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Business bankruptcy

When can a business go bankrupt?

A business can choose to become bankrupt when it is insolvent and when it owes over $1,000. A business is insolvent when it is no longer able to pay its debts on time, or when the business cannot pay off its debts in full even if it were to sell all of its assets.

How can a business go bankrupt?

There are three ways that a business can go bankrupt. First, the most popular method is when a business voluntarily chooses to declare bankruptcy. Second, a business can become bankrupt if it makes a proposal to its creditors that is not accepted. Third, a business can be forced into bankruptcy if its creditors file a petition with the court. This third method is very rare.

A licensed trustee executes a business bankruptcy. The licensed trustee will sell the business assets and distribute the proceeds of the sales to the business’ creditors. In most scenarios, a bankruptcy lawyer is required because a lawyer must review the matter before the trustee is involved.

Effect of bankruptcy

The effect of a business bankruptcy largely depends on whether the business is structured as a sole proprietorship, a partnership, or a corporation. If the business is a sole proprietorship or a partnership, the business bankruptcy will result in an automatic personal bankruptcy as well. This means that the business owner’s personal assets like their car and home can be sold to satisfy any outstanding business debts. Additionally, the bankruptcy will appear on the bankrupt business owner’s personal credit report.

If the business is a corporation, the bankrupt business owner’s personal assets might not be impacted. It will be impacted however, in situations where the bankrupt business owner personally guaranteed a loan, or where the individual is a director and the company failed to make tax payments like the Harmonized Sales Tax (HST) and employee source deductions. If you are in a situation where you are filing for a business bankruptcy, make sure you completely understand the consequences that your business bankruptcy will have on your personal financial situation.

The bankruptcy process can be very complicated in nature. It is especially important that you consult a lawyer or an accountant if you require specific legal and financial advice regarding how to proceed with a business bankruptcy.

Read more:

Office of the Superintendent of Bankruptcy Canada

Bankruptcy and Insolvency Act