Will a Consumer Proposal or Personal Bankruptcy Deal with Business Debt?
Unmanageable business debt can leave you in dire straits, leading you to contemplate choices like a consumer proposal or personal bankruptcy. But which option will truly alleviate your situation? In this article, we delve deep into the nuances of both these options and how they can affect your business debt.
Understanding Consumer Proposals and Personal Bankruptcy
Before deciding whether a consumer proposal or personal bankruptcy is the right solution for your business debt, it’s crucial to understand what they entail.
Consumer Proposals
A consumer proposal is a negotiation process where you offer your creditors a reduced sum than what you owe via a Licensed Insolvency Trustee. The payments typically span over 60 months and can lead to debt reductions of around 80%. This option permits you to retain your assets and your payments are not contingent on future earnings.
Personal Bankruptcy
Personal bankruptcy is a more severe debt relief option that involves surrendering your assets to your trustee for distribution to your creditors. Monthly payments in this case are based upon your monthly income. In most cases, you can keep your assets if desired.
Corporation versus Sole Proprietorship
The structure of your business plays a significant role in determining how your debt is managed during a consumer proposal or personal bankruptcy.
Sole Proprietorship
In a sole proprietorship, the business is unincorporated and all personal and business debts are personally owed. There is no legal distinction between the two. Filing for bankruptcy or a consumer proposal under a sole proprietorship will settle both your personal and business debts.
Corporation
Corporations are distinct entities from their owners, providing a level of protection against liability and debt. If credit is applied for in the corporation’s name and not personally guaranteed, the owner is not personally liable for defaulted debt. However, there are exceptions, such as the obligations of a company director, including the collection & remittance of HST/GST and employee source deductions. Failure to fulfill these can result in personal assessment.
Impact of Business Structure on Consumer Proposal or Bankruptcy
The outcome of a consumer proposal or bankruptcy can greatly depend on your business structure for two main reasons:
1. Corporation Liability Protection
If your business is incorporated, you have some liability protection against your creditors. Unless you have personally guaranteed any debts, your creditors can only target your business assets. However, many business owners unknowingly have personally guaranteed debts within their corporation.
2. Treatment of Certain Debts
Some debts are handled differently based on your business structure and the debt relief option you choose. For instance, if you’re a sole proprietor owing CRA for Payroll source deductions and wish to file a consumer proposal, this debt is considered a secured debt. In contrast, if you’re incorporated and your company owes source deductions, you will personally only have a contingent Director’s Liability that is treated as an unsecured debt in a personal consumer proposal or bankruptcy.
Consumer Proposal for Business Debt
A consumer proposal can be an effective way to manage business debt without resorting to bankruptcy. It involves negotiations with your creditors to settle your debts at less than 100% via monthly payments. Whether a consumer proposal is worth it depends on several factors, including your business structure.
Consumer Proposals as a Sole Proprietorship
As a sole proprietor, your situation will be dealt with similarly to a regularly-employed consumer filing a consumer proposal.
Consumer Proposals as a Corporation
Corporations cannot file a consumer proposal. Instead, they can file a Division 1 Proposal, intended for corporations and consumers with more than $250,000 in debt, excluding their primary residence. This is often done to continue operating the business and restructure its debt.
In some cases, it may make sense to file a consumer proposal in your name and dissolve your existing company. This could be if the business is not viable post-filing or if the owners cannot financially survive due to personally-guaranteed debts and/or Director’s Liability claims.
Personal Bankruptcy for Business Debt
Bankruptcy is often the last resort to tackle debt, but it can effectively eliminate certain difficult debts, like source deductions owed to CRA.
Bankruptcy as a Sole Proprietorship
Your situation will be handled as if you didn’t run a business. Debts to CRA without a memorial judgment or your property can be included and discharged upon successful completion of your bankruptcy. Deemed trust debts can also be included and discharged, keeping in mind their secured nature.
Bankruptcy as a Corporation
Corporate bankruptcy eliminates all dischargeable debts within the corporation but does not release any guarantors of personally-guaranteed debts or the director from potential director’s liability claims. Thus, corporate bankruptcy is relatively uncommon unless there are assets left inside the corporation or the owner does not wish to handle the wind-down. Consult a Licensed Insolvency Trustee if considering bankruptcy for your corporation.
Role of a Licensed Insolvency Trustee in Managing Business Debt
A Licensed Insolvency Trustee is essential when filing a consumer proposal, Division 1 proposal, personal, or corporate bankruptcy. They can assist you in understanding which debts can and cannot be discharged, understanding your financial position and your company’s, and determining the best approach to navigate your business debt.
Don’t hesitate to reach out to a Licensed Insolvency Trustee if you’re seeking advice or wish to file a bankruptcy or consumer proposal.
