The goal of filing for bankruptcy is to receive protection from creditors and to get a discharge for unsecured debts. A bankruptcy trustee is best suited to advise you on the best bankruptcy option. They can also help you avoid bankruptcy by identifying other less punitive options such as the consumer proposal.
Bankruptcies in Canada can be classified into two main categories: business and personal bankruptcies. Below are the main types of bankruptcies in Canada that fall under these categories.
1. Small Business Bankruptcy
Should a sole proprietorship or a partnership become insolvent, it is treated as a personal bankruptcy. This is because such an entity is considered to be one and the same as the person running the business. In other words, the business’s assets and those of the owner are inseparable.
For an incorporated company, the bankruptcy process takes an entirely different route, which can be very challenging. An incorporated business is an entity by itself, separate from its owner, which conversely means its assets and those of the owner are treated separately in case of insolvency.
2. Corporate Bankruptcy
When filing for corporate bankruptcy, you need a trustee whose specialty is filing corporate bankruptcies. Since corporations are deemed as separate or independent legal entities, their owners are legally exempted from liability should the corporation become insolvent. This means that the only assets that can be seized are the business’s, not the owner’s.
However, if as an owner you have attached your personal property or mortgage as security or collateral against any of the company’s debts, such personal property can be seized.
3. Consumer Proposal
In a consumer proposal, the Bankruptcy & Insolvency Act allows you to wipe out your debt by paying a portion of your unsecured debt within five years. However, this provision is only available to individuals and not corporations. To be considered for this provision, your debt (excluding your principal residence mortgage) should be less than $250,000. Besides, you are required to be insolvent by the time you file for a consumer proposal.
Should your debt exceed $250,000, you can file for a Division I proposal. To file for a consumer proposal, a bankruptcy trustee reviews your debts and assets and advise you on the most suitable type of proposal or bankruptcy. They also advise you on whether or not to pursue a consumer proposal. At the end of the day, a consumer proposal aims to eliminate your debts.
4. Division I Proposal or a CCAA filing
This type of bankruptcy is the equivalent of the US Chapter 11 bankruptcy. Both companies and individuals can file for a Division I Proposal, but only heavily indebted corporations can apply for a CCAA filing.
The two options provide businesses and individuals with a window to settle part of their debt. Each of these options protects an individual or a corporation from creditors as they work to re-establish their financial viability.
5. Summary Administration Bankruptcy
You can apply for a summary administration under consumer bankruptcy if the realizable value of your assets is below $15,000. (This is the total value of your assets when sold. Such assets include your investments, home, or other assets that can be seized by a bankruptcy trustee. The limit can be periodically increased by the government to factor inflationary tendencies that impact on the value of assets. Consumer bankruptcies in Canada are mostly summary administrations.
Businesses, however, are not allowed to apply for a summary administration bankruptcy. The popularity of a summary administration among Canadians is perhaps informed by the fact that one does not have to advertise the bankruptcy in the dailies. You are also not required to call a First Meeting of Creditors. Besides, this type of bankruptcy attracts fixed trustees disbursement and fees since they are not pegged on asset value or time.
6. Ordinary Administration Bankruptcy
This type of bankruptcy can be filed by a corporation or an individual. If your personal assets are projected to be more than $15,000 by the time you file, you are required to file an ordinary administration bankruptcy. In this case, you are also required to advertise the bankruptcy in a local newspaper, and you must call a creditors’ meeting.
You might also want to consider filing for a consumer proposal if you project your assets to be worth more than $15,000. Having this option on the table allows you to keep your assets and at the same time bypass the stringent requirements of an ordinary bankruptcy.
An ordinary bankruptcy is usually a business bankruptcy where the sold assets are used to meet the trustee fees, which are calculated based on the time it takes to administer the file. This is informed by the fact that ordinary bankruptcy is more involving and engaging. Both summary and ordinary administration may be automatically discharged after nine months from the date of filing, although an ordinary bankruptcy could take longer to administer, in which case your trustee will be active for a bit longer.