Small Business Bankruptcy in Alberta
It’s unfortunate, but businesses don’t last forever. Much like people, businesses can also struggle with the burden of debt. When your small business starts to struggle to keep up with payments, you may be thinking about declaring bankruptcy. Before launching into an important financial decision that will impact both your business and potentially your personal life, consider all of your options to determine whether or not bankruptcy is the right solution for you.
If you have never faced bankruptcy before, you may not realize just how intricate the whole process is. There are many factors to be consider before declaring bankruptcy in Red Deer and Central Alberta, including the structure of your business and the types of creditors you have.
It’s also important to evaluate what potential consequences might arise from business bankruptcy, so you can exit bankruptcy proceedings in a better situation than when you first entered.
Bankruptcy Business Structures
Did you know that bankruptcy is not the same for all businesses? There are two main categories of businesses that might declare bankruptcy in Alberta.
- Partnerships and Sole Proprietorships – Neither a partnership nor a sole proprietorship can actually go bankrupt. In both instances, it is actually you, the owner, who declares personal or small business bankruptcy. This is because, in the eyes of the law, you are the business. There is no legal separation between your assets and liabilities and those of the business. In both a sole proprietorship and a partnership, you are held personally responsible for any accounts payable your business holds, but you are also assigned ownership of your company’s assets and accounts receivable owed. These can help reduce the overall amount you owe creditors during the bankruptcy process.
- Incorporated Companies – Incorporated business bankruptcy is different than personal and small business bankruptcy. A corporation is legally considered to be its own separate entity, capable of owning its own assets and liabilities. If an incorporated business cannot complete its financial obligations, it can file for bankruptcy. This awards the business owner with liability protection. The actual bankruptcy process for business bankruptcy and personal bankruptcy are in principle the same. A main difference is that in business bankruptcy, no assets are exempt. Much like personal bankruptcy, a corporation can voluntarily declare bankruptcy or be forced into it by a creditor.
Types of Bankruptcy
There are 3 main types of bankruptcy that can impact businesses, as outlined by the Canada Revenue Agency. These include:
- Voluntary Assignment – This is when you voluntarily assign your assets to a Licensed Insolvency Trustee for the general benefit of your creditors.
- Involuntary Assignment – Involuntary assignment occurs when one or more of your creditors file a petition in Court for a assignment order against your assets, in order to try to recuperate some of the money you owe to them when you can no longer pay.
- Deemed Bankruptcy – This occurs when you have started the insolvency process as a proposal or notice of intention to file a proposal but fail to make an agreement with your creditors that they are willing to accept.
Business Bankruptcy Considerations
There are many debt relief solutions available for small businesses besides bankruptcy, including shutting the company down. Before rushing to declare your business bankrupt, ask yourself the following 3 questions to determine if bankruptcy is the right path for your company.
- Does my business make money?
Hard times can hit any business at any time. It doesn’t necessarily mean you are doing something wrong. If your business is still profitable but temporarily unable to meet its financial obligations, debt reducing options may be your best option.
However, if your business is consistently losing money or relying on personal subsidies to get by, it may be time to think about dissolving the business.
- Does my business have assets?
The types of assets your business has can complicate bankruptcy proceedings. Some creditors may have preferential claims on certain assets, which need to be carefully handled by a Licensed Insolvency Trustee.
What’s more, if your business still has more assets than liabilities, bankruptcy might not be the right solution for you. Instead, you may be able to save or sell your business.
- Am I personally liable for my business debts?
Even if your business has been legally incorporated, it is still possible for some debts to be personally guaranteed. This means that you are now personally responsible for paying these debts back, even if your company declares bankruptcy. Even closing down your business will allow creditors to go after your personal finances for the debts you guaranteed.
These debts will need to be carefully navigated by a Licensed Insolvency Trustee in Red Deer in order to carefully consider all your options, including negotiating new payment terms with your creditors.
Business Bankruptcy Overview
- Find a Licensed Insolvency Trustee (LIT) – In order to declare bankruptcy in Canada, you have to assign your assets over to a Licensed Insolvency Trustee to deal with creditors directly on behalf of your bankruptcy estate.. All LITs in Canada are licensed by the Office of the Superintendent ob Bankruptcy (OSB) and are federally regulated professionals who provide advice to both individuals and businesses who are struggling financially.
To find a Licensed Insolvency Trustee in Red Deer, look no further than Blanchard & Company Ltd. They offer free consultations so you can feel good about your financial decisions.
- Explore All Options – A benefit of consulting an LIT is that they can help you discover all of your available options. While bankruptcy may seem like the only option for your business, this may not be the case. Discuss your financial situation and your business needs with your LIT to determine if bankruptcy is the right option for you.
- Understand the Bankruptcy Process – From initial paperwork to the liquidation of your business assets, bankruptcy is a complicated process. That’s why it is important to have a professional and reliable LIT to show you the way and deal with your creditors directly on behalf of your bankruptcy estate.
Once you have declared bankruptcy, there are several steps you will have to complete, including:
- Liquidate your “non-exempt” assets to pay off your creditors
- Attend at least two financial counselling sessions
Make surplus income payments into the estate, if required.
Affects of Bankruptcy on Your Business
While declaring business bankruptcy might not impact you directly, it leaves a lasting impact on your business. Bankruptcy is often considered to be a last resort due to its severe outcomes, so it’s important to consider all aspects of bankruptcy before rushing to a decision.
- Your assets will be liquidated – You’ve worked hard to grow your business. Having to declare bankruptcy is not always a sign of mismanagement – if there is a downturn in the economy or bad fortune falls on your company, even the strongest business can fail. During bankruptcy proceedings, you will be required to assign your assets to your LIT to repay your creditors. Depending on how much you owe, this can mean selling everything and being forced to shut the business down because you can’t operate a business without assets.
- Your business might shut down – Regardless of the type of business, your business may be required to shut down if you declare bankruptcy. Unless you run a small e-commerce store, chances are good that you have at least a couple of employees working for you. Not only will going bankrupt mean you lose the business you worked hard to achieve, but it also likely means that employees will lose their jobs, although they will be entitled to severance pay.
- Corporate bankruptcy is specialized – Corporate bankruptcies are slightly different from personal and small business bankruptcies, and so require special attention. It’s important that you find an LIT who is experienced in corporate bankruptcies to ensure that you have thoroughly examined every option available to your business and that your bankruptcy proceedings are handled by an experienced professional.
Types of Business Bankruptcy Discharges
Whether you are declaring personal, small business, or corporate bankruptcy, there are 4 types of discharges you may receive.
- Absolute – Both the most common and the best possible outcome, an absolute discharge from bankruptcy is an automatic release from all applicable legal obligations to repay your debts.
- Conditional – this outcome means that you need to complete an additional set of conditions in order to receive your absolute discharge.
- Suspended – A suspended discharge means that you will NOT automatically receive an absolute discharge. Instead, you will receive your absolute discharge at a later date.
- Discharge Refused – Extremely rare, a discharged refused means that you will have to work with your LIT to adjust the terms of your bankruptcy or wait and apply again in future.
Consult A Professional
Bankruptcy is a big decision for your small business. If you have questions about bankruptcy in Alberta or want to know how bankruptcy works in Alberta, consult the Licensed Insolvency Trustee at Blanchard & Company Ltd. Not only is Brian Blanchard an LIT and CIRP who lives right here in Red Deer, AB, he also offers FREE consultations so you can start your journey back to financial freedom with confidence. Whether you run a sole proprietorship, a partnership, or a corporation, the knowledgeable and approachable team at Blanchard & Company Ltd. has the right solution to your business’s financial struggles.
Get started today by sending us a message or giving us a call at (403) 348-5880.