129 – How Bankruptcy Works for Individuals vs. Businesses in Canada

Wayne Kay 00:05
Well, today on the show, how does Bankruptcy work for individuals versus businesses in Canada? That’s our topic for the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.

I’m Wayne Kay and by the end of the show, you’re going to understand why 90% of the time a business will not file Bankruptcy right away and what’s holding them back. We’re going to talk about some of the first steps a business should take if they are struggling.

Also, what’s the number one mistake business owners make when they are struggling? We’re going to talk about what a Bankruptcy for a business typically looks like and can someone effectively protect themselves personally from the financial fallout from a business failure?

My guest today, Mary-Ann Marriott with Allan Marshall & Associates Licensed Insolvency Trustee from Halifax and the Bridgewater offices in Nova Scotia. Hi, Mary-Ann.

Mary-Ann Marriott 01:03
Hello, Wayne. I’m so excited to be back talking to you again.

Wayne Kay 01:06
Well, we always had such great, interesting discussions, and today is an interesting one because we hear about Bankruptcies in business. You know, a lot of times you see in the news that somebody’s filed for Bankruptcy. And so it’s a good thing to discuss the differences between Bankruptcy for business and for individuals. Are they completely different?

Mary-Ann Marriott 01:27
Yes, I love this topic because there’s so much misconception around it. And, you know, most of the time a business doesn’t need to go through Bankruptcy. And that’s really the biggest misconception.

But then, in answer to your question, business Bankruptcies are quite involved and very expensive. So, you know, here in our part of the woods, you’re looking at, you know, at least $10,000 to $15,000 the cost to put a business through Bankruptcy. So most of the time it doesn’t make sense to do that.

Wayne Kay 02:02
It doesn’t make sense to put it through Bankruptcy.

Mary-Ann Marriott 02:04
No. And I’ll tell you why. It’s because a good portion of business debt falls on the individual.

So if you have any bank loans, more than often you have personally guaranteed them. If you owe money to Canada Revenue Agency under director’s liability, you owe the money. So one of the biggest misconceptions is people think if I put the company through Bankruptcy, I’m personally absolved of all that debt. And they’re not. It falls on the individual who then has to deal with it individually.

So unless you’re the Irvings or the McCain’s of the world, obviously those companies have their own credit, their own credit rating. Typically, personal guarantees aren’t required. Those companies potentially would use the Bankruptcy and Insolvency act, but most of the time someone would just close down their company, the debt would fall on them and they would deal with it personally.

Wayne Kay 02:57
That’s good to discuss because I think a lot of people think that, yes, you just put the company through. So the bigger you are, then if you have a ton of debt, I would imagine our major company, then the banks will be doing whatever they can to try to help you.

Mary-Ann Marriott 03:14
Yes. And then the other thing comes in with a company is in order to put it through Bankruptcy, the way that’s normally paid for is through the assets of the company.

Oftentimes when someone reaches out to me, they might have an incorporated company. It’s a service based business, there’s no assets. So there really isn’t any point in them spending out, nor would they be able to spend out, you know, again, somewhere between $10,000 to $20,000 to put that company through Bankruptcy.

But if you have a company that has a lot of assets with a lot of competing interests, meaning, you know, there’s four banks and they have security on these assets and this one has security on these and this one has security on both. And this one has security and other stuff.

Oftentimes a business owner needs someone to go in and just take care of that for them because it’s far too complicated for them to manage on their own. And the cost of that comes out of the liquidation of assets or from the creditors who need support in liquidating the assets.

Wayne Kay 04:12
So 90% of the time a business will not file for Bankruptcy.

Mary-Ann Marriott 04:16
I would say that based on what I’m seeing, like, they really are very minimal, you know, amount of business Bankruptcies. We don’t do business bankruptcies at Alan Marshall. We would typically refer them to someone who specializes. And I can tell you the amount of referrals we make is very low.

Wayne Kay 04:33
Really? Oh, okay. Well that’s good, I guess.

Mary-Ann Marriott 04:37
And the other piece too, that’s worth mentioning is the difference between incorporated and sole proprietors. So if you’re a sole proprietor, you are your business.

It’s dealt with personally because there isn’t a different business entity. So it’s really those incorporated businesses where again, I would say a very small percentage of them would go through a Bankruptcy or would do a proposal. So they can do a proposal to creditors as well.

Wayne Kay 05:00
Right. So if a business is struggling, what would you say, what is the first step that they should do?

Mary-Ann Marriott 05:07
I typically will start asking questions about, do they have an accountant? Do they meet with their accountant? In other words, business viability. Because what happens is a business, whether it’s a sole proprietor or a limited company, may be struggling, but they have no idea if they’re viable.

Meaning, can this business turn around? Does it need to be closed down? Because it’s just simply not making money and hasn’t been making money and isn’t going to. And so I find more often than not, these types of businesses just don’t have good advice to give them the answers to those questions. And sometimes we need the answers to those questions before taking the next step.

Wayne Kay 05:48
There’s been some very interesting tv shows where, you know, business gurus will walk into a business and they’ll say, this thing isn’t even viable. Like, what are you doing? We got it. We got to completely change the entire business model. And I’m sure tons of entrepreneurs would love that person to come in and just be truthful with them. But I think a lot of times, nobody wants to hurt somebody’s feelings.

Mary-Ann Marriott 06:14
No, you’re right. And, you know, and then on the flip side, if you’re a business owner, most of the time you’re struggling initially and you’re not investing the money in to get that honest advice.

Wayne Kay 06:22
Yes, exactly. So when you talk to your business owners, the number one reason that they hold back is what?

Mary-Ann Marriott 06:31
The number one reason that most are struggling or the number one mistake, I think, is what I would say, because obviously they hold back because there’s this. I can’t afford it, and this kind of plays into that and it’s chasing their losses. And so when someone starts a business, it’s literally like giving birth to this new thing. Right. And it is like your baby.

Wayne Kay 06:55
Yes.

Mary-Ann Marriott 06:55
So it’s losing money and you just keep throwing money into it. And, you know, in your mind, you want it to be successful and you see that it’s a great opportunity. But again, you don’t have the financial expertise to back that up. And so you’re constantly chasing your losses. So you’re putting money in, and then you’re putting more money in.

You’re taking your savings, you’re taking your investments. That’s really the biggest mistake, is they just don’t sit down and look at it from an impartial place to make a really good decision. It’s from an emotional place, and it exhausts a person’s funds.

Wayne Kay 07:24
And there’s somebody who may be the greatest – furnace installer. And they’ve done it for a long time, and all of a sudden they decide they’re going to start their own company, running a business. And all that goes along with that is completely different than the actual work aspect of a business.

Mary-Ann Marriott 07:43
Absolutely. And that is so frustrating to business owners because all of a sudden you are not that installer anymore. You are the accountant, you’re the bookkeeper, you’re the marketing person, you’re the supply person. I mean, you’re all these other things. And all you wanted to do in the first place was what you love to do and do it well and make money.

Wayne Kay 08:00
What do you have? You had that happen where you’ve talked to people and said, I mean, here’s why. And when you start not having fun in your business, you’re not enjoying it. That’s when things also go sideways.

Mary-Ann Marriott 08:12
Yes, I think one of the things that makes more sense to do starting out, and I know this is tough because it comes down to that, I don’t have money. A lot of people get into business without a lot of capital to start things off, but hiring people for the stuff you hate to do. So if you detest paperwork and financials, then you need someone to help you with that. Marketing, then you need someone to help you with that.

Wayne Kay 08:34
So when you have a business that is shutting down, can we talk about, you know, what does a Bankruptcy for a business typically look like?

Mary-Ann Marriott 08:44
If you’re putting a business through Bankruptcy, all that’s happening is the Trustees are stepping in between you and your creditors and we’re going to liquidate your assets. We’re going to pay out the creditors in full and final settlement of what you owe. And I mean, this is obviously a very brief answer to that question. But again, more often than not, an individual can do that.

So I literally just had a conversation with someone this morning on this topic, and I said, yes, you could do that. And you could pay $10,000, $15,000, at which point they set a minimum, at which point they said, well, how am I going to do that? And I said, you’re not. And I said, or you can do the exact same thing. Most of the time there aren’t any assets.

So in this case, basically they would just shut down the corporation and potentially open another one because that happens a lot of times. And the debt that the business owes dies with the business. The debt that is personally guaranteed by the individual goes to the individual. So then we clean it up on that end. Typically it just means you notify the invested parties in your business, you have to notify them that you’re closing it down.

So Canada Revenue Agency if they are suppliers. I mean, obviously this gets really complicated when there’s employers, which is typically why I will always say you want your lawyer and you want to engage your accountant to make sure you’re doing the things you need to do properly.

Wayne Kay 10:08
And when you said that sometimes they’ll just change the name or open another corporation doing the same type of thing.

Mary-Ann Marriott 10:16
Yes, in this particular case, this gentleman had been operating for many years.

He has about $90,000 in the business. He’s going through a very messy separation. All of his assets are tied up in trust until they finalize it. He literally is living in an off grid friends camp in the woods. Because he has no money.

So that was a perfect example of someone who, there’s no asset, there’s little, minimal assets in the company, less than 5000. So for him, putting it through Bankruptcy doesn’t make sense. Basically, you know, he would just shut down the company. He would create a new company, start over, you know, start fresh. After the separation, his company was mixed up with his ex spouse and that’s, you know, that’s what he’s looking at doing.

So our last conversation was, talk to your accountant, talk to your lawyer, and make sure you dot your I’s and cross your t’s, and then you can start a new company. There’s no debt. So what you make, you can live on and actually, you know, support yourself where you’re going through this.

Wayne Kay 11:15
Oh, okay. Now, typically when you are coming to the idea that, okay, my business is in trouble and, and Bankruptcy might be an option, is it the same as individual Bankruptcy?

I’m assuming it is pretty darn close that you’re just chasing your tail around and around, around. You’re just not even able to make those payments anymore.

Mary-Ann Marriott 11:38
Yes, absolutely. And then again, if you’re exhausting everything you own, you’re hurting yourself on the other side. I mean, I’ve seen people put their entire investment funds into a dying business and then have to close it down anyway.

You know, that’s heartbreaking. It is heartbreaking. And, you know, had they talked to me three years prior, we could have done something to help them get them back on their feet and reserve the retirement fund, which is just a whole nother topic because I think that’s so important.

Wayne Kay 12:05
Right. So just as a very sub little micro spot is don’t ever do this without talking to a Trustee. Don’t touch your retirement savings.

Mary-Ann Marriott 12:17
Yes, I mean, that’s my personal opinion is don’t exhaust your savings really for anything unless you absolutely have to and you know it’s going to get you back on top and you’re going to be able to recontribute. That’s typically my position, but I know people do what they need to do in desperation.

Wayne Kay 12:32
Right. But that desperation, there you go. Have the phone number close by. So remember this, wecanhelp.ca, that’s what you have to remember when you have these kinds of questions.

So you said, you mentioned that your business is going to go through Bankruptcy and then it really just falls back on your shoulders anyway because you’re probably the personal guarantee guarantor of it and maybe you put up your house or who knows what you’ve had to do. Can somebody protect themselves personally from the fallout from their business failure?

Mary-Ann Marriott 13:07
Yea, that’s a great question. And, you know, six, eight months ago, I would have said yes, yes, they can. And I’m going to explain why I don’t say that anymore. But, you know, most, many people when they get into business, they have good financial legal advice and they’re guided to protect themselves.

So if a gentleman or a female doesn’t matter, which is going to start a business, then the property they have, they may put it in the other spouse’s name, knowing that I’m at a greater risk down the road. And then depending on timeframes, if something happens to the business, that typically wasn’t an issue. But most of the time there’s obviously gray areas.

But what’s happened recently is there was a recent case where they basically said that that was, gosh, the names are eluding me at the moment, but, yes. Basically they did that to defraud the creditors, even though at that time the business was new and there was no risk of it not succeeding.

But they basically said 20 years ago when you started the business, you put the property in your spouse’s name. And so we’re going to consider that to be a step to defraud your creditors. And it’s only, it’s only the one case. We don’t know how it’s going to play out, but enough for us to now say, just be aware of this.

Wayne Kay 14:22
Oh, okay. And then what do you do? Let’s say you were to get into trouble and you did have to pay it back. I mean, it’s like a double heartbreak because you, not only do you lose your business, but now all of a sudden you’re going to be going into possibly a Consumer Proposal or a Bankruptcy on your own. Yes or no?

Mary-Ann Marriott 14:43
Yes, more often than not it does lead to someone having to do something personally, just simply because, not what we just talked about, simply because banks do not give companies money without a guarantor. And if you owe the government, which oftentimes someone does when their business is failing because they stop paying their taxes to try to keep the business afloat, then it’s director’s liability. So I would say more often than not, the person has to do something personally if the business falls apart.

Wayne Kay 15:10
Okay. But that’s where you’re always there to help. Any final words of advice you want to share? I mean, we just did a surface touch on this, but I think it’s enough to get people thinking properly when it comes to business. Bankruptcy versus individual.

Mary-Ann Marriott 15:23
I think just, when you’re starting a business, don’t just jump in from a point of passion. Do some research or talk to some professionals and just know the things that you have to look for, look at. And then if your business is all of a sudden, not doing well again, don’t just throw money at it blindly. Get that expert advice. It’s well worth the investment to figure out what you need to do to move forward, whether it is changing your business structure or time to walk away.

Wayne Kay 15:52
Terrific, Mary-Ann, thank you very much for being on the show and all the great information.

Mary-Ann Marriott 15:56
You’re welcome. Thanks for having me.

Wayne Kay 15:59
My guest today, Mary-Ann Marriott. You can learn more or schedule that free consultation with Allan Marshall & Associates Licensed Insolvency Trustee through their website wecanhelp.ca

And of course, if you know somebody who’s going through a situation like this and you need to share this podcast with them, we sure would appreciate it. That is it for today’s 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.