Understanding the Discharge of Business Debts in Personal Bankruptcy
Running a small business can be financially challenging. Sometimes, financial hardships may lead to the consideration of personal bankruptcy. One common question many small business owners ask is, “Can Business Debts Be Discharged in Personal Bankruptcy?” The answer to this question can be quite complex and depends on several factors.
Personal vs Business Bankruptcy
Understanding the Differences
The first step to understanding whether business debts can be discharged in personal bankruptcy is to understand the differences between personal and business bankruptcy. If you’re a small business owner operating as a self-employed contractor, sole proprietor, or have an unlimited partnership, your business debts are also your personal debts.
In Canada, filing for personal bankruptcy will eliminate both your business and personal debts. However, this process may result in the forfeiture of any non-exempt personal assets for the benefit of your creditors. In most provinces, including Ontario, there are exemptions for tools of the trade, which can be essential for contractors.
Conversely, filing a business bankruptcy as a corporation will only deal with the business’s debts and will only lead to the seizure of business assets. If you’re incorporated and have personally guaranteed your business debts, you may need to file personal bankruptcy as well.
What Business Debts Are Cleared in Personal Bankruptcy?
Loans, Lines of Credit, and More
If you’ve borrowed money to fund your business operations, personal bankruptcy can clear many types of debt. Unsecured loans, lines of credit, and credit card debt can all be eliminated through this process. Outstanding utility bills and unpaid suppliers can also be cleared.
However, it’s essential to remember that secured creditors are not included in a bankruptcy. They retain the right to seize any assets pledged as collateral for the loan. Landlords also have specific rights in a bankruptcy, which can affect your right of occupancy if you want to continue the business and who has a claim against business assets.
Does Bankruptcy Clear Tax Debt?
Dealing with Back Taxes
Another significant concern for small business owners considering personal bankruptcy is tax debt. Personal bankruptcy can also eliminate back tax debts, such as unpaid income taxes, source deductions, and HST owing to the Canada Revenue Agency (CRA).
However, the CRA has powerful collection abilities, including registering a lien on your assets, garnishing your wages, and freezing your bank account. Therefore, if you owe money to the CRA, it’s crucial to file your tax returns to determine how much you owe and act quickly to avoid potential adverse collection actions.
Using a Consumer Proposal for Business Debts
An Alternative to Bankruptcy
If your business debts don’t exceed $250,000 (excluding your personal residence mortgage), you can make a consumer proposal to your creditors. This option allows you to offer to repay a portion of what you owe. Once you complete your proposal payments, all debts are forgiven.
A consumer proposal can be a viable alternative if you have assets you want to protect or if your income is high enough to generate significant penalty payments in bankruptcy. However, if your personal and business debts exceed $250,000, you can make what is known as a business proposal or Division I proposal.
Contacting a Licensed Insolvency Trustee
Getting the Help You Need
If you’re considering bankruptcy or a consumer proposal, it’s crucial to consult with a Licensed Insolvency Trustee. They can review your business situation, who you owe money to, and how you plan to move forward. This discussion can help you determine the best option for your specific circumstances.
Remember, the question of whether business debts can be discharged in personal bankruptcy is complex and depends on many factors. It’s essential to get professional advice to make the best decision for your situation.
Conclusion
Filing for personal bankruptcy is a significant decision that can have far-reaching effects on both your personal and business finances. It’s crucial to understand the implications fully before proceeding. If you’re a small business owner facing significant debt, remember you’re not alone. Help is available, and understanding your options is the first step towards financial recovery.