With such a large number of start-ups and businesses in Canada, self-employed
individuals are prone to run into debt problems. When these debt problems get overwhelming, small business owners may need to file for bankruptcy to gain a fresh start.
When an individual files for bankruptcy, this is considered personal bankruptcy. In legal terms, as a sole proprietor, the assets owned from the individual filing for a bankrupt business are not separate assets from the business.
If you are a sole proprietor owner in Canada and have to file bankruptcy for your business, here are ten common questions answered on how filing bankruptcy will affect your business.
1. Can I continue to operate my business after filing for bankruptcy?
The answer is yes. However, there are distinctions. Here are the specific distinctive factors that small business owners face.
If the small business is incorporated, then it will be the business that files bankruptcy due to it being a legal entity. Incorporated businesses have certain assets that will be sold by the Licensed Insolvency Trustee (LIT) to use the funds to pay off the creditors of the corporation. However, often there is little benefit to the corporation going bankrupt.
It’s important to understand that incorporated businesses can continue to be operated; however, the owner can face difficulties accessing business credit and unpaid suppliers may not want to work with the corporation going forward.
In the cases of a partnership or sole proprietorship, the individual(s) files for personal bankruptcy as this business is not a separate entity.
2. What happens to my assets after I file for bankruptcy as a sole proprietor?
After a small business owner files for bankruptcy, the individual might lose some of their assets. However, legally, small business owners can get a bankruptcy exemption called “Tools for the Trade.”
This exemption in Ontario covers an amount of up to $11,300. The amount of the exemption varies from each province in Canada. Be sure to check on the amount according to the province where the business is located.
3. Will I lose everything after I file for bankruptcy?
No. You will be able to keep some of your belongings, such as clothing, furniture, and a basic car. In terms of a house, depending on the circumstances, those who file for bankruptcy will be able to keep their home as they’re still responsible for paying the mortgage. However, any equity you have in the property is an asset the trustee must realize for your creditors.
4. Which debts are eliminated by filing for bankruptcy?
After filing for bankruptcy, most debts can be eliminated, including:
- Credit cards
- Lines of credit
- Unsecured debts
- Income tax debts
- Payday loans
5. Which debts will I still owe after filing for bankruptcy?
Debts you still owe are:
- Car loans (If you choose to keep the car)
- Child support
- Court fines or penalties
- Employment Insurance Overpayments
- Mortgage (If you choose to keep the property)
- Secured Lines of Credit
- Student loans, if the business owner has not been out of school for more than seven years.
6. How is income determined after filing for bankruptcy?
Almost all money you receive is considered income. Your monthly income is compared to Federal Income Standards and if you are over their ‘line’, Surplus Income rules apply based on a government formula to determine your monthly payment.
7. Will it be difficult to get credit afterwards?
Yes, those who file for bankruptcy will face difficulties accessing future credit. Upon filing for bankruptcy, all credit cards must be surrendered to each credit card company; this includes those with zero balance. Credit card accounts will be frozen and be named creditors in bankruptcy.
Bankruptcy can stay on your credit report for seven years. However, once the bankruptcy is over and you’re discharged, getting a secured credit card will usually result in creditors working with you after using the card for a year.
8. Can I include tax debt when I file for bankruptcy?
One of the largest amounts in debt owed for small business owners is income tax. Tax debt can be listed in your bankruptcy. However, the exceptions include if the Canada Revenue Agency (CRA) has set a property lien before the business owner filed bankruptcy. This should be looked at as if Canada Revenue Agency has a mortgage on your house. A title search of the ownership would show if CRA has such a lien.
9. How long does the bankruptcy process take?
Each individual’s case is different. Two distinctions determine the length of the sole proprietor owner’s bankruptcy process.
If it’s your first time filing for bankruptcy and you have surplus income, it typically lasts more than nine months. Having surplus income adds more time to the bankruptcy process. It typically takes 21 months to be discharged from bankruptcy for first-time filings.
A small business owner who files for bankruptcy for the first time without any surplus income can expect a nine-month process.
If this is the second time filing for bankruptcy, the usual time is 24 months to get discharged without surplus income or 36 months with surplus income.
10. What are my bankruptcy options?
Besides filing for bankruptcy, another option is to file a consumer proposal. Filing a consumer proposal lets the sole proprietor owner keep their assets, including those that are needed for continuing to operate the business. It allows for negotiating a deal with the creditors to repay a portion of the amount owed. The monthly payments are usually spread over a five year period (60 months).
For example, an unsecured debt under $250,000 that has been agreed to pay within five years. The total offer is based on what assets are worth along with surplus income payments.
To learn more about how bankruptcy affects your business, call Kevin Thatcher & Associates at 1-866-702-9801 or contact us here.