What is Bankruptcy and Its Different types
There are different types of bankruptcy in Canada, personal, small business and corporate. Personal and small business bankruptcies are essentially the same in terms of their requirements and processes, If business is legally set up as a partnership or sole proprietorship.
If the business is incorporated, it follows a different set of rules and legal process under Corporate Bankruptcy also administered by the Bankruptcy and Insolvency Act.
What is Bankruptcy
But what is bankruptcy and how can it help individuals, small businesses and corporations find much needed relief from overwhelming debts?
All bankruptcies in Canada are governed by the Bankruptcy and Insolvency Act (BIA). It is a legal process that gives an insolvent person or business who has no other way to meet their financial obligations an affordable solution to repay what they owe.
An individual or business is considered insolvent when it can no longer pay its debts as they become due.
Individuals or companies who file for bankruptcy are required to give all of their non-exempt assets to a Licensed Insolvency Trustee (LIT) who then sells it and distributes the money to creditors.
Any person or business who needs to declare bankruptcy in Canada needs to work with a Licensed Insolvency Trustee. A LIT will make an assessment of your financial situation and recommend which type of bankruptcy you may qualify for.
Filing for personal bankruptcy
The most common type of bankruptcy in Canada is personal bankruptcy. It is popular because it provides debtors legal protection from their creditors.
As soon as a bankruptcy is filed, a stay of proceedings takes effect and immediately stops all collection activities. This means no more collection calls or letters, wages cannot be garnished and you cannot be sued by your creditors.
Before you file, it’s important that you get all the facts needed to make an informed decision. There may be other options which may work for you.
In your first meeting with the Trustee, the LIT will provide an assessment of your situation and explain the many alternatives to bankruptcy that you may consider, such as a consumer proposal or debt consolidation.
Always get second opinions and alternatives first, filing for bankruptcy should always be your last resort. The bankruptcy process will cost you a lot of money and discharge will take time.
If you end up choosing to file for personal bankruptcy, make sure it is the best choice for your circumstances.
Small business bankruptcy in Canada
A small business bankruptcy is legally the same as a personal bankruptcy. If the business is legally structured as a sole proprietorship or a partnership, the person who owns the business will need to file for bankruptcy.
All assets and debts of the business are treated as the owner’s personal assets and debts.
Just as with personal bankruptcy, the business owner will also receive the same major benefit of the stay of proceedings and get protection against creditors.
See Also: Opening a Company in USA
Declaring corporate bankruptcy
For corporate bankruptcies, the business will need to find a trustee who specializes in corporate filings. The trustee will manage the company’s assets throughout the process.
The trustee will be responsible for distributing corporate assets to secured creditors and unsecured creditors according to bankruptcy law and then use the proceeds of the sales to settle the company’s outstanding debts.
Corporations are considered independent legal entities, so all the owners are protected from liability. Only the assets of the business will be forfeited, not the assets of the business owners.
However, if any business owner has put up any personal assets to cover the business’ debts like a home or vehicle, then these assets would be subject to forfeiture.
As with a personal and small business bankruptcy, filing for a corporate bankruptcy should be regarded as a last resort. Always consider other alternatives to take before filing a corporate bankruptcy.
After a review of your corporate finances, the trustee will be able to determine if there is another option that is suitable besides declaring bankruptcy.
More often, it’s possible to find another option available even if a corporation has been insolvent for an extended period of time.
If filing for bankruptcy is the only option for the business, the trustee will start the process of liquidating the assets, completing the necessary forms, and handling all communications with creditors.
Which Type of Bankruptcy Should I File?
The trustee will be able to determine which of the different types of bankruptcy is applicable to your particular situation.
However, keep in mind that no matter what type of bankruptcy you file, there are some major disadvantages. Such as the loss of valuable assets, damage to your credit score and difficulty in obtaining future credit for 6 years where it stays on your credit report after the date you’re discharged.
Contact us to find out how we can help you take control of your debt today.