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Business Bankruptcy Vs Personal Bankruptcy

Considering Closing Your Business and Filing for Bankruptcy? Read These 4 Tips First.

If your small business is in trouble, there are some important facts you need to know about business Bankruptcy vs. personal Bankruptcy.

The economic crisis has been tough on many small businesses. Some have eliminated staff, cut their hours of operation, or closed altogether. Bills are being paid late or sometimes not at all. If you are one of the unfortunate business owners whose income has been significantly reduced, you may be considering Bankruptcy.

You are not alone. There are actions you can take, however, that will mitigate the damage or, if possible, help you avoid losing your business altogether. The best choice you can make right now is to educate yourself on your small business Bankruptcy options so that you can make the best of a tough situation. Personal Bankruptcy can be a viable option for your small business. But it may not be your only choice.

Business Bankruptcy vs. Personal Bankruptcy

First, consider the structure of your business. If you are a corporation, you would not be able to file personal Bankruptcy. Instead, your options are corporate Bankruptcy or a Division 1 proposal.

On the other hand, if you are not a corporation, then your business is considered either a sole proprietorship or an unlimited partnership. This means that there is no difference legally between you and the business. The assets and the liabilities belong to you. Fortunately, your options are less complicated than a corporate Bankruptcy.

Two Options for Small Business in Financial Distress

Consumer Proposal, in fact, is a great option when you are facing temporary difficulties. It could be that your restaurant or store is struggling due to the pandemic, but you expect the business to make a profit once more.

If you believe your problems are more enduring, however, you should consider personal Bankruptcy. Bankruptcy is a legal process governed by the Bankruptcy and Insolvency Act of Canada and administered by a Licensed Insolvency Trustee(LIT). Your LIT can answer all of your questions and help you make a sound financial decision. They are the only people registered by the federal government of Canada to file either a Consumer Proposal or Bankruptcy on your behalf.

What You Need to Know

Bad information can paralyze you and keep you from taking action. What about my taxes? How about that CERB loan? Do I have to shutter my business? There are a lot of misconceptions regarding business Bankruptcy. It’s important to separate truth from fiction.

Here are four things that are important to understand:

1. Tax obligations are unsecured.

Bankruptcy covers most if not all of your unsecured debt prior to the filing date. This means that all of your credit card balances, personal loans, lines of credit, and payday loans are covered. But what about tax obligations?

It’s a common misconception that tax bills remain. Not true. All of your personal income tax bills are discharged following Bankruptcy. There is one exception that applies to a few people, however. If your personal income tax debt exceeds $200,000 and is greater than 75 percent of your total debt, you may not be eligible for automatic discharge. However, that doesn’t mean that the debt won’t be eliminated.

Speak to your LIT for more information. In the vast majority of cases, taxes are treated just like any other unsecured debt. Remember, though, if you owe taxes you cannot pay, don’t wait to file Bankruptcy. You must act before Revenue Canada takes a lien on your property. This lien secures the amount owed so that the government has a right to the property even if you file for Bankruptcy.

2. CEBA and CERB loans can be included in Bankruptcy.

Canada’s COVID-19 Economic Response Plan (CERP) offered a lifeline to many businesses with its interest-free loans. Unfortunately, some people who received CERP benefits were, through no fault of their own, ineligible, overpaid, or found themselves owing taxes. If you are unable to pay the amount due in full, you can make arrangements with the CRA. But for those who cannot pay at all, CERB can be discharged as part of a Bankruptcy or Consumer Proposal.

The Canadian federal government helped small businesses during the pandemic by extending additional loans through the Canadian Emergency Business Account, created in April 2020. These CEBA loans may also be included in your personal Bankruptcy. Do not let these small business government loans prevent you from taking action.

3. You can continue to operate your business.

A corporate Bankruptcy would most likely result in business closure unless you find a way to repay the money owed in full. But when you file for personal Bankruptcy, the law is in your favor for continuing the operation. Contrary to common belief, you do not have to shutter your business. One of the primary goals of Bankruptcy is to give you a fresh start. You are still entitled to make a living through your business and the process allows you to keep the tools of your trade.

Once you have reduced or eliminated your debt, your business may provide the new beginning need. Of course, it’s important to evaluate whether the business is viable. There is no point in continuing to operate a business if it will lose money. Filing for Bankruptcy protection means you will have the time you need for business restructuring without pressure from creditors. Your business can still be the key to your financial future.

It’s essential to ask yourself, in light of the current economic environment these key questions:

  • Will the business generate enough money to cover expenses, including new tax bills?
  • Is it possible to further reduce expenses and increase revenue?
  • Must the business rely on credit to manage cash flow?

If you think that your business is still viable and you will continue to generate the cash needed to run the business day to day, consider a Consumer Proposal rather than Bankruptcy. A Consumer Proposal reduces your debt and allows you to make payments over five years, providing substantial time to regain your financial footing.

4. Avoid Preferential Payments

Even if you want to continue your business, it’s important not to pay off a favored creditor or two while ignoring the others. Under Bankruptcy law, all transactions prior to filing are reviewed. You may have debt that you would prefer to pay first, for example, money owed to a friend, family member, or a favorite vendor. Careful, though. These can be considered preferential payments. And they have consequences.

Bankruptcy laws exist to ensure that everyone is treated fairly. Payments can be examined and deemed preferential within a certain time period while you were insolvent. The laws are specific and it is important that you follow them. That’s why it is critical to seek professional advice before you make missteps that must be remedied.

Take Action, Seek Advice

If your business is in trouble, you may need to make the decision to file for Bankruptcy protection. Certainly, you will have an essential discussion with your LIT before you act. Perhaps the most difficult step is the first one: Pick up the phone. You can schedule a free, no-obligation consultation today. Once the paperwork is filed, you will have immediate protection from creditors and a lot more room to breathe.

Of course, the decision is not one to take lightly. You will need to rebuild your credit. But that will be easier to do when you are no longer drowning in debt. After you file, you can plan how to either revitalize or sunset your business. Discharge from Bankruptcy can happen in as little as nine months. From there, you can begin to rebuild your credit and secure your financial future.

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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