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Small Business Tips

Should You Declare Bankruptcy?

Marin Perez
Is bankruptcy the answer?

The legal process known as bankruptcy can absolve you of most of your debts. If you are having financial problems, declaring bankruptcy can offer you relief and give you hope for the future.  Keep reading to learn about the pros and cons of bankruptcy, and whether the process is right for you.

What are the pros of bankruptcy?

No more collection calls

If you've been struggling for a while, you've probably gotten used to receiving calls from collection agencies on behalf of your creditors. Filing for bankruptcy should put an end to those calls. This is thanks to a process called the stay of proceeding. As soon as your creditors become aware of your bankruptcy, the calls must stop.

Wage garnishments should cease

Have your creditors obtained permission to garnish your wages to pay off your debts? Once you file for bankruptcy, all wage garnishments will end. This is true for all wage garnishments that are not for family support.

A fresh start

Whether your financial woes are due to poor money management, bad health, or a bad business deal, declaring bankruptcy can allow you to erase most, if not all of your debts and start over. The only debts you can't include in bankruptcy are student loans, fines, and child support payments.

What are the cons of bankruptcy?

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You will lose your assets

After you file for bankruptcy, all of your assets and property are put in the hands of a trustee. These assets are usually sold and deposited into a trust that will be used to pay off your creditors. As a result, most people who file for bankruptcy must start over from scratch. This can mean losing your house, furniture, car, and even your RRSPs.

The process will destroy your credit for years

Most people who file for bankruptcy already have bad credit due to unpaid bills. That being said, once you file for bankruptcy, a notice will be applied to your credit report, where it will stay for at least six years. This means that anyone who pulls up your credit report will see that you either have bad debts or have filed for bankruptcy, which may make it harder for you to obtain future loans.

You will still need to make payments on some of your debt

The bankruptcy process lasts a minimum of nine months and one day. During this time, you are considered to be "in bankruptcy," and are required to make payments that will be used to repay your creditors. These are known as surplus income payments. The more money you make, the higher your surplus income payments will be.  High earners may also be discharged later than individuals with less surplus income. If your income is above the government's standards, your bankruptcy will last 21 months and one day.

You will have additional duties to perform

In addition to paying trustee fees and surplus income payments, you may be required to attend a meeting with your creditors so that they can find out more about your bankruptcy. You may also be examined under oath by the Office of the Superintendent of Bankruptcy and you will be required to attend two financial counselling sessions.

Small business bankruptcy is also personal bankruptcy

Unless your company is incorporated, when your business goes bankrupt, you go bankrupt too. This is because your business assets are not considered separate from your personal assets.  If you want to avoid having to liquidate all of your assets and having an R9 rating placed on your credit report for at least 6 years, you may want to consider some alternative solutions.

Alternatives to bankruptcy

If your income is very low and you have no assets and a mountain of debt to pay, bankruptcy may be right for you. But if you own a home or earn a high income, the effects of bankruptcy are long-lasting and the process should be your last resort. Before you start looking for a Licensed Insolvency Trustee, consider your options.  For instance, you might want to see if there's any way you can make extra income to pay off your debts. You can also look into obtaining a debt consolidation loan, or see if your creditors will agree to a consumer proposal.  Before you make a decision, you can always consult with a Licensed Insolvency Trustee to discuss your options. Consulting with a trustee in bankruptcy does not mean you have decided to file for bankruptcy! It can help bring clarity to the situation and help you figure out how to resolve things.

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