Q: I ran my own flooring business for 11 years. After back injuries and with tariff uncertainty pushing up the cost of materials, I shut down the business this spring. I still owe about $38,000 on a business line of credit and a credit card in my name , plus roughly $6,000 in GST/HST. I assumed the debts would end when the business closed, but the bank keeps calling. Am I personally on the hook for all of it? Are these now debts I have to declare bankruptcy on to deal with? — Dan
FP Answers: Closing a business after 11 years is difficult enough without the added stress of leftover debt. So, the short answer is: Yes. As a sole proprietor you are personally responsible for these debts, even if the accounts were only used for business expenses. That also means any missed payments appear on your personal credit report, not one for the business. But the good news is that bankruptcy is far from your only option.
Before deciding what to do, get a clear picture of what you owe and what you can afford to pay each month. Then contact the Canada Revenue Agency and your bank to compare repayment options. Taking these steps in order will help you make a practical decision rather than reacting to collection calls .
Make a complete list of all of your debts, including each lender, balance, interest rate and minimum payment. Note which accounts are secured, which are unsecured and which are behind. If you have equipment you no longer need, selling it and putting the proceeds toward your debts, starting with any loan the equipment secures, will reduce the balance and interest charges.
Next, close your business account with CRA and file your final GST/HST return. Closing the account will not erase what you owe, so ask CRA for a payment arrangement you can realistically maintain. Contacting CRA before the account moves further into collections may give you more room to work out a manageable plan.
Then, contact your bank rather than waiting for another call. Most lines of credit are payable on demand, so the lender could ask for the full balance when a business closes or payments fall behind. Explain your situation and ask whether the balance can be converted to a fixed-term loan with set monthly payments. Refer to a current budget and do not agree to payments you cannot afford.
If loan payments do not fit your budget, speak with a non-profit credit counsellor. Unsecured business debts in your name, such as a line of credit or credit cards, may be eligible for repayment through a Debt Management Program (DMP). A DMP consolidates unsecured debt payments into one affordable monthly amount, and participating creditors typically reduce or stop ongoing interest. A counsellor can review your situation, help refine your budget and answer any questions.
If full repayment is not realistic, bankruptcy is not the only alternative. A consumer proposal is a legal arrangement, administered by a licensed insolvency trustee, to repay part of what you owe over a maximum of five years. A proposal stops interest and collection calls, and GST/HST debt from a sole proprietorship can generally be included.
Creditors representing the majority of the debt must accept the proposal. Because it affects your credit and becomes a public record, weigh the pros and cons carefully. A credit counsellor can explain how to prepare to file a consumer proposal and help you compare alternatives before you decide.
Your business may be closed, but you still have options. Acting now gives you the best chance of finding a solution that is both manageable and sustainable.
Mary Castillo is a Saskatoon-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt since 1996.
Do you have a debt question for FP Answers? Email wealth@postmedia.com.
