If your small business has run into financial trouble and you are not incorporated, bankruptcy can eliminate both personal and business debts.
Personal vs Business Bankruptcy
If you operate a small business as a self-employed contractor, sole proprietorship or unlimited partnership, any business debts are also owed by you personally. Filing personal bankruptcy in Canada will eliminate both debts from the business and any personal debts you owe.
If you file bankruptcy, any non-exempt personal assets would be forfeit to your trustee for the benefit of your creditors. In most provinces, including Ontario, there are bankruptcy exemptions for tools of the trade which can be essential to contractors.
Filing a business bankruptcy as a corporation would only deal with business debts and would only result in the seizure of business assets. If you are incorporated and have personally guaranteed your business debts, you may need to file personal bankruptcy as well.
What business debts are cleared if I file personal bankruptcy?
If you borrowed money to fund business operations, any unsecured loans, lines of credit or credit card debt will be eliminated through bankruptcy. Filing bankruptcy will also deal with any outstanding utility bills and unpaid suppliers.
When you file bankruptcy, credit card companies will review all transactions you have made over a minimum of the last three months, so it is important to stop using your personal credit cards for business purchases as soon as you realize that you may be filing bankruptcy.
Secured creditors are not included in a bankruptcy; they retain the right to seize any assets pledged as collateral for the loan.
Landlords have specific rights in a bankruptcy which can affect your right of occupancy if you want to carry on the business and who has a claim against business assets. If you lease a premises for your business, it is important that you discuss your lease with your trustee before you file.
Does bankruptcy clear tax debt?
Filing personal bankruptcy as a small business owner will also eliminate back tax debts including unpaid income taxes, source deductions and HST owing to the CRA. It is important if you owe money to Canada Revenue Agency that you file your tax returns (to determine how much you owe) and act quickly to avoid potential adverse collection actions. The CRA has strong collection powers including registering a lien on your assets, garnishing your wages (if you are now working) and freezing your bank account.
Filing a consumer proposal to deal with business debts
It is also possible to deal with small business debts by making a proposal to your creditors to reduce and change the payment terms on your small business debts.
If your debts, excluding the mortgage on your personal residence, do not exceed $250,000 you can make a consumer proposal to your creditors. A consumer proposal allows you to make an offer to repay your creditors a portion of what you owe. At the completion of your proposal payments, all debts are forgiven. A consumer proposal is a viable alternative if you have assets to protect or are earning income high enough to generate significant penalty payments in a bankruptcy.
If your personal and business debts exceed $250,000 you can make what is known as a business proposal or Division I proposal.
Contact a Licensed Insolvency Trustee to discuss your situation. A review of your business, who you owe money too and how you want to carry forward will help you determine the best option.
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