My small business needs to go bankrupt… where do I start?

My small business needs to go bankrupt… where do I start?

Small businesses have been through a particularly tough time lately, and even businesses that were doing very well previously have run into problems through no fault of their owners and managers, who have worked hard to keep things going for longer than they ever expected they'd have to.

We often receive calls from small business owners looking to put their business into bankruptcy after tough times have resulted in a business that can’t be saved. We’re always willing to give advice in these situations, and we definitely recommend that you reach out for help, but we’ve prepared this post in the hope that it may save you time or at least prepare you for that conversation.

Here’s what we tell people when they call

The first thing we’ll do is ask some questions to determine if bankruptcy really is the right option for the business. More often than not, the outcome of that conversation is that we determine bankruptcy is not a good option for the company. This is usually due to the fact that the company doesn’t have enough available assets to pay for the cost of the bankruptcy, which is a significant cost as a Licensed Insolvency Trustee must be retained, and once they are retained they are bound to carry out a series of specified procedures regardless of the size of the business.

When the business can’t pay these costs, often the company’s owners are either unwilling or unable to fund the cost as they've already invested a large amount of personal funds in trying to keep the business going. It's also worth noting that if the company can’t cover the cost of the bankruptcy there isn’t much chance that the creditors will receive any recovery from the bankruptcy, so its benefit to creditors is limited.

When bankruptcy isn’t an option but the company can’t continue, the owners of the company often simply shut down the business and tell its creditors that it unfortunately can’t pay them back. Often, there is liability for the business’s owners (which can't be extinguished by the company filing a bankruptcy) as they have usually guaranteed some of the company’s debts, have taken on personal debt to try to save the company, and/or are liable as directors for unpaid tax debts. The conversation then shifts to how the individual owners are going to deal with that debt.

In the somewhat unusual event that bankruptcy does appear to be a viable option for a small business, we then discuss what that means for the company, its owners, and any employees. If, after a brief discussion about the bankruptcy process the owner wants to pursue that option, a series of discussions and correspondence typically ensues between the business owner and the Licensed Insolvency Trustee to gather details and documents to help nail down the plan and get a better sense of the costs that will need to be funded. During these discussions, if it appears that other options, like a creditor proposal or a going concern sale, might be available to the company those options will be weighed as well before a decision is made to file the bankruptcy.

So what are the things that impact whether bankruptcy is right for your company?

Here is a non-exhaustive list of things we consider before determining if bankruptcy is a viable option for your company:

Is the business incorporated?

If a business is incorporated, the business itself can be assigned into bankruptcy. However, if the business is a sole proprietorship or a partnership, the business cannot be separated from the individual proprietor or partners. In that case, the only way to assign the business into bankruptcy is to bankrupt the proprietor or partners, too.

Does the business owner want to continue to run the business or shut it down?

If the plan is to make an insolvency filing that deals with the debt so that the existing company can continue, usually a bankruptcy is not the answer, as a business can only exit bankruptcy if its debts are paid in full. The reason most people aren’t aware of this is that the media often talks about large corporations “exiting bankruptcy” - in those cases, the terminology the media is using is either incorrect (they are actually referring to a restructuring), or they are referring to a United States case, which uses different terminology.

A small business that wants to shed debt and continue on may be eligible to file a Division I Proposal, or possibly a plan under the Companies’ Creditors Arrangements Act (CCAA). Such a proposal or plan is essentially a contract where creditors agree to delayed payments and/or a reduction of the debt. A Licensed Insolvency Trustee can discuss these options if applicable.

How much does the company owe and who are its creditors?

The amount and type of debt can make a big difference in determining what options might be available to the company. Some examples of how this impacts the decision:

  • If there is a large debt owed to a bank, often that debt is secured against the assets of the company. In that case, even if the company were to file a bankruptcy, the secured creditor has first claim to the assets of the company. And secured debts are not included in a bankruptcy, so bankruptcy won’t deal with the problem. In this case it may make more sense for the secured creditor to seize the assets or appoint a Receiver to do so.
  • If the company owes more than $5 million to its creditors, it is eligible to file a CCAA, which is a court-driven, flexible (but expensive) restructuring. If the debts are below that threshhold, this option isn’t available.
  • If the company owes money to Canada Revenue Agency (CRA), CRA has first claim to the company’s assets, even before a bankruptcy trustee or a secured creditor, for certain debts like GST and payroll remittances. So if the company’s assets are insufficient to pay CRA, bankruptcy may not be an option unless the Trustee can get CRA to agree to allow the bankruptcy costs to be deducted from what CRA will receive.

What are the assets of the company and how much could be realized from selling them?

In a bankruptcy, the assets of the company are sold and the funds are used to pay the cost of the bankruptcy and provide some sort of distribution to the company’s creditors. However, as mentioned above, we often find that the value of the remaining assets (after secured creditor and CRA claims) are insufficient to provide enough funding to cover the cost of the bankruptcy, let alone leave anything for the unsecured creditors. In this situation, a bankruptcy provides little benefit to creditors.

Additionally, the costs of the bankruptcy have to be covered in some other way, which often involves someone (like the business owner) providing funding to the Trustee. Quite often, the owner cannot afford to provide this funding or does not view it as a good use of funds, so a bankruptcy is not a viable option.

To what extent is the business owner liable for the business’s debt?

It's very common for a small business owner to guarantee or co-sign certain debts of the company like bank loans or premises leases. In addition, there are certain debts which directors are legally liable for if they aren’t paid, such as certain debts owed to Canada Revenue Agency or employees. Before the business owner decides to assign the company into bankruptcy, we review the debts that they may become liable to pay if those creditors can’t be paid from the sale of the company’s assets. In some cases, business owners decide that a bankruptcy of the company will only exacerbate their personal liabilities. This is because a bankruptcy trustee will often not be able to sell the business’s assets for as much as the owner could generate by selling the assets, particularly if they can do so while the company is still operational.

How many employees does the company have?

Commonly, when a small business owner approaches us about bankrupting their company they have laid off most or all of the company’s staff as they tried to cut costs to save the business over time, but sometimes employees remain. Bankruptcy or no bankruptcy, shutting down the company will end the employment of those that remain, but if the company files a bankruptcy the remaining employees (or those that were let go very recently) may be eligible for payments from the government under the Wage Earner Protection Program Act (WEPPA) to cover outstanding wages and/or vacation pay. This can be a reason to file a bankruptcy even if there is no other obvious benefit. However, the bankruptcy Trustee has to administer the WEPPA claims, so while more employees means a larger benefit of bankruptcy to employees, it also means higher costs that have to be funded somehow.

As you can see, there are many things to consider to determine if it makes sense for a company to file a bankruptcy. A Licensed Insolvency Trustee will review these with the business owners and help them come up with a plan to deal with the company. Sometimes, after this review they decide to go ahead with a bankruptcy. Other times, they decide to offer a proposal (either formal or informal) to the company’s creditors. But more often than not, small business owners end up deciding to simply shut the company down themselves, selling assets and using those funds to pay as much as possible to creditors until there is nothing left. Then we can work with them to deal with the impact of the company’s failure on their personal finances.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly provide advice to business owners. If you would like advice on options for dealing with your business's debts, contact us for a free, no-commitment consultation.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

Frequently Asked Questions

When a business owner decides not to file bankruptcy but to instead just shut the business down, there are certain things that need to be done to shut it down cleanly: selling remaining assets, laying off employees, dealing with the landlord, communicating with creditors. It's understandable that this seems overwhelming after everything you've been through. This is where it can make sense to find a way to fund the cost of the bankruptcy or to cooperate with a secured creditor who might be considering appointing a receiver. Absent such a formal engagement, a Licensed Insolvency Trustee can give you referrals to others that might be able to help, such as an auctioneer that can deal with the assets or a lawyer that can help you manage responses to creditors. Contact us if you'd like to explore this option.

At Charla Smith & Company, we focus on the needs of individuals who are struggling with debt, so you've come to the right place. Check out our solutions page for information on insolvency options, our blog for a discussion of various bits of information surrounding those options, or better yet give us a call at 1-403-899-3890 or send us a message and we will work with you to figure out how the various options for dealing debt might look for you.

We can't comment on CRA's requirements to allow a business loss, but we've heard shareholders say that CRA refused to allow a business loss where there was no bankruptcy or formal shut-down of the company, and it's our understanding that a company cannot formally dissolve while it has debts outstanding, so it may be that you have to wait until the corporation is struck for failure to file annual returns, or take other steps to get CRA to allow the loss for tax purposes.

Getting a formal resolution through bankruptcy can be one of the reasons business owners decide that bankruptcy is worth the cost for their small business. Contact us to discuss this option.

We'd suggest working with your bank to determine the plan for shutting down the company and turning over assets to them. Getting in touch with a Licensed Insolvency Trustee can help, as they may be able to give you advice or even in some cases work with both you and the bank to determine a liquidation plan

There are several factors which must be considered to determine which options are feasible for you and to select the best one, including:

  • What assets do you own?
  • Who do you owe money to and how much?
  • What sort of income are you bringing in and how predictable is it?
  • What is your family situation?
  • Your personal goals and priorities

Check out our Consumer Proposal and Bankruptcy pages for information about each of these options and their pros and cons. For more indepth information about these and other options, we've provided a plethora of information on our blog

For a fulsome review of your situation and advice about which option is best for your specific circumstances, contact a Licensed Insolvency Trustee for a free no-committment assessment.

In some cases, particularly where the debt is large, you may benefit from consulting a lawyer for assistance with negtiating a deal with your creditors. If you need help finding a good lawyer, a Licensed Insolvency Trustee can typically make a referral to a lawyer experienced in debt issues. If you can’t afford a lawyer, you may be able to find free legal resources in your community.

A credit counsellor may be willing to assist you, for a fee. However, make sure you do your homework before you sign anything or pay a credit counsellor. Some credit counsellors are essentially debt settlement companies, with the same potential pitfalls discussed in Everything You Need to Know About Debt Settlement. And like debt settlement companies, they are not well regulated so you need to do your own research to make sure they are legitimate and have ethical practices.

Another option is to contact a Licensed Insolvency Trustee for a free consultation. Licensed Insolvency Trustees will educate you about your options and may be able to give you some guidance on negotiating with your creditors.

Reach out to us. You can make an inquiry directly from our website by clicking here, or you can call or text us at 1-403-899-3890. We will respond quickly, and work with you to find a good time for the meeting.


With our experience and our caring approach, we will help you find the best option for debt relief based on your unique situation - from advice on talking to your creditors to a consumer proposal or bankruptcy, and everything in between. We are here to lift the burden caused by overwhelming debt. 

Contact us today at 1-403-899-3890‌ for a FREE, no-commitment meeting, and let us guide you to regaining your financial footing.

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