How Filing for Personal Bankruptcy Impacts Your Small Business
While personal bankruptcy eliminates most, if not all, unsecured personal debts, what happens if you are self-employed or a small business owner, who has accumulated more personal and business debt than you can pay off? What options do you have?
Keep reading to learn more about the impact personal bankruptcy can have on your small business, along with how it can eliminate certain business debts.
Types of Debts Discharged Through Personal Bankruptcy
Bankruptcy is a legal process, through which individuals unable to repay their debts can eliminate them and have them discharged.
It’s important to note, that bankruptcy only eliminates unsecured debts – debts that are not backed by collateral, such as a car loan or house mortgage. Unsecured debts include:
- Credit cards
- Utility bills
- Medical bills
- Payday loans
- Bank loans
- Unsecured lines of credit
- Personal loans
- Income and HST tax debts not secured by a CRA tax lien
- Debts owed to suppliers of goods and services to a sole proprietor
In exchange for the elimination of the debt, bankrupts must surrender certain assets to a Licensed Insolvency Trustee (LIT) – with some exceptions – who will sell them to help repay your creditors, or let you retain them if you are prepared, and able, to buy them back from the LIT.
Debts Not Discharged in Bankruptcy
Secured creditors are creditors who have been given the right to seize and sell an asset, or assets, in the event you default on payments. Unless the bankrupt surrenders these assets to the secured creditor for sale upon filing bankruptcy, the debts must continue to be paid. Secured debts typically include mortgages on homes and vehicles.
Certain unsecured debts survive a discharge from bankruptcy, and include:
- Student loans, if it has been less than 7 years since you completed your education
- Spousal and child support arrears
- Fines and penalties imposed by the court
- Debts incurred due to fraud, breach of trust, or misrepresentation
How Personal Bankruptcy Can Impact Your Business
If you operate a small business as a self-employed contractor, or as a sole proprietor, business debts are considered to be personally owed by you, and they must be included in your personal bankruptcy.
This also applies to business assets, meaning any assets belonging to your business must be disclosed to the LIT and, subject to statutory exemptions, seized by the LIT and sold for the benefit of your creditors, or sold back to you, for the amount of the assets’ value in excess of the exemption.
In Ontario, bankruptcy asset exemptions related to your sole proprietorship include tools and equipment used to earn your living, up to value of $11,300. This is in addition to other permitted exemptions for personal belongings and a vehicle.
If the value of your tools and equipment exceeds the exemption of $11,300, you will have to make arrangements with the LIT to pay the excess amount to it for the benefit of the creditors.
What is Classified as A Small Business and Can I Continue Operating it?
In Canada, a small business is often classified as a privately-owned corporation, partnership, or sole proprietorship with fewer than 100 employees.
If your business is conducted through a corporation, the assets it owns do not belong to you, nor are its debts owed by you. If the company is insolvent, it can be put into bankruptcy, if appropriate to do so. Perhaps, you can continue your business as a sole proprietor, continue operating your existing corporation, or incorporate a new company. Of note, if you are in bankruptcy, you cannot be a director of a corporation. The LIT will advise you on your options prior to filing bankruptcy.
Corporate shareholders and directors can be personally liable for corporate debts if personal guarantees were given to company creditors, or by way of statutory directors’ liability for CRA tax debts. These debts will have to be declared to the LIT in your personal bankruptcy. Again, these matters can be complex and should be discussed with a LIT when assessing your options.
What Business Debts Can Be Eliminated Through Personal Bankruptcy?
Unsecured loans, lines of credit, credit card debts, or amounts owed to suppliers, incurred to fund your sole proprietorship’s business operations will be eliminated by your discharge from bankruptcy. If you conducted business with a corporation, and personally guaranteed corporate debts, they too will be extinguished by your discharge from bankruptcy.
Debts owed as a sole proprietor, or as a director of a corporation, on account of personal income taxes, or CRA employee source deductions and HST arrears, are also extinguished upon discharge from bankruptcy.
Filing a Consumer Proposal to Help Manage Business Debts
A consumer proposal is a government-regulated debt relief solution, administered by a LIT, that allows you to retain personal and business assets and substantially reduce your unsecured debt load. It may be used if, excluding your principal residence mortgage debts, your debts total less than $250,000.
If your non personal residence mortgage debts exceed $250,000, you can still obtain debt relief and the assistance of a LIT, by filing a business proposal, referred to as a Division I proposal.
Whether you file a consumer proposal, or a Division I proposal, you will be assisted by a LIT, who will negotiate the settlement with your unsecured creditors, and determine an appropriate re-payment plan.
If you are a small business owner in financial stress, speak with a LIT to learn more about what bankruptcy and proposals entail, and which debt relief option is best for you.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee. Its professionals have assisted thousands of individuals successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!