In Canada, you can file for Personal Bankruptcy or Business Bankruptcy to help eliminate debt. You’ll need to work with a Licensed Insolvency Trustee (LIT) before you can initiate any type of Bankruptcy. A LIT will assess your financial situation and recommend what type of Bankruptcy is right for you.
What is Personal Bankruptcy and How Does it Work?
Personal Bankruptcy is a legal process that releases you from most unsecured debts when you’re insolvent.
The first step in filing for Bankruptcy is speaking to a Licensed Insolvency Trustee (LIT). A LIT is the only professional in Canada who can administer a Bankruptcy proceeding.
Once declared bankrupt, you can stop making payments directly to your creditors. Any wage garnishment or creditor lawsuits will also stop.
Your Trustee will sell your non-exempt assets to try and raise money to repay your creditors. As part of your Bankruptcy, you’ll have to attend two financial counselling sessions to help you understand what caused your Bankruptcy and how to manage your money moving forward.
Who can file for Personal Bankruptcy?
You can file for Personal Bankruptcy if:
- You can no longer pay your debts when they’re due
- You have debts over $1,000
Will Filing For Personal Bankruptcy Affect My Business?
If you file for Personal Bankruptcy, it may affect your business depending on how it’s structured.
- Sole proprietorship. You and your business are the same legal entity. The day after you file for Bankruptcy, you are considered a new legal entity. To continue running your business, you’ll need to sign up for a new business number.
- Partnership. Like a sole proprietorship, there is no legal separation between you and your business. When you file for Bankruptcy, the assets of your business are included. If your partnership consists of two people, it can no longer exist after you file for personal Bankruptcy. If it consists of more than two people, the partnership can continue to operate.
- Corporation. If your business is incorporated, you and your business are considered separate legal entities. Filing for Personal Bankruptcy won’t necessarily affect the operation of your business. On the other hand, if your business goes bankrupt, your individual assets are protected. In most cases, if you file for Bankruptcy, your business will cease to exist.
What is Business Bankruptcy?
If your corporation can no longer pay its bills, you might have to file for Business Bankruptcy. Similar to Personal Bankruptcy, this is a legal proceeding carried out under the Bankruptcy and Insolvency Act (BIA).
Like Personal Bankruptcy, you’ll need a LIT to administer the process. Once your LIT files your Bankruptcy documents, all legal proceedings and collections activities will stop. Your LIT will sell your corporate assets. Since a corporation is a separate legal entity, your personal assets, including your house and car, are typically not affected.
Who can file for Business Bankruptcy?
You can file for Business Bankruptcy if you:
- You can no longer pay your debts when they’re due
- You have debts over $1,000
- Your business debts are greater than the value of your business assets
What is Receivership?
If your business has secured debt that it can no longer pay, it can go to receivership. This is a tool secured creditors can use to recoup some of their money. It involves selling your business’s assets to pay off secured loans. A receiver is an LIT that the court or secured creditor assigns to take control of the company’s assets and supervise the sale of the items.
There are a few important differences between Bankruptcy and Receivership:
- Who initiates it? In Bankruptcy, the borrower initiates the process, in Receivership it’s the lender.
- What debts are included? Bankruptcy deals with unsecured debts while receivership deals with secured debts.
- What happens to the business? In Bankruptcy, your business will close. In receivership, it’s possible for your business to continue.
Alternatives to Bankruptcy
If you’re struggling to pay your bills, you may assume that Personal Bankruptcy or Business Bankruptcy is your only option. However, while Bankruptcy is a useful debt relief solution for many Canadians struggling with debt, a Licensed Insolvency Trustee can assess your finances and let you know if you have alternative options.
Consumer Proposals are available to individuals, and a Division I Proposal is available to companies and individuals. Both options allow you to keep your assets, as long as you continue to make payments to your secured creditors.
Restructuring is also an option for large corporations that carry a high amount of debt.
What are the differences?
- Consumer Proposal. A Consumer Proposal, also known as a Division II Proposal, is for individuals who owe less than $250,000, excluding a primary mortgage. In a proposal, you work with a LIT to make an offer to your creditors to pay a percentage of your debt, extend the time you have to pay, or both. If your creditors accept your proposal, you have up to five years to make your payments.
- Division I Proposal. Also known as a commercial or corporate proposal, this applies to individuals owing more than $250,000 and companies that owe any amount of money. If your proposal is accepted by your creditors, you have to pay a lump sum or regular payments. If your proposal is rejected, you’ll have to file for Bankruptcy. Unlike a Consumer Proposal, there’s no time limit for a Division I proposal.
- Corporate restructuring. To avoid company bankruptcies, another option is restructuring your business through the Companies Creditors Arrangement Act (CCAA). This is a federal law that applies to insolvent companies who owe more than $5 million. The CCAA gives the company short-term protection from its creditors so they can restructure their business.
Personal Bankruptcy vs. Business Bankruptcy
If your business is structured as a sole proprietorship or partnership, you and your business are the same legal entity. If your small business is insolvent, you file for Personal Bankruptcy. If you run a corporation, you and your business are separate legal entities. If you file for Business Bankruptcy, it will not impact your personal assets. If you file for Personal Bankruptcy, it won’t necessarily affect the operation of your business.
Whether you’re struggling with personal or business finances, the Licensed Insolvency Trustees at Allan Marshall & Associates can assess your situation and assist you in finding the right debt help option. If you can’t pay your bills, bankruptcy is not always your only option. Depending on your debt amounts, there are alternatives. For a free no-obligation consultation call us at 1-888-371-8900 or fill in our online contact form.
