you may have to make surplus income payments. These are mandatory payments that help ensure creditors receive a fair portion based on your ability to pay.
Having to make surplus payments will also extend the duration of your Bankruptcy to 21 months for your first Bankruptcy, and 36 months for a second Bankruptcy.
Mandatory counselling
As part of your Bankruptcy, you will need to attend two financial counselling sessions with a qualified counsellor or LIT. The focus of these sessions is to understand the root cause of your debt issues and how to avoid them moving forward.
Benefits of Filing for Bankruptcy in Canada
While there are consequences associated with filing for bankruptcy, there are also several important benefits to consider, particularly when evaluating bankruptcy and self-employment situations.
Some benefits of filing for Bankruptcy include:
- Payments stop. Upon declaring Bankruptcy, you can stop making payments directly to your unsecured creditors.
- Wage garnishment will stop. If your creditors are garnishing your wages, this will stop immediately once you file.
- Creditor harassment will stop. If creditors are coming at you with collection calls or lawsuits, these will also stop immediately upon filing Bankruptcy.
- Fresh financial start. Once you are discharged from Bankruptcy, you are released from most of your debts, and you can start over financially.
Alternatives to Bankruptcy
As a sole proprietor in Canada, Bankruptcy might not be your only option. You can also speak to a LIT about a Consumer Proposal.
Consumer Proposal
A Consumer Proposal is a legal agreement that helps to reduce your debt. To file a Proposal, you’ll work with an LIT to create an offer to your creditors where you agree to pay a certain percentage of your debt, extend the time you have to pay, or both.
If your creditors accept your proposal, you will have to make fixed payments to your LIT for up to five years.
Unlike Bankruptcy, you don’t have to sell any of your assets, and your credit score won’t take as big of a hit.
Bankruptcy and self-employment
Being self-employed offers flexibility and independence, but it also comes with many challenges like inconsistent income, cash flow management, and doing your own taxes. When you’re a sole proprietor, all of the financial responsibility falls on you.
Understanding Bankruptcy and self-employment can help you make informed decisions during difficult financial times. The good news is that support is available. If you’re going through financial stress with your business, a Licensed Insolvency Trustee can help you explore your options and find the right solution.
For a free, no-obligation consultation, give us a call today at 1-888-371-8900 or complete our online contact form, and we’ll reach out to you.
