Filing for commercial bankruptcy is a difficult decision to make and one that should not be taken lightly. It can have long-term effects on your business, finances, and credit score, so it’s important to understand the process before making a decision.
Types of Bankruptcies for Businesses
Different types of businesses require different types of bankruptcies. The rules are as follows:
Sole Proprietorship
If your company is a sole proprietorship, then you would have to file for personal bankruptcy. A sole proprietorship is an unincorporated business owned by a single individual. The company is run under the owner’s name and the business risks and liabilities fall under the owner’s responsibility — meaning that the owner’s own assets and property would be included in a bankruptcy. If the company is a sole proprietorship, a personal bankruptcy must be filed.
Personal bankruptcy protects you from your creditors and is a last resort that enables you to stop your financial position from growing worse, reclaim control of your life, and start over after all other possibilities have been exhausted.
All of your debts, including credit card debt, mortgage debt, vehicle loan, tax debt, and more, will be discharged after your bankruptcy is over. Some debts, such as court penalties and citations, alimony, fraudulent debts, and school loans (if bankruptcy is within 7 years after the date of graduation), are not dischargeable.
Registered Company
A registered company is considered a sole proprietorship. If the owner of the business wishes to operate under a different name than his own, then the company must be “registered” and pay annual fees. As a sole proprietor and registered company, the owner assumes all of the risks and liabilities of the business, including any debts.
Commercial Bankruptcy
A commercial bankruptcy involves liquidating the company’s assets in order to discharge the company of debts. It ends all legal actions taken against the company, prevents further filing of proceedings, and can prevent seizures. It should only be considered a last resort. Though a company could be eligible to file for commercial bankruptcy even if they only have more than $1000 of debts, it should seek other options first.
Eligibility Requirements
Before filing for bankruptcy, you must meet certain eligibility requirements. This will ensure that you are able to receive the benefits of the bankruptcy and not risk losing your assets. In Canada, there are a few commercial bankruptcy requirements that you must meet before filing. They are as follows:
- You must reside in Canada, do business in Canada, or own property in Canada.
- You must have at least $1000 worth of debts.
- You must be incapable of paying off those debts — meaning you have insufficient income and can’t afford to pay off your monthly obligations.
- You must owe more than what your assets are worth.
Steps in the Filing Process
Before you can file for commercial bankruptcy, you’ll need to meet with a Licensed Insolvency Trustee (LIT). This is required by all commercial bankruptcies. An LIT will help you determine if filing for bankruptcy is the best option for your business. They will look at all of your financial information, including your income, expenses, assets, and liabilities. They’ll also determine if you have any other debt relief options available to you. Once the LIT has assessed your situation, they’ll advise you on the best course of action.
If you decide to file for bankruptcy, the next step is to file the necessary paperwork. You can file at a trustee’s office. Though many seem to think filing for commercial bankruptcy is a scary process, that couldn’t be further from the truth. If you want to see an end to your financial troubles and have a completely fresh start, filing for commercial bankruptcy is the best option.
Pros and Cons of Filing for Commercial Bankruptcy
There are both pros and cons to filing for commercial bankruptcy. This will depend on your specific situation and the type of bankruptcy you choose to file. Let’s take a look at some of the pros and cons of filing for commercial bankruptcy.
- A commercial bankruptcy does not personally affect the business owner.
- You will no longer receive harassing phone calls from creditors.
- You will be able to sell the corporation and/or its assets through your trustee.
- You won’t have to fear having any stay of proceedings against you.
- The entire process is regulated, so everything will be done in a fair and legal manner through the trustee.
- Though you will lose the corporation, you’ll have learned from the experience and will be able to start fresh.
Debt Relief Options
Before you make the decision to file for bankruptcy, you should explore your other debt relief options. They might be able to help you avoid bankruptcy altogether. Let’s look at a few of the most popular debt relief options. They are as follows:
Debt consolidation
Debt consolidation allows you to combine multiple debts into one single monthly payment. This will allow you to simplify your finances and put all of your energy towards paying off that one single debt. Debt consolidation is most commonly used to pay off high-interest debt, such as credit card debt.
Create a budget
If you have monthly expenses, but you don’t have the cash flow to cover them, you need to create a budget. A budget will allow you to prioritize your expenses and determine which ones you can cut back on. This can help you avoid missing payments and filing for bankruptcy.
Business Proposal
Just like a bankruptcy, a licensed insolvency trustee is responsible for managing a business proposal, which is a legal tool made available under the Bankruptcy and Insolvency Act. The proposal’s goal is to give a bankrupt business the ability to discharge its obligations while carrying on with its activities. Where the business owner can carry on with the business activities, creditors will also be able to receive more than if the owner file for commercial bankruptcy — making it a win-win for all parties involved.
A LIT will help assess your situation and determine the best course of action. They will ask you a number of questions, such as how much debt you owe and what type of assets you have. They will also assess your income and expenses to determine if you’re capable of paying back your creditors. Your licensed insolvency trustee can help you navigate the entire commercial bankruptcy filing process so that you come out on top.