What will happen to my business if I file a consumer proposal?

September 2, 2016

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In past columns, we’ve discussed several cases where consumer proposals are a practical way to offer a fair settlement to creditors. If you are a business owner, you may be wondering what will happen to your business if you decide to file a consumer proposal. Will you lose your business?

What will happen to my business if I file a consumer proposal?

In the vast majority of cases where the business is profitable or shows promise, the business assets should not be sold and the owner will continue to operate the business after a consumer proposal is filed. If the business is generating positive cash flow or is on the verge of doing so and the owner is willing and able to continue running the operation, there is good reason to keep the doors open for business.

What will happen to my business if I file a consumer proposal?

It is not uncommon that business owners lump all of their money into one pot. They consider personal and business assets, debt and cash flow as one and the same. This is a mistake. Making the distinction between business and personal is essential to properly managing the business. The owner needs to understand whether or not the business is making money and whether he/she is able to maintain the standard of living he or she expects. Doing otherwise leads to confusion, bad decision making and overspending.

The business assets –for example, equipment, vehicles and merchandise – are often paid through a mix of personal and business financing (loans, personal credit cards, or lines of credit). Banks will often require the owner to sign off personal guarantees in case the business defaults on the payments. It’s not unusual for the line to become blurred between what is personal and what is business. Your Licensed Insolvency Trustee (LIT) will read through the contracts and loan agreements and determine what the owner’s exposure is.  From there, your LIT can determine which option best fits your case.

If you are a sole proprietor or a partner in a business, your LIT will consider the business assets, debt and cash flow and provide advice so that the appropriate proposal is filed and a fair deal is offered to all creditors affected.

If your business is incorporated, your consumer proposal will not affect the business. You’ll still own the company shares and you’ll continue to operate it as long as it profitable.

If your corporation is in financial difficulty however, the options vary. There is a proposal process available (if appropriate to your company’s situation), but instead of filing a consumer proposal which is limited to individuals, the corporation may file a “Division I” proposal.

If both you and your corporation are in financial difficulty, you may need to consider separate proposals: a consumer proposal for yourself, and a “Division I” proposal for your company. Your LIT will layout the appropriate strategy.

The main challenge for business owners is inconsistent cash flow. From one week to the next, there is no guarantee of when or how much you will be able to collect to meet your commitments. Many business owners will rely on their operating line of credit. Far too often, the result is a mounting debt cycle that is difficult to reverse and becomes unaffordable. Once the business has been in operation for some time and has kept the books in order, the owner will have more reliable information to make the right decisions and plan accordingly. Working with your LIT, you will be better able to determine if the cash flow crunch is temporary and whether a proposal is viable and realistic.

If you are burdened with debt stress, asking for sound advice is a sign of strength and the smart thing to do. Asking sooner rather than later is always better. Try our debt reduction calculator and call Doyle Salewski today for your free, no obligation consultation. You’ll be glad you did.

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