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When to Consider a Consumer Proposal or Bankruptcy as a Small Business Owner
- Maha Sultan
- 3 days ago
- 5 min read
Running a small business in Alberta is rewarding, but it also comes with financial risks, especially in today’s economy. But when the financial pressures become too great, it may be time to look at formal debt relief solutions such as a consumer proposal or bankruptcy.
If you run a one‑person shop, professional practice or side hustle and the debts are in your name, two federally regulated options can give you a fresh start:
Consumer Proposal - a negotiated repayment plan that freezes interest and lets you keep working.
Bankruptcy - a legal reset that wipes out most unsecured debts but may require you to surrender non‑exempt assets.
These insolvency options aren’t one-size-fits-all; each has unique implications for your business, assets, and financial future. Understanding the differences between them and knowing when to act can help you regain control before the debt spirals further.
Signs Your Business May Need Debt Relief
Alberta’s business landscape is resilient but not immune to economic downturns, interest rate hikes, or sector-specific challenges. You might need to consider a formal insolvency option if:
You are consistently behind on tax obligations or payroll remittances.
Your business is unable to cover monthly loan or credit payments.
Collection agencies are contacting you regularly.
You are using personal savings or credit cards to float business expenses.
You are unable to pay yourself a salary.
What is a Consumer Proposal for Business Owners?
A consumer proposal is a formal, legally binding agreement negotiated between you and your creditors with the help of a Licensed Insolvency Trustee (LIT). This option is available to individuals (including sole proprietors) who owe less than $250,000 in unsecured debt (excluding mortgages).
Key Features:
You repay a portion of your total debt over a period of up to five years.
Interest stops accruing once the proposal is filed.
You retain ownership of your assets, such as business tools and equipment.
Protection from legal actions and wage garnishments.
Consumer proposals are often suitable for self-employed professionals, sole proprietors, or entrepreneurs who want to avoid bankruptcy while keeping their business operational.
Bankruptcy Solutions for Small Business Owners
Bankruptcy is a legal procedure that clears most unsecured debts, but it carries more significant consequences. If you're unable to afford a consumer proposal or if your debts exceed the threshold, bankruptcy may be your only option.
Key Features:
All or most of your unsecured debts are discharged.
You may have to surrender non-exempt assets.
Your credit rating drops to R9 (the lowest possible).
You must file monthly income and expense reports.
In Alberta, certain personal assets like basic household furnishings and tools of the trade (up to a limit) are exempt from seizure under provincial law.
Bankruptcy vs. Consumer Proposal for Small Business Owners: A Comparison
Feature | Consumer Proposal | Bankruptcy |
Debt Forgiveness | Partial | Full (mostly unsecured) |
Asset Retention | Typically, keep all assets | Some assets may be surrendered |
Credit Rating Impact | R7 (rebuildable) | R9 (worst) |
Duration | Up to 5 years | 9-21 months (first-time) |
Cost | Negotiated monthly payments | Variable, based on income |
Business Continuity | Can continue to operate | May be more limited |
When Should Business Owners Choose a Consumer Proposal?
Choose a consumer proposal if:
You have regular income or cash flow to support monthly payments.
You want to avoid asset loss.
You are concerned about long-term credit impact.
You are looking to maintain trust with clients, partners, or suppliers.
A consumer proposal provides a structured way to resolve your debts while allowing you to continue operating your business. It also provides breathing room by halting creditor calls and freezing interest.
When is Bankruptcy a Better Option for Sole Proprietors and Small Business Owners?
Consider bankruptcy if:
Your debts are too high to repay through a proposal.
Your income is inconsistent or insufficient.
Legal action has been taken against you (such as garnishment).
You need a complete reset to rebuild from the ground up.
Though it's often seen as a last resort, bankruptcy can offer a faster way out of crushing debt and the chance to start over with a clean slate.
The Role of a Licensed Insolvency Trustee
No matter the path you choose, working with a Licensed Insolvency Trustee (LIT) is essential. Only a LIT can legally file a consumer proposal or bankruptcy in Canada. They’ll assess your situation, explain your options, and help you make an informed decision that protects both your personal and business interests.
How to Protect Your Assets as a Business Owner
A common fear among entrepreneurs is losing everything. However, Alberta's Civil Enforcement Act allows you to retain specific exempt assets, such as:
Tools necessary for your trade (up to $10,000).
One vehicle (up to $5,000).
Household goods (up to $4,000).
Proper planning and early intervention can also help you avoid unnecessary losses. For example, filing a consumer proposal early might prevent the need to sell equipment or inventory under pressure.
Common Myths Busted for Small Business Owners in Alberta
Myth | Reality |
“Bankruptcy means I lose absolutely everything.” | Alberta’s exemptions let you keep basic household items, one vehicle up to $5K equity, and tools of trade up to $10K. |
“I can’t be self‑employed during a proposal.” | You can continue earning business income; you simply budget around your fixed proposal payment. |
“A proposal ruins credit longer than bankruptcy.” | The opposite - maximum 6 years from filing vs. 6–7 years after discharge for bankruptcy. |
“CRA never accepts proposals.” | CRA regularly votes “yes” when the proposal offers them more than they’d get in your bankruptcy. |
Final Thoughts: Don’t Wait Until It’s Too Late
Debt doesn’t disappear on its own, and for business owners, waiting too long can lead to serious consequences, including asset seizure, legal action, and credit destruction. Whether you’re a sole proprietor, freelancer, or small business owner in Alberta, you have options.
A consumer proposal for business owners can be a powerful tool to restructure your debt without closing your doors. Meanwhile, bankruptcy for business owners may provide necessary relief when all else fails.
If you’re unsure about the best course of action, reach out to SCB Debt Solutions for a free, confidential consultation with a Licensed Insolvency Trustee. You’re not alone in this. We’ll help you understand your rights, protect your business and personal assets, and take the first real step toward financial peace of mind.
FAQs
Can I include supplier invoices that are in my sole proprietor’s business name?
Yes. Because you and the business are legally the same person, those debts go into the proposal or bankruptcy.
Can I still invoice clients and receive payments while in a consumer proposal?
Absolutely. If you're self-employed, you can continue to operate your business and invoice as usual. Just ensure your proposal payments are maintained and you're staying current on new tax obligations moving forward.
Will my clients or suppliers find out I filed a proposal?
Not unless they are listed as creditors or you choose to disclose it. Consumer proposals are private in practice - only your creditors and the LIT are notified. They do not appear in public notices like bankruptcies do.
I’ve used personal credit cards and lines of credit for business expenses, Can those be included?
Yes. Even if the debt was used for business-related purchases, if it's in your personal name, it can be included in a consumer proposal or bankruptcy.
