Small Business Bankruptcy in Ontario

Small Business Bankruptcy in OntarioNavigating the intricacies of Small Business Bankruptcy in Ontario can be a daunting task. Regardless of its size, declaring bankruptcy for your business is a significant decision that requires thorough contemplation and understanding of the facts. This guide aims to shed light on the bankruptcy process for small businesses in Ontario, helping you make an informed decision about your business’s future.

Overview of Small Business Bankruptcy in Ontario

Small business bankruptcy, although not an ideal situation, is sometimes the necessary step to take when a business is no longer profitable. Bankruptcy is a legal process that allows businesses struggling with insurmountable debt to find relief and make a fresh start. The primary aim is to provide a fair distribution of the business’s assets amongst its creditors.

When to Consider Bankruptcy for Your Small Business

The timing and reasons for considering bankruptcy will vary for each business. Some common signs that your business might need to consider bankruptcy include:

  • Your industry is experiencing an extended downturn.
  • The economy in your area is struggling.
  • Your business is heavily in debt with limited cash flow.
  • You are relying on personal credit cards or loans to keep your business afloat.

Types of Business Structures and Bankruptcy

In Ontario, the type of bankruptcy you can file depends on the structure of your business. The two main types are:

  1. Sole Proprietorship or Partnership: Here, the business owner(s) and the business are considered the same entity. Therefore, personal and business assets and debts are not separated. In this case, filing for business bankruptcy essentially means filing for personal bankruptcy.
  2. Incorporated Business: In an incorporated business, the business is a separate legal entity from the owner. Therefore, the owner is not required to file for personal bankruptcy if the business is bankrupt.

The Role of a Licensed Insolvency Trustee

A Licensed Insolvency Trustee (LIT) is a professional licensed by the government to assist with the bankruptcy process. The LIT helps you understand the bankruptcy process, your options, and the associated costs. They are also responsible for filing for bankruptcy on your behalf, notifying your creditors, selling the assets, and distributing the proceeds to your creditors.

The Bankruptcy Process

The process of filing for small business bankruptcy in Ontario typically involves the following steps:

  1. Evaluation: Before you file for bankruptcy, you must first evaluate your financial situation. This involves assessing the profitability of your business and the viability of continuing operations.
  2. Consultation with a LIT: If bankruptcy seems like the right option, consult with a Licensed Insolvency Trustee. They will help you understand the process and the potential consequences.
  3. Filing for Bankruptcy: If you decide to proceed with bankruptcy, the LIT will file the necessary paperwork, notify your creditors, and take control of your business assets.
  4. Liquidation of Assets: The LIT will then sell your business assets and distribute the proceeds to your creditors.
  5. Discharge: After all the necessary steps have been completed, you will be discharged from your debts, allowing you to start fresh.

Alternatives to Bankruptcy

Bankruptcy should be considered a last resort. There are other options available which include:

  • Consumer Proposal: This is an offer you make to your creditors to repay a portion of your debt and/or extend the repayment period.
  • Division I Proposal: This is similar to a consumer proposal but is meant for businesses with debts exceeding $250,000.

Impact on Employees

In case of bankruptcy, employees of the business are given priority. They are entitled to certain amounts for unpaid wages and vacation pay from the proceeds of the liquidation of assets.


Post-bankruptcy, your business operations will cease. However, it can act as a fresh start, allowing you to rectify past mistakes and make more informed decisions in the future.


Declaring Small Business Bankruptcy in Ontario is a challenging process that requires thorough understanding and careful consideration. However, with the right information and guidance, you can make the decision that is best for your business’s future.

Frequently Asked Questions

Q: What happens when you declare bankruptcy in Ontario?
A: You surrender any non-exempt assets to a Licensed Insolvency Trustee, who will sell them to pay off your debts.

Q: Who qualifies for bankruptcy in Ontario?
A: Any business owing at least $1,000 and is unable to pay it back.

Q: What do you lose if you declare bankruptcy in Canada?
A: Any non-exempt assets which will be sold to pay off your debts.

Q: Can I keep my car if I declare bankruptcy?
A: It depends on the value of the car and the amount of equity you have in it.

Q: What happens 5 years after bankruptcy?
A: Your bankruptcy will be removed from your credit report and you may be eligible for better credit options.

Please note that this guide is intended to provide general information. Each business’s situation is unique, and it’s advised to consult with a Licensed Insolvency Trustee to understand the full implications of bankruptcy for your specific situation.

Remember, bankruptcy is not the end but a stepping stone towards a brighter financial future.

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