When you are struggling with business debt, it can feel like you are stuck in a nightmare. You may not know where to turn for help. Do you file for a consumer proposal or personal bankruptcy? Which one is best? How will they impact me, and my business?
These are great questions that we will answer in this article.
Both options can provide relief from business debt, but they work in different ways. So will a consumer proposal or personal bankruptcy deal with business debt? Let’s take a closer look…
***Disclaimer: When dealing with business debt there are nearly an infinite amount of possibilities as to how your situation may need to be handled. While we are providing this article as general information, it is imperative that you receive personalized advice with respect to your specific situation from a Licensed Insolvency Trustee.
The Difference Between a Consumer Proposal and Personal Bankruptcy
A consumer proposal is a process whereby you negotiate with your creditors (via a Licensed Insolvency Trustee) to offer your creditors less money than you owe. They are typically paid over a 60 month period. It is not uncommon to see reductions in debt of ~80%. You do not lose any assets, nor are your payments based upon future earnings.
Bankruptcy is the ultimate debt relief option that involves surrendering your assets to your trustee (and don’t worry, in most instances, you can retain your assets if you want to ) for distribution to your creditors and making monthly payments that are based upon how much money you earn monthly.
Corporation vs a Sole Proprietorship
When considering whether to file a consumer proposal or declare bankruptcy to deal with any business debt, you must understand how your debt is actually owed.
A sole proprietorship is a business that is unincorporated. All of your personal and ‘Business’ debt is owed by you personally. Legally, there is no distinction between the two. If you file for bankruptcy or a consumer proposal both your personal and business debt will be settled.
Unlike a sole proprietorship, you and your corporation are two distinct entities. Corporations do provide their owner’s limited protection against liability and debt. If you apply for credit in your corporation’s name and do not personally guarantee it, you will have no personal liability for any defaulted debt.
Creditor protection doesn’t apply to all debts, however. If you are a director of a company, you have certain director obligations that you must meet. The most common is to collect & remit HST/GST as well as employee source deductions. If you fail to do so, these can be assessed on you personally.
Being A Sole Proprietorship vs Incorporated in a Consumer Proposal or Bankruptcy
The structure of your company will highly impact the potential outcome that a consumer proposal or bankruptcy might provide you. There are many reasons for this, but two primary reasons are:
# 1 – Corporation Liability Protection
If your business is incorporated you personally have some liability protection against your creditors. This means that your creditors can only come after the assets of your business and not your personal assets, assuming you have not personally guaranteed any debts. Unfortunately, most people have personally guaranteed debts inside of their corporation, often without realizing the implication.
# 2 – How Certain Debts Are Treated
Certain debts are treated differently depending on how you operate your business and what option you wish to pursue. For example, if you owe CRA for any Payroll source deductions as a sole proprietor and wish to file a consumer proposal, this debt is considered a secured debt (because it is a deemed trust).
However, if you’re incorporated and your company owes source deductions, you will personally only have a contingent Director’s Liability that is treated as an unsecured debt in the event you personally file a consumer proposal or bankruptcy.
How a Consumer Proposal Can Help with Business Debt
A consumer proposal is a great option to help with business debt and avoids filing bankruptcy. A consumer proposal is like debt settlement – you negotiate with your creditors to come to terms to settle your debts at less than 100% by way of affordable monthly payments. Determining if a consumer proposal is worth it depends on several factors. The benefits, and what type of proposal you can file, will depend on your business structure.
Consumer proposals as a Sole Proprietorship
As mentioned above, as a sole proprietor your situation will be dealt with in the same manner as a regularly-employed consumer that files a consumer proposal.
Consumer proposals as a Corporation
A corporation is unable to file a consumer proposal, instead, they are able to file what is known as a Division 1 Proposal and is also regulated by the Bankruptcy and Insolvency Act. A Division 1 proposal operates like a consumer proposal but is intended for corporations and consumers who owe more than $250,000 in debt, excluding their primary residence.
This is usually done if there is an intention to continue operating the business and offers the opportunity to restructure its debt
There are certain circumstances where it makes sense to file a consumer proposal in your own name and dissolve your existing company. This might be the case where the business is not viable to continue operating post-filing or in the event the business restructures, the owners are unable to financially survive due to personally-guaranteed debts and/or Director’s Liability claims that CRA may have against you.
How Personal Bankruptcy Can Help with Business Debt
Bankruptcy is typically the last resort option that businesses and consumers take to tackle their debt. However, bankruptcy can be an incredibly effective way to eliminate debt, especially some of the tougher debts to tackle such as source deductions owed to CRA.
Bankruptcy as a Sole Proprietorship
Your situation will be dealt with exactly as it would if you didn’t run a business. If you owe CRA and they do not have a memorial judgment against you or your property, then you are able to have these debts included and discharged upon successful completion of your bankruptcy. If you owe deemed trust debts they can be included and discharged as well, however, the secured nature of them must be factored in.
Bankruptcy as a Corporation
Just like personal bankruptcy, a corporate bankruptcy will eliminate all dischargeable debts from inside the corporation. It will not release any guarantors of personally-guaranteed debts, nor release the director from any potential director’s liability claim.
Because of this, it is uncommon for a corporation to file a bankruptcy unless there are assets left inside the corporation or in the event the owner of the corporation does not want to deal with the wind-down. Consulting a Licensed Insolvency Trustee is highly recommended if you are considering a bankruptcy for your corporation.
How a Licensed Insolvency Trustee Helps With Business Debt
A Licensed Insolvency Trustee is required when filing a consumer proposal, Division 1 proposal, personal or corporate bankruptcy. Our Trustees can assist you in knowing which debts can and cannot be discharged, understanding your current financial position, and that of your company, as well as helping you understand the best approach to navigating your business debt.
No matter if you are looking for advice or want to file a bankruptcy or consumer proposal, do not hesitate to reach out to us.
This article was written by Angela Rodgers, CIRP, LIT. She is a Licensed Insolvency Trustee and the President of Powell Associates Ltd. She has worked in the insolvency industry for over 20 years. No matter if you are looking at filing bankruptcy, a consumer proposal, or simply looking for debt management advice, Angela can help.