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Avoid Small Business Bankruptcy

How to Avoid Bankruptcy and Save Your Small Business

Are you a small business owner that’s finding it harder and harder to sustain your company’s day-to-day operations? Are you having to decide which of your creditors to pay first – or at all – and are starting to think that bankruptcy is your only option?

There are many reasons small business owners find themselves struggling with financial difficulties. Whether you’re trying to get your new business up and running, you’ve lost your biggest client, or you’ve expanded so quickly that your cash flow can’t keep up, the most important thing you can possibly do is to get help immediately. Filing for bankruptcy is not the inevitable – or only – option! There are ways to avoid small business bankruptcy.

How Can I Avoid Financial Distress and Bankruptcy?

Below are three essential tips to avoid bankruptcy.

Tip #1: Negotiate directly with your creditors.

If you’ve got a pretty uncomplicated situation, and perhaps just one large creditor, you might want to reach out to that creditor directly and negotiate the restructuring of your debt with them. The thing is, many small business owners have more than one creditor, and the situation is far from simple. This option may not be a possibility for everyone.

Tip #2: Immediately seek the assistance of a Licensed Insolvency Trustee.

If you’re having trouble meeting your obligations in the ordinary course of business, reach out to a Licensed Insolvency Trustee. A trustee will formally assess your business and determine the options available to you in your particular circumstances.

Having an expert to help guide you through financial difficulties is an immeasurable help. And don’t worry, you’ll still have the final say on how to proceed.

Besides, seeking the assistance of a trustee is a requirement if you want to proceed with making a Consumer Proposal or Commercial Proposal to Creditors, which brings us to Tip #3.

Tip #3: Make an offer that your creditors can’t refuse.

A Consumer Proposal or Commercial Proposal to Creditors is a formal procedure governed by the Bankruptcy and Insolvency Act, and it is available to businesses and individuals. Basically, a Proposal allows a business to avoid bankruptcy by reducing a portion of its debts and allowing for a structured plan to make payments to creditors.

How Do I File a Proposal?

The first step is to file a Notice of Intention to Make a Proposal. This filing immediately stops your creditors from hampering your company with collection efforts and lawsuits for a period of thirty days, which can be extended to six months with the Court’s approval. The idea is that this period gives you sufficient time to prepare your Proposal for the consideration of your creditors. Moreover, during this time, no payments are made to unsecured creditors.

Your trustee will help you develop a plan to present to your creditors.

The Pros of Filing a Proposal

A Proposal not only allows you to remain in possession of your business, it gives your business the coveted opportunity to become profitable again. It lifts the financial burden from your shoulders, and offers you protection from creditors while you restructure your small business.

Even just its filing will have immediate benefit to you. As indicated above, once filed, secured and unsecured creditors must not start – or continue – legal action against you. Also, because you aren’t required to make payments to unsecured creditors during this time, you can improve your cash flow, which will help as you attempt to make your company stable and solvent.

Additional benefits include the fact it’s quite flexible. You can negotiate and tailor a Proposal that works in your circumstances. For example, you can compromise and pay a debt that’s less than the full amount, delay payment, convert debt to equity, or do a combination of these.

That said, generally, in order to get approval from your creditors, the amount you offer should be more than what they would get if you went bankrupt, but still low enough to help you improve your financial situation.

Further flexibility includes tailoring your Proposal to address any director obligations that may follow you personally in the event of a business bankruptcy. And you may also want to consider restructuring your operations, such as closing down locations that aren’t doing well or selling off assets to repay secured creditors. The costs involved in such restructuring will be covered by the Proposal.

Once the terms of the Proposal are fulfilled, your company is released from further legal obligations to those creditors.

The Cons

Keep in mind, not all creditors are required to accept your Proposal. You’ll need the majority of creditors (holding at least two-thirds of the value of the claims) to approve your Proposal. And once they do, the Court needs to approve it. Only then is the Proposal legally binding on unsecured creditors, as well as secured creditors whose classes voted to accept it.

This brings us to one of the downsides of a Proposal. If your creditors reject your Proposal, which they have the right to do, your business immediately goes into bankruptcy. (It’s worth noting that this is not actually a huge risk if you’re likely making a last ditch effort to avoid a bankruptcy.)

However, the more money you offer your unsecured creditors, even if the payment is termed out over future periods, the more likely it is that your creditors will accept your proposal.  They know that a bankruptcy will usually result in them recovering less of their debt.

The bottom line: Seek the assistance of a trustee if you want to know how to avoid a bankruptcy and save your small business from closing.

Before you make a decision that will seriously impact your small business, you need to know the options available to you in your circumstances, as well as the implications of any decisions you make. A trustee is not only necessary (depending on which route you choose to resolve your financial difficulties), it’s also incredibly beneficial.

There are so many provisions of the Bankruptcy and Insolvency Act that can impact your filing a Proposal. Know the rights and remedies you have so you can protect what you’ve fought so hard to create.

Consult us today for more information and a free initial consultation to discuss the best next steps for your small business.

Photo by Joshua Rodriguez on Unsplash

John Adamson, Licensed Insolvency Trustee Ontario

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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