Small Business vs. Personal Bankruptcy in Canada – When it comes to small business bankruptcy, there isn’t much of a distinction between personal bankruptcy and small business bankruptcy if the company isn’t incorporated. In general, bankruptcy is a legal process through which businesses or individuals can seek relief from unmanageable debt.
When a bankruptcy petition is filed, a “stay of proceedings” is put in place, which stops unsecured creditors from taking legal action against the creditor to recover obligations. In the case of personal bankruptcy, the stay of proceedings precludes a creditor from garnishing the debtor’s earnings, for example.
The stay of proceedings levels the playing field for unsecured creditors, ensuring that no creditor has an unfair advantage over others when it comes to debt payback. Note that unsecured creditors can start bankruptcy proceedings—if a creditor owes more than $1,000 to a debtor and the debtor has recently committed acts of bankruptcy, such as failing to pay liabilities, committing payment fraud, avoiding creditors, secretly disposing or hiding assets, and so on—a creditor can file a petition to put the debtor into bankruptcy.
Secured creditors are normally unaffected by bankruptcy since they have the right to reclaim collateral put up as security for debts by the individual or organization, such as a mortgage on the debtor’s home or liens on business equipment.
Personal or Non-Incorporated Bankruptcy
If a person’s business is a sole proprietorship or a partnership, they are legally their business, which means that if they file for bankruptcy, all of their assets are at risk, and the bankruptcy processes are the same. In other words, a small business bankruptcy is effectively a personal bankruptcy because the assets of the business cannot be kept separate from its personal assets.
Incorporated Business Bankruptcy
Because corporations are separate legal entities, small business bankruptcy differs from that of unincorporated firms. A small business owner’s responsibility is reduced when the company is incorporated; the assets of the company are forfeited, not the individual’s. The exception is where the business owner(s) has pledged personal assets as security for the debt (as is required in many circumstances to get debt financing) (such as mortgages on personal property, etc.).
Aside from that, the bankruptcy processes are nearly identical to those for personal bankruptcy. All of the firm’s assets are turned over to the Trustee in Bankruptcy, who sells them and distributes the proceeds to the creditors, whether the company is forced into bankruptcy or chooses to do so freely.
Note that if your company is formed and is unable to pay taxes, it will be compelled to file for bankruptcy, and the Canada Revenue Agency (CRA) will have first priority over all other secured creditors on the firm’s assets. Also, if there are unremitted source deductions (income tax, employment insurance, CPP) or unpaid sales taxes (GST/HST), firm directors may be held accountable.
According to the Office of the Superintendent of Bankruptcy Canada, 121,609 personal bankruptcies occurred in Canada in 2015, up 3.0% from 2014. Consumer Proposals accounted for 58,203 of them. At the time of filing, total assets for all bankruptcies in 2015 were $10,474,489,079, with total liabilities of $14,125,879,957.
In 2015, firms filed 4,107 insolvency petitions, a reduction of 2.7 percent from 2014. There were 1,018 proposals among them. At the time of filing, total assets for all business bankruptcies in 2015 were $680,664,124, with total liabilities of $5,944,924,099.
Alternatives to Declaring Bankruptcy
A Consumer Proposal entails making a partial payment on your obligations in exchange for your creditors forgiving the remainder. Unlike filing bankruptcy, a Consumer Proposal does not expose your personal assets to seizure, which is a significant benefit for lone owners and couples.
A Consumer Proposal is preferable to bankruptcy from the perspective of creditors since it allows them to collect at least a portion of the remaining debt, but in a bankruptcy process, they may lose it altogether.