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Are You a Small Business Owner? What You Need to Know About Business Bankruptcy and Other Options

Due to a perfect storm of challenges, business Bankruptcies are soaring in Canada. Many businesses are carrying large amounts of debt and are struggling to keep their doors open. If you’re a small business owner in this situation, there are options to help you through this difficult time. 

Here, we’ll examine why debt has become such a big problem for many businesses. We’ll also look at how your business can find debt relief with government-approved options.

Business Insolvencies

More and more companies need to rely on credit to run their operations. It’s not uncommon to take out a  loan to buy equipment or use operating lines of credit for expenses. Many use credit cards for purchases or have government loans.

As we have seen in the last few years, economic conditions can change quickly. The impact of these changes can make it hard for businesses to repay their debts. Significant changes such as the recent pandemic and rapid increase in interest rates can cause havoc on finances.

A business is insolvent when it doesn’t have enough income to pay its creditors. Recently, insolvency has been happening more often in Canada. The 12-month period between June 2022 and June 2023 saw a 37.8% increase in business insolvencies compared to the previous 12 month period.

There have been big changes in both the Canadian and global economy that are contributing to the financial difficulties of businesses. The lingering effect of Covid-19, slow recovery in some sectors, ongoing supply chain problems, inflation, labour shortages and less consumer demand are impacting the bottom line of Canadian businesses.


Businesses had to deal with a lot of unique challenges due to Covid-19. Many were closed. Others had to scale back their operations, which led to less revenue. Certain sectors, such as restaurants and hotels, had significant losses during the lockdowns.

The federal government gave businesses an economic lifeline through the Canadian Emergency Business Account (CEBA). However, those who got the CEBA must repay some or all of the money. Some businesses are not back to their pre-pandemic earnings and can’t afford the CEBA payments.

Slow recovery

While some areas of the economy are booming, others are still trying to return to pre-pandemic income levels. In February 2023, 52% of small businesses hadn’t had their earnings return to pre-pandemic levels. Slower sales add to the other economic problems that are putting pressure on the bottom line of many companies.

Supply chain problems

Some items were hard to get during the pandemic, if you could get them at all. While much of the global economy is back to business, shortages still exist. Companies that rely on items in short supply may be unable to do business the way they did before the pandemic. Or, they might not be able to do the same amount of business they did before supply chain shortages began affecting their operations.


Inflation has caused the cost of raw materials, goods, services, transportation and wages to skyrocket. The Bank of Canada raised interest rates to curb inflation. Higher rates increase the cost of borrowing for businesses. Raising prices to cover the increased cost of borrowing is an option, but some companies are reluctant to do this. A price increase may cause their customers to scale back their purchases or shop elsewhere, negatively affecting the business’ revenue.

Labour shortages

Many companies are having a hard time finding employees. Businesses are competing to attract workers, and some must offer higher wages. Due to these factors, some companies have to either absorb higher labour costs or run short-staffed. 

Less demand

Buyers are also experiencing inflation and rising interest rates. Consumers have less purchasing power due to price increases and higher borrowing costs. As a result, some are cutting back on spending. Less demand typically results in less revenue for businesses, causing some to rely on borrowing to continue operations. 

Small and medium-sized businesses contribute significantly to Canada’s economic success. 

These companies employed 10.7 million workers in 2021, accounting for 88.1% of the Canadian labour market. Government-approved debt relief options can offer much-needed support to this vital sector of our economy.

Business Bankruptcy and Division 1 Proposals

A recent Canadian Federation of Independent Businesses study found that many owners struggling with insolvency would rather close their doors (46%) than file for business Bankruptcy (10%). 

However, several options exist for businesses with more unsecured debt than they can manage. Depending on the business structure, some business owners can deal with insolvency by filing a Consumer Proposal, Division 1 Proposal, or Bankruptcy. Others can file a Division 1 Proposal or Corporate Bankruptcy.

Self-employed, sole proprietors and partnerships can file a Consumer Proposal or a personal Bankruptcy. Consumer Proposals and personal Bankruptcy apply to these structures because the owner(s) is the business. As an owner/owners, you’re personally liable for the debts of your business.

You can file for Corporate Bankruptcy or a Division 1 Proposal if incorporated. A corporation is a separate legal entity from its owner or owners. Assets and liabilities belong to the corporation. The corporation is liable for the debt, not the owners.

Regardless of the structure of your company, you can file a Division 1 Proposal if you don’t want to file for Bankruptcy and your unsecured debt is over $250,000. A Division 1 Proposal can provide the necessary debt relief to help a company reorganize its finances, meet its obligations and continue operations.


Consumer Proposals, Division 1 Proposals, and personal and corporate Bankruptcy offer debt solutions for unsecured debt. But what about secured debt? Some businesses use assets such as buildings, machinery or equipment as collateral to secure their loans. 

When an asset secures debts, and the company can’t repay the loans, the company may go into receivership. Receivership is the selling of the business’ assets to repay its creditors. Unlike a Bankruptcy or Proposal, it is not voluntary by the debtor.

 A Licensed Insolvency Trustee (LIT) manages the process. The LIT can be appointed by the Court or privately appointed by the secured creditor. In some cases, a business can continue to operate while in receivership with the intention that it will be sold.

Help With Your Debt

If your company is insolvent or overwhelmed by the amount of debt it’s carrying, you don’t have to struggle alone. At Allan Marshall & Associates, our Licensed Insolvency Trustees fully understand the needs of business owners.

If you are like many owners, your business is your dream. We will work with you to find the best options to manage your debt so you can focus on your small business. Contact us today at 1-888-371-8900 for a free consultation. We have solutions to your debt options to help you eliminate your financial stress and get back to doing what you love.

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Allan Marshall & Associates Inc.

Allan Marshall & Associates Inc. is a Licensed Insolvency Trustee firm in British Columbia, Alberta & the Maritimes. Our dedicated writing team consists of LIT's, counsellors, and debt administrators that help to write informative articles and answer questions about your debt issues.

We are licensed by the Federal Government of Canada to administer Personal Bankruptcies, Consumer Proposals, other insolvency services such as Credit Counselling. We have the knowledge and experience to assess your situation and offer the best advice for your particular need, whether you are a first time bankrupt or simply struggling to make ends meet.