If your business has become overwhelmed with debt, company bankruptcy might be a course of action you want to take. When closing your business and declaring bankruptcy, there are a number of steps to complete. We’ve broken down the process into four parts so you know what to expect.
- Why declare business bankruptcy?
- Bankruptcy for sole proprietorships
- Bankruptcy for partnerships
- Bankruptcy for corporations
Why declare business bankruptcy?
If a business is dealing with debts it is unable to pay, filing business bankruptcy is an option. It is a legal process that can forgive the company’s debts.
If you wish to declare business bankruptcy in Alberta, the first step is to contact a Licensed Insolvency Trustee (LIT). A LIT will provide advice and present all the available options. They support you while you navigate financial difficulties, and help you determine whether to file bankruptcy or not.
To qualify for business bankruptcy, you must be a Canadian resident and have liabilities of at least $1,000 above the amount of your assets and be unable to make payments.
Even if you qualify for bankruptcy, it doesn’t mean you have to declare it. There are alternatives to bankrupting a company. If you’re an individual, a consumer proposal is one route you could take. A Division 1 proposal is another option for businesses or individuals. They are similar to formal procedures, where you can pay a percentage of what is owed, or extend the deadline to pay.
Another option is to restructure your business. An LIT will discuss all of these with you, and advise what is best for your debt situation.
Bankruptcy process for sole proprietorships and partnerships
There are specific steps to follow for declaring bankruptcy as a sole proprietor or while in a partnership.
Bankruptcy for sole proprietorships
When doing business as a sole proprietor, it is not the business that goes bankrupt, it is the individual. Legally, the business is not separated from personal assets. In this case, declaring business bankruptcy is the same as declaring personal bankruptcy. Assets like houses or vehicles can be seized, but some are exempt, like RRSPs, life insurance policies, and pension plans.
As is the case with personal bankruptcy filings, you must send the LIT proof of income each month, and make consistent monthly payments on the amount owing. You’re also required to attend two credit counselling sessions.
Bankruptcy for partnerships
If you’re in a partnership that is just you and one other person, and you declare bankruptcy, the partnership becomes void. If the partnership has more than two partners and one declares bankruptcy, the partnership can continue if the rest of the members enter into an agreement. The bankruptcy filing process is otherwise identical to closing a sole proprietorship.
Bankruptcy process for corporations
If your business has been incorporated, then it is a separate entity and filing bankruptcy will not impact personal assets. This is unless you have a personally guaranteed loan or are a director and the company has not made government payments toward entities like the CRA and GST. When closing a corporation, all business assets are surrendered to reduce liabilities.
When bankrupting a corporation, you must work with a LIT. The LIT will review the financial situation and give recommendations on the next step. If bankruptcy is the best way forward, the LIT will file a declaration with the Office of the Superintendent of Bankruptcy (OSB), which is responsible for administering the Bankruptcy and Insolvency Act. The LIT then resumes management of the company’s assets. Those assets will be sold, and the proceeds will be paid to creditors. Once all debts have been paid, the business may be discharged from bankruptcy.
Sometimes, business owners will have the opportunity to buy back assets to start the corporation over again. An LIT can advise you on this process and if it is possible for you.
Let Faber help with your business debt
Our LIT team is here to guide you through the bankruptcy process. Contact us today to get more information about resolving your business.
These are our top resources on the Bankruptcy and Insolvency Act:
Learn more about our Business Debt Solutions if you’re interested in working with a LIT.
Company bankruptcy FAQs
If you are an unincorporated business, business debts and personal debts are one and the same. Declaring business bankruptcy is the same as declaring personal bankruptcy. There will be a note about the bankruptcy on your credit report for six years. You may be seen as a lending risk for a while, but there are things you can do to rebuild your credit.
When the LIT files the documents with the Office of the Superintendent of Bankruptcy (OSB), you will immediately stop making payments on your unsecured debts and any related lawsuits will also be suspended.
The timing varies depending on your financial situation. If it is your first bankruptcy, you may be discharged in as little as nine months.
Your LIT will guide you through this process, and determine if a pre-bankruptcy, in-bankruptcy, or post-bankruptcy return needs to be filed. If you received a tax refund prior to bankruptcy, it is considered to be the property of the estate.
It will depend on your financial situation. A Licensed Insolvency Trustee can assess your financial situation and guide you through the appropriate option.
The Office of the Superintendent of Bankruptcy (OSB) supervises all bankruptcies and proposals in Canada. They are the licensing body for LITs and are all responsible for all work that falls under the Bankruptcy and Insolvency Act.