43 – Business vs Personal Bankruptcy: What Is the Difference?

Wayne Kay  0:04  

Welcome to the Debt Matters podcast, a show where it’s all about helping Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. 

I’m Wayne Kay. Today we’re going to talk about business versus personal Bankruptcy. What is the difference? Is there a difference between the two? And why is there a difference? We often hear about businesses that go bankrupt, but they end up rebounding and doing really well. So why is that? What’s the different processes between the two? And who handles business Bankruptcies? Or who handles personal Bankruptcies? And where do you turn for advice? That and a lot more coming up on the show today. 

To help us out, my guest today, Derek L. Chase from Derek L. Chase and Associates, a Licensed Insolvency Trustee serving Vancouver Island, Sunshine Coast, and the BC North Coast. Derek, thanks for being here.  

Derek Chase  1:00

My pleasure, Wayne.

Wayne Kay 1:05

So today a big topic regarding business versus personal Bankruptcy. And I guess when I think of Bankruptcy, I just think of it as being all the same, but there is a difference. What is the difference?

Derek Chase  1:16  

I think the difference is more in the structure as to how the Bankruptcy is handled. And the government in its wisdom, has put different rules and procedures in place just to provide a structure to handle different settings. 

So personal Bankruptcy, I think that describes itself and it’s a little bit more simplistic. You still get relief from your creditors, but there are differences. You may not need to have a meeting of creditors. You usually don’t, as a matter of fact. You don’t have to necessarily publish a notice in the newspaper that there has been a Bankruptcy for the vast majority of personal Bankruptcies. 

When you think of business Bankruptcy, that in itself, is a big topic. And because there’s different ways that businesses can be structured, as I mentioned, there’s different rules and laws. I often see it being misquoted when there’s been a business Bankruptcy because you could potentially have a business, that’s a multinational business, or a national business that needs to use something called the Company Creditors Arrangements Act. If it’s got millions and millions of dollars of debt, it could be perhaps a receivership where the secured lender, which is typically a bank, will go in and take control of the business’s operations and assets. Or it could be a Bankruptcy filing. All these things are subtly different. And they carry different processes. 

So there’s, it’s more complicated, I suppose, with the business Bankruptcy. It’s usually a larger setting where there’s bigger assets to handle potentially bigger issues. Personal Bankruptcy, you’ve got more of a smaller setting. You’ve got smaller numbers and therefore less cumbersome procedures that need to be followed as compared to a business Bankruptcy, I suppose.

Wayne Kay  3:30  

Can I ask if a business is going into Bankruptcy, is that typically it for that business – or do they use it as a restructure? We hear about when they have gone into receivership or they have chapter 11 down to the United States. Is that different for businesses? Do they ever come out of business Bankruptcy and do well again?

Derek Chase  3:58  

I think the answer to that is yes. Because those are usually large settings. You know, it’s not something that our office would handle in a national setting. So I don’t have a lot of practical experience in that. 

But you certainly see businesses going into some sort of creditor protection, and then coming out as an operating business. The assets may have been sold to a new party or there would be some sort of refinancing to get it out of its current state of indebtedness. But it often does continue. 

If I think of a business that’s more local or smaller in its status, or oftentimes those types of businesses won’t continue in a Bankruptcy setting. They would just close and be liquidated. So I guess part of the answer to that is, it goes to the scale and how many assets – what the assets are of that business that can be used for collateral, or how much money is at hand,

Wayne Kay  5:01  

I guess, the bigger they are, the more they do to try to save them. But I guess it would still be within that Bankruptcy. Is there a distinction between the two business and personal? Is it a different process? Or is Bankruptcy for a small business basically the same as a Bankruptcy for a person?

Derek Chase  5:28  

There’s a lot of similarities. In both settings, the business or the personal. There’s a list of assets, there’s a list of debts, The Licensed Insolvency Trustee does the filing with this same part of the federal government. So there’s a lot of similarities to the structure in that way. 

But after that, a business Bankruptcy, especially on a large scale, will likely have the courts involved in a lot of decisions. Potentially, it could last a long time. I think on the personal side of things, it’s been designed just to be a bit more streamlined and smoother. There’s less need for the court, there’s less need for creditor meetings. It’s just different rules really.

Thankfully, in Canada, we’ve got a really good insolvency system that’s, I think, respected around the world. And without these rules, we would really just be in chaos when it comes to the matter of debt repayment. You can think of some of the history around insolvency and debt payment going back in time. I don’t think anyone wants to revisit the ages where there was, you know, the skin off your back was taken some times when it was a bad situation. 

So it’s good that we have these different rules, and it is just applicable to what setting you’re in. Whether that’s a corporate setting, or sole proprietorships, that setting or a personal, just a person that’s an employee or retired or a student, or to be able to account for the different settings that we have in society, it’s good to have this.

Wayne Kay  7:12  

So if you’re a sole proprietor, let’s use that as an example. Because there’s a lot of sole proprietors that are running their businesses. We did a show on taxes and how tax problems can come to be if you’re a sole proprietor – is that under your own personal tax, or would that then fit under a business Bankruptcy?

Derek Chase  7:32  

That would fall under a personal Bankruptcy and doesn’t necessarily have to be a Bankruptcy. That person could also file a Consumer Proposal. But sole proprietorship tends to be fairly small in scale, and as a result would fall under the personal Bankruptcy umbrella. 

If that person had incorporated their business, then it would be a corporate Bankruptcy or a business Bankruptcy. So again, there would be different requirements in the filing there. Just because it’s a corporation, you have to have the directors assign the company into Bankruptcy, and there’s just a different process.

Wayne Kay  8:13  

Well, let’s talk about that for half a second here. So maybe that’s a good reason for people to not be sole proprietors, depending on how much income that they’re making. But when it becomes its own entity, its own corporation, then there’s a separation between the business and the owner, correct?

Derek Chase  8:33  

There is to some degree. In theory, a creditor of that corporation has to collect from the corporation first. You know, if they couldn’t, if the corporation went into Bankruptcy, I think that creditor would be stuck. And the president of that corporation might be free and clear. 

But you know, lenders have been around for a while, and they learn from their past, as we all do. And so what happens, at least on the smaller scale, corporation or corporate setting is that the lender will provide a service or a supply to that company. But they will also find someone to sign a personal guarantee, which is usually the main shareholder of the company. So if the company can’t pay that creditor of the company, it will just look in their records and say, Hmm, we’ve got this personal guarantee, let’s call the president. They kind of do this and run around the company to get out to continue to collect. And so that’s a good question. 

You know, when we’re talking with somebody that’s doing a corporate Bankruptcy or a corporate filing of some sort is, have you personally guaranteed this debt or who is guaranteed this debt? And I guess it’s also a question you could ask a person who’s facing a proposal filing or Bankruptcy filing. Has anyone cosigned this debt or, or guaranteed this debt because they’re still fully liable for it – for the interest, for the income tax departments, for a corporate setting. They don’t necessarily have to have you sign anything to be personally liable for that corporate debt. 

They have the ability to raise an assessment against a director, which means they can also dance around that sort of shield of a corporation to get the individual if they feel the situation warrants it. So if you haven’t paid your payroll source deductions, and you’re in a corporation, and you’re the president, and only shareholder of that corporation, you know, you’ll probably be hearing from Her Majesty the Queen to get payment for that day.

Wayne Kay  10:49  

That’s what I was wondering as well. Is it common for a business to go into Bankruptcy as well as the person to go into Bankruptcy as well? Do you see that?

Derek Chase  11:02  

It really is a two step process that we like to look at. And the first step is looking at the corporation or the business and trying to make a judgment call there as to whether there will be any greener pastures in the future. And if there will be, then there’s the possibility of using a proposal to get through this time period to get to a better spot. 

But oftentime there’s not. It’s just, it’s a tough setting, and it’s getting worse. And so if that business either goes into Bankruptcy, or discontinues, then a lot of the debt will flow through to the owner or the president of that business. And we do have a subsequent discussion as to, do you need to do anything personally to get protection from these corporate debts? So it’s usually a two step process there.

Wayne Kay  11:57  

And Licensed Insolvency Trustees, they deal with both business Bankruptcies and personal Bankruptcies, correct?

Derek Chase  12:05  

That’s correct. To make a Bankruptcy filing, you have to use a Licensed Insolvency Trustee in Canada. I would say for business bankruptcies, where there’s corporations in the corporate structure, there’s often lawyers involved in that, much more so than in a personal Bankruptcy setting. So it’s a combination of lawyers assisting Trustees in the corporate setting. And under the personal side of things, it’s much more so just directly with a Licensed Insolvency Trustee. 

Wayne Kay  12:36  

Okay, and where do you go for advice?

Derek Chase  12:39  

Well, I think if you’re in a business setting, especially if you’re in a corporate business setting, the first thing you want to go to for advice is your accountant and your lawyer. Really lay out the situation and see what their thoughts are, because they’ve seen it before, they’ll have seen similar situations. 

They can often refer people on to the Licensed Insolvency Trustee that they’ve dealt with in the past. So the combination of a lawyer, accountant or Trustee, I think, is always good to go to for advice. On the personal side of things, again, I would never discourage anyone from getting advice from a lawyer. That’s just a healthy thing to do. But it’s not a requirement especially in a personal setting.

Wayne Kay  13:25  

I imagine for most businesses, you would have to have a lawyer that you’re dealing with regularly.

Derek Chase  13:30  

Most do. I mean, it’s not a requirement. You don’t have to have a lawyer act as a records office or incorporate your business for you. But the vast majority of corporations, do you have a company lawyer or law firm that they use as their lawyer.

Wayne Kay  13:47  

For sure. All right, final words of wisdom for this topic, business versus personal Bankruptcy?

Derek Chase  13:54  

There’s differences. It can seem complicated, but at the end of the day, it’s the company or person getting protection from their creditors and hopefully reorganizing to head off into a better future.

Wayne Kay  14:08  

Well, there you go. And if they do want to schedule a free consultation with you, all they need to do is go to the website bankruptcytrusteebc.ca. Derek Chase, thanks very much for being on the show. It’s always a pleasure.

Derek Chase  14:20  

You’re welcome and you have a great day. 

Wayne Kay  14:22  

Well, that’s it for another edition of the Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca Thanks for listening.