Financial challenges can affect both individuals and corporations. Companies and individuals own assets and incur debt, which means both can be faced with the possibility of bankruptcy. Bankruptcy is filed under the Bankruptcy and Insolvency Act whether you are an individual or business owner. In fact, over 120,000 Canadians file for bankruptcy or enter into a consumer proposal agreement with creditors each year. Although the bankruptcy process is similar for both businesses and individuals, there are some key differences and factors to be considered.

What is bankruptcy?

Bankruptcy is the process in which an individual or business surrenders their assets in order to resolve their debt. The way and which assets are surrendered can vary based on the situation. Sole proprietorships are handled in the same manner as an individual bankruptcy as the law views a sole proprietor and their assets as one and the same. Corporations, on the other hand, are viewed as legal entities separate from their owners, which means the corporation is responsible for its own debts, assets, and lawsuits.

Both Individual Bankruptcies and Corporate Bankruptcies have the same steps in general, with some key differences. Both are handled by a licensed insolvency trustee who is authorized by the Office of the Superintendent of Bankruptcy to manage the process including the handling of assets, initiating meetings with creditors and the distribution of assets.

Common Bankruptcy Myths

There are some common myths about bankruptcy, especially surrounding personal bankruptcy. Many consumers are under the impression it can be used to avoid paying back their debt, or that in order to file for bankruptcy they will lose their home. Here are a few common bankruptcy myths clarified:

1. It’s the only option for paying debt

   When drowning in debt it is not uncommon to think bankruptcy is your only option. However, we can assess your finances and make a recommendation that might include debt consolidation or filing a consumer proposal or Division 1 proposal for businesses. We will find the option that will best keep your business or personal assets intact and have the least impact on your credit rating.  

2. Bankruptcy solves financial problems

   Bankruptcy can stop debt collection and garnishments, but it far from solves your financial problems. When filing for bankruptcy it has to be with the mindset you not only want to resolve your debt issues but make an honest effort to pay back what you can and commit to avoiding debt in the future. Approximately 10 percent of Canadians who file for bankruptcy do so more than once. Although you are given a chance to redeem yourself, it is not a free ticket to spending beyond your means and never having to pay the price. You also remain obligated to creditors for at least 21 months.

3. All your assets are lost

   Individuals do have exemptions including your home, personal items, and often your car. In some cases, discussion about selling or surrendering your home might come up. As well for small businesses, your business and you are considered one entity under the law. Corporations, on the other hand, must surrender all of its assets.

4. Bankruptcy is free

   Unfortunately, this is also not true. You will be faced with ongoing costs based on your income. Although you will keep the majority of your monthly income, the law requires that you have to contribute 50 percent of “surplus” income towards your creditors. This amount is determined based on your net monthly income. If you make in an average of $6000 per month and bring in $7000 for example, you would have to pay $500 of the extra $1000 earned towards your creditors.

Personal Bankruptcy

Both individuals and sole proprietors are eligible for voluntary bankruptcy when you owe more than $1000.00. For sole proprietors, there is no difference between your business assets and personal assets so you would file the same way as an individual. You can file whether the debt is personal, for your business or a combination of both.

If you determine you wish to file for bankruptcy, you will require the service of a licensed insolvency trustee. We will discuss your options and then if it is agreed this is your best or only option, we will begin the process. Once we have filed on your behalf your assets will be entrusted to us and we will handle your assets throughout the process. You will also receive a stay of proceedings which will put an end to credit calls, wage garnishments and if any legal action is in progress by your creditors.

We will also take a look at your income to determine your surplus income obligation. If this is your first bankruptcy, you will be obligated to make surplus payments for a period of 21 months. If you do not have a surplus, you are obligated to pay the Trustee’s fee and your bankruptcy will last for nine months. If this is not your first bankruptcy, your surplus income obligations will last for 36 months and without surplus, it will be 24 months. If you have filed more than twice it is 36 months whether you have surplus income or not.

Corporate Bankruptcy

In the case of corporate bankruptcy, a corporation cannot voluntarily dissolve if:

• It is bankrupt
• It has a trustee under a proposal
• It has an interim receiver under the BIA

Under the BIA a corporation is considered to be bankrupt if it has made an assignment into bankruptcy, or if a bankruptcy order has been made against it. It is considered insolvent when it can no longer meet its debt obligations when due or it is no longer paying current obligations. If the corporation is unable to pay its obligations even if it were to sell its assets it is considered insolvent.

The steps for corporate bankruptcy are not much different than filing for personal bankruptcy.  An initial meeting will be held to review your financial situation to determine if this is your best solution. The paperwork will be filed, and creditors will be notified. We will take over your assets and day-to-day management.

Payment to creditors will be prioritized and the corporate assets will be sold in order to provide payments to creditors. In some cases, there will be a meeting with creditors to discuss the procedure or a request might be made by the OSB to review the reason for your bankruptcy. Discharge from corporate bankruptcy can only be made if all debts have been paid to creditors.

For more information about bankruptcy, call Charles Advisory Services at (416) 915-9007 or contact us here.