Small Businesses and a Proposal to Creditors
Many people believe that, when a business has financial difficulties, the only option is to file for bankruptcy. This isn’t true. While bankruptcy may be the most well-known way that businesses deal with significant financial issues, it isn’t the only option that is available in most cases.
You may need to close your business or file for bankruptcy because your company is having financial troubles.
While bankruptcy for business owners is certainly a valid way to handle financial struggles, for many businesses, there are other options available. One common one is called a “proposal to creditors.”
What is a Proposal to Creditors?
In a proposal to creditors, a business makes an arrangement with its creditors to repay them only a portion of what they are owed and/or to pay them lower monthly payments over a longer period of time. This agreement allows the business to avoid bankruptcy and stay in operation while ensuring that its creditors still receive at least some of what is owed to them.
It is also possible to restructure the small business operations through a proposal. As part of the proposal process, businesses are able to close unprofitable locations and sell or return excess assets to creditors. The costs associated with small business restructuring are covered by the proposal payments.
Once a proposal is prepared, it is sent off to all of a small business’ creditors. At this point, the creditors are given an opportunity to vote on whether they would like to accept the proposal. If the required majority of creditors vote to accept, the proposal becomes legally binding. Not all creditors need to accept the proposal for to become legally binding.
After the proposal has been filed, creditors are not able to commence legal action against a business in order to collect debts that are owed to them. Legal action to collect such debts that is currently underway must also stop.
Many small business owners choose a proposal over bankruptcy as it can help a small business move towards profitability over time. In addition, the business is able to retain assets (that are not sold or returned as part of the proposal) as long as the terms of the proposal are honoured and the business makes the required proposal payments as agreed upon. This can help the business continue to operate and grow.
Why Would Creditors Accept a Proposal?
You may be wondering why creditors would accept less than is owed to them. There are several reasons, but the main reason tends to be that creditors recognize that a small business that is filing a proposal is a business that is having significant financial difficulties. If the proposal is not accepted by the required majority of the creditors, then the business is automatically bankrupt. In a bankruptcy, creditors do not often receive very much (if anything at all). For this reason, most creditors will vote to accept a proposal if it is fair. They would rather receive something than nothing.
Is a proposal an option for your small business? That will depend on the particular financial situation of your business. Speaking with a Licensed Insolvency Trustee can help you understand if a proposal makes sense for your company.
Speaking with a Trustee
A proposal to creditors can only be filed with a federally Licensed Insolvency Trustee. This is a person who has received extensive training and has passed a comprehensive exam in order to be licensed by the Office of the Superintendent of Bankruptcy (OSB).
A Licensed Insolvency Trustee is bound by a strict code of ethics. He or she ensures that insolvency processes are carried out fairly and according to law. If your small business is having financial difficulty and it is not able to meet its financial commitments, speaking with a trustee can help you understand the available options. Depending on your situation, this could include a proposal to creditors.
Most trustees offer an initial consultation at no charge where they can review your business financials and provide you with information on the options available to you. The choice as to how to proceed is always entirely up to you. Bankruptcy for business owners is not the only option in most cases, so it makes sense to find out more information on the alternatives.