Types of Bankruptcy
When you file for bankruptcy, you start the process of being absolved of the debts you owe. Making the decision to file for bankruptcy is difficult for most people. It’s not something we ever think we’re going to have to deal with. It’s important to really understand what each of the types of bankruptcies entail so you can make an informed decision about whether or not to actually file.So, what are your options and the types of bankruptcy available?
What are the Different Types of Bankruptcy in Canada?
There are three main types of bankruptcies in Canada:
- Small business
In addition to these three types, there is also what’s known as a Consumer Proposal to deal with your debts. The major difference between bankruptcy and a Consumer Proposal is bankruptcy eliminates all debts, whereas a Consumer Proposal allows you to pay back a determined portion of your debts over a longer time period.
All three bankruptcy types are governed by the Bankruptcy & Insolvency Act (BIA, or “the Act”). There are several nuances and intricacies to each of the types of bankruptcy, so taking the time to understand them can save you a lot of time and energy in the long run.
Three Types of Bankruptcy
There are three types of bankruptcy, personal, small business and corporate. But despite being designated as their own “type,” personal and small business bankruptcies are essentially the same thing. Note that this is only true if the small business is set up as partnership or sole proprietorship, not if it is incorporated.
Before you can declare any type of bankruptcy in Canada, you need to work with a Licensed Insolvency Trustee, who will assess your financial situation and recommend which type of bankruptcy you may qualify for.
There are some basic, general qualifiers that set the parameters for whether or not you’ll be able to declare bankruptcy, including:
- You must be a Canadian resident
- You must owe more than $1000 to creditors
- Your debts are greater than the value of your assets and/or you are not be able to pay your bills when they are due
Personal bankruptcy is the most common type of bankruptcy in Canada. How do you know if you should file for personal bankruptcy? While all cases are unique, there are several indicators that may help you determine if personal bankruptcy is the logical (and best!) next step for you.
If you can identify with any of the following, personal bankruptcy might make sense for you. You:
- Have experienced a loss of income
- Aren’t able to decrease debt despite making payments
- Have maxed out your borrow-potential and can’t get any more credit
- Rely on credit for everyday expenses like groceries, gas and household bills
There are several steps to take when filing for a personal bankruptcy. The licensed insolvency you work with will use their assessment to determine which type of personal bankruptcy you should file for:
Summary Administration Bankruptcy – If once sold, your assets will not exceed $15,000
- More common for individuals
- Trustee fees are fixed by bankruptcy legislation and are based on the amount realized by your trustee rather than trustee’s time
- Assets might include equity in home and property or investments but most will likely be exempt from seizure
- Incorporated businesses file this type
- No requirement to advertise your bankruptcy
Ordinary Administration Bankruptcy – If once sold, your assets will exceed $15,000
- More common for businesses
- Trustee fees are usually paid from asset sales and trustee’s time is a determining factor
- More work to file
- Required to advertise in a newspaper
- Must call a creditors’ meeting
- May want to consider filing a consumer proposal instead
Once your bankruptcy is complete, you’ll get one of four types of discharge:
- Absolute – The best outcome. Most common. Automatically released from any and all legal obligations to repay your debts. NOTE: not all debts can be relieved through a bankruptcy filing. You will still be required to pay obligations such as alimony, child support and fines.
- Conditional – You must complete set conditions in order to receive your Absolute Discharge.
- Suspended – You will not automatically and immediately receive an Absolute Discharge. Rather, you will get it on a future date.
- Discharge Refused – This is a rare outcome, but does and can happen. If your discharge is refused, you may need to work together with your trustee in order to find a way to receive your discharge or you may need to wait and apply again at a later date..
Small Business Bankruptcy
For all intents and purposes, a small business bankruptcy is treated the same as a personal bankruptcy. If your business is structured as a sole proprietorship or a partnership, in legal terms, it is treated the same as if an individual is running the business. The assets and debts from the business are seen as the owner’s personal assets and debts.
Note this is true only in cases where a business is not incorporated. If your business is incorporated, the process will be more challenging and very different than a simple personal bankruptcy. You will still need to find a trustee to file the business bankruptcy, and you want one who has extensive experience in these types of bankruptcies. In most cases, incorporated businesses offer the business owner liability protection, which means the owner’s personal assets are not at risk.
Just as with personal bankruptcy, when you file a small business bankruptcy, you will receive one of the four above-mentioned discharge types. You will also receive the same major benefit of protection against creditors.
Corporate bankruptcies are different in that you will likely need to find a trustee who specializes in corporate filings. Corporations are independent legal entities, so owners are protected from liability. Only the business’ assets will be forfeited, not the owners. Note there is an exception to this though. If an owner has put up any personal assets like personal property or a home as collateral or security for any of the business’ debts, then it would be subject to forfeiture.
Which Bankruptcy Should I File?
Your trustee can help you determine which of the different types of bankruptcy you should consider filing for. Keep in mind, there are some major disadvantages to filing for any type of bankruptcy, including: damaging your credit score and the ability to obtain future credit for a minimum of six years; potential surrender of assets; releasing your tax information and other detailed income/expense information.
The bankruptcy types explained here are meant to inform you of your options, but you should also understand that there are alternatives to declaring bankruptcy. One of these alternatives is what’s known as a Consumer Proposal.
A Consumer Proposal is an alternative solution to avoid declaring bankruptcy. It involves negotiating with creditors to come to an agreement on a partial payment of debts that will be resolved over a set amount of time. The biggest advantage to a Consumer Proposal is that personal non-exempt assets are not automatically liable for seizure. And there is a benefit for creditors, too. They will recover at least some of the outstanding debt, whereas if you file bankruptcy, they may lose everything you owe them.
Are you ready to learn more about bankruptcy and see if it may be a good option for you? Reach out today to receive a free consultation and contact a licensed trustee. It takes less than one minute to begin the process…and you may be on your way to a fresh start and financial freedom.
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