The Canada Emergency Business Account (CEBA) loan program was introduced by the federal government in April 2020 as part of its COVID-19 Economic Response Plan. It aimed to provide interest-free, partially forgivable loans to small businesses and not-for-profit organizations to help cover operating costs during the economic shutdown caused by the pandemic.

 

CEBA Loan Terms

Eligible businesses could receive a $60,000 interest-free loan from the government, with up to $20,000 (33%) being forgivable if repaid by December 31, 2023. The remaining $40,000 (67%) would convert to a 5-year term loan effective January 1, 2024 at an interest rate of 5% per annum. The full $60,000 must be repaid by December 31, 2025 if the business wishes to avoid further interest charges.

 

To qualify, businesses had to be operating as of March 1, 2020, have paid between $20,000 and $1.5 million in total payroll in 2019, and have eligible non-deferrable expenses. Over 900,000 CEBA loans were approved, providing nearly $49 billion in liquidity support to businesses across the country.

 

CEBA Loans and Bankruptcy 

As businesses now struggle with repaying these CEBA loans while also managing other debts, some may be considering bankruptcy or restructuring options. It's important to understand how a CEBA loan is treated in these insolvency scenarios.

 

First and foremost, declaring bankruptcy does not automatically eliminate or forgive the CEBA loan debt. It remains an outstanding liability that must be dealt with through the bankruptcy process, just like other business debts.

 

In a bankruptcy, the trustee is required to collect all assets from the bankrupt business and distribute the proceeds to creditors in a prescribed order of priority. CEBA loans have a higher priority status than ordinary unsecured creditors like suppliers or business credit cards. However, they still rank below secured creditors like banks that issued mortgages or lines of credit backed by collateral.

 

There are two main paths a bankrupt business can take regarding its CEBA loan:

1. Make a Proposal to Creditors

The first option is to make a formal proposal to all creditors under the Bankruptcy and Insolvency Act. This proposal outlines a plan for partially repaying debts over a defined period, often at a reduced amount.

 

For example, a business may propose paying $0.50 on the dollar for all unsecured debts, including the CEBA loan balance, over 5 years. Secured creditors may need to be paid in full.

 

All creditors vote on whether to accept this proposal. If the requisite majority vote in favor, the proposal is binding on all creditors in that class - even those who voted against it. This gives the bankrupt business a path to reduce the CEBA loan amount and manage a measured debt repayment.

 

2. Bankruptcy Discharge

Alternatively, if the business has no reasonable ability to repay any portion of its debts, including the CEBA loan, it can instead proceed to bankruptcy and pursue an eventual discharge release from debts.

 

Once all available business assets are liquidated and distributed to creditors based on priority, the remaining CEBA loan balance would become legally uncollectible upon discharge.  

 

However, this discharge is not immediate or guaranteed. The business owner must undergo bankruptcy counseling, make mandatory surplus income payments if applicable, and have their bankruptcy reviewed and approved by officials after a period of time - typically 9-21 months for a first-time bankruptcy.

 

Consequences of Bankruptcy

While bankruptcy provides debt relief, it carries significant consequences that make it an option of last resort. Primary risks include:

 

- Assets Seized: Non-exempt assets like equipment, inventory, vehicles, investments, etc. must be surrendered to the trustee to repay creditors. This can cripple operations.

- Credit Rating Impact: Bankruptcy severely damages credit ratings/scores for both the business and owner personally for 6-7 years, restricting future borrowing ability.

- Public Record: Bankruptcies become a matter of permanent public record accessible by lenders, suppliers, customers, etc. This can stigmatize the business.

- Costs: Bankruptcy trustees, legal fees, counseling costs can eat into remaining funds.

- Income Garnishment: Any surplus personal/household income must be remitted to the trustee during bankruptcy.

 

For these reasons, bankruptcy should only be pursued if the debt burden is truly impossible and the business is no longer viable going forward.

 

Other CEBA Loan Options

Prior to bankruptcy, businesses struggling with CEBA loan payments have other potential remedies:

 

1. Amend CEBA Terms 

The government may allow for further extensions, partial forgiveness, or interest relief on CEBA loans beyond given pandemic impacts.

2. Debt Consolidation Loan

Refinancing higher-interest loans/debts into one consolidated payment, allocating more funds to CEBA repayment.

3. Negotiate with Creditors

Speaking with CEBA representatives and private creditors to restructure payment terms without formal insolvency proceedings.

4. Obtain New Investment/Financing

Raising capital from investors, government small business loans, etc. to boost cashflow for loan payments.

5. Wind Down Operations

If the business is no longer viable, an orderly voluntary wind-down avoids bankruptcy while repaying portions of CEBA and other debts.

 

Businesses considering insolvency should review all options with licensed insolvency trustees and legal/accounting advisors to understand their specific situation and make the best decision for CEBA loan repayment or restructuring. With careful planning, bankruptcy may potentially be avoided.

 

You can also check the information regarding Does Bankruptcy Clear Taxes?

 

FAQs:

Q: If you declare bankruptcy, will the CEBA loan be automatically forgiven?

No, the CEBA loan is not automatically forgiven if you declare bankruptcy. It remains an outstanding debt that must be dealt with through the bankruptcy process, just like other debts.

 

Q: How is the CEBA loan treated in a bankruptcy?

The CEBA loan has a higher priority status than ordinary unsecured creditors like suppliers or credit cards, but lower priority than secured creditors like banks with collateral. The assets of the bankrupt business will be used to pay back creditors in the order of priority set out by bankruptcy laws.

 

Q: Can you make a proposal to creditors to reduce your CEBA loan amount?

Yes, one option in bankruptcy is to make a formal proposal to all creditors outlining a plan to partially repay debts over time, often at a reduced amount. If accepted by the required majority of creditors, this proposal would be binding and could reduce the remaining CEBA loan balance.

 

Q: What happens if you can't repay any portion of the CEBA loan?

If you have no ability to repay any of your debts, including the CEBA loan, you can proceed to bankruptcy discharge. After liquidating assets and undergoing the prescribed bankruptcy process, any remaining CEBA balance would become legally uncollectible upon your discharge.

 

Q: Does bankruptcy eliminate the CEBA loan immediately?

No, there is no immediate debt forgiveness. The bankruptcy discharge process, including counseling and potential surplus income payments, typically takes 9-21 months before you receive your legal discharge release from debts.

 

Q: What are the consequences of declaring bankruptcy?

Major consequences include assets being seized, severely damaged credit rating, public record, trustee fees/costs, potential income garnishment, and reduced ability to obtain credit or financing in the future.

 

Q: Are there alternatives to avoid bankruptcy for the CEBA loan?

Yes, options like negotiating amended CEBA terms, debt consolidation loans, settlements with creditors, raising new investment, or an orderly wind-down of the business can be explored before bankruptcy.

 

Q: Who should you consult about your CEBA loan situation?

Licensed insolvency trustees and professional legal/accounting advisors can review your full financial situation and advise you on the best path forward for dealing with the CEBA loan, whether through bankruptcy proceedings or an alternative debt relief solution.