Running a small business in BC is definitely no small feat. It takes real vision, grit, and constant problem-solving. And yet, even the most committed entrepreneurs can hit a wall…financially speaking. Maybe you expanded too quickly? Or maybe inflation chipped away at your margins. Maybe even a couple of late-paying clients set off a chain reaction you just couldn’t control.
Whatever the reason, when debt piles up and stress builds, it can really start to feel like bankruptcy is the only way out. But there’s another option.
In Canada, small business owners facing serious financial strain can file a Division 1 Proposal. This is a legal debt restructuring process that can help you avoid bankruptcy, protect your business, and chart a path forward.
This isn’t just about saving a business. It’s about giving entrepreneurs a second chance, without the shame or the panic… and more importantly without starting from scratch.
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What Exactly Is a Division 1 Proposal?
A Division 1 Proposal is a formal, legal arrangement under the Bankruptcy and Insolvency Act (BIA). It allows an individual or a business (including incorporated companies and sole proprietors with higher levels of debt) to make an offer to creditors to settle debts over time—often with reduced payments or extended timelines.
Unlike bankruptcy, where assets are liquidated, a Division 1 Proposal is designed to keep the business alive and operating. Creditors often prefer this option because they may recover more through continued business operations than through a forced shutdown and liquidation.
Once approved, the process provides immediate protection from creditor actions such as lawsuits, garnishments, or asset seizures.
Why a Division 1 Proposal?
To understand how this works in practice, let’s look at two fictional but realistic case examples.
Case 1: Maria’s Bakery
Maria opened a neighborhood bakery in 2015, and for years, her business thrived. But when she decided to expand to a second location, things didn’t go as planned. Construction delays, higher costs for flour, dairy, and utilities during inflationary periods, and her inability to pass all of those increases onto customers shrank her profit margins. To cover shortfalls, Maria relied on business credit cards and a line of credit. Before long, her debt reached over $250,000.
When cash flow tightened, creditors began calling daily. Maria considered bankruptcy but didn’t want to lose her bakery, which supported her family and employed five local staff.
With the guidance of a Licensed Insolvency Trustee, Maria filed a Division 1 Proposal. She offered to repay her creditors 40% of what she owed over five years, with payments structured around her bakery’s seasonal cash flow. Creditors accepted because they knew they’d recover more than in bankruptcy. Maria kept her doors open, her staff employed, and her customers happy. Today, she is on track to complete her payments and looks forward to being debt-free.
Case 2: John’s Retail Company
John runs a small retail business. Rising material costs, tariffs, and delayed client payments put him in a difficult position. When two major clients defaulted on invoices, he couldn’t keep up with supplier bills or payroll. His debt ballooned to $600,000.
Rather than declare bankruptcy, John pursued a Division 1 Proposal. With his Trustee’s help, he negotiated with suppliers, creditors, and the Canada Revenue Agency, offering a plan to repay a portion of the debt over six years. Because John’s company remained operational, suppliers continued to receive new business while also recovering part of what was owed.
This restructuring gave John the breathing space to stabilize cash flow and implement stronger accounting practices to prevent similar issues in the future.
How the Division 1 Proposal Process Works
For a small business owner, the thought of navigating legal and financial restructuring may feel overwhelming. With the guidance of a Licensed Insolvency Trustee, the process is structured and manageable:
1. Initial Consultation
The Trustee reviews the business’s debts, assets, cash flow, and future viability. All options, including bankruptcy, restructuring, or a Division 1 Proposal, are discussed so the owner can make an informed decision.
2. Drafting the Proposal
A repayment plan is developed after reviewing cash flow. This may involve reducing debt, stretching payments over time, or consolidating multiple obligations. Certain requirements apply, such as paying employees their outstanding claims as of the proposal date and ensuring employee remittances are paid in full within six months.
3. Creditor Vote
The proposal is presented to creditors, who vote on whether to accept. For approval, votes in favour must be received from a majority of creditors in number and two thirds in value of the claims filed. So in a proposal with 10 creditors, at least 6 must vote in favour, and in a proposal with $100,000 of claims filed by creditors, creditors with claims totalling at least $66,666.67 of that must vote in favour. Both of these thresholds must be met in order for the proposal to pass.
4. Court Approval
If creditors approve, the proposal is submitted to court for final confirmation. Once approved, it becomes legally binding on all parties.
5. Carrying Out the Plan
The business makes regular payments as outlined in the proposal. During this period, creditors cannot pursue legal action or collections, allowing the business to operate without constant pressure.
Key Benefits of a Division 1 Proposal for Small Businesses
Keeps the Business Running
Unlike bankruptcy, a Division 1 Proposal allows the owner to continue operations and maintain customer and community relationships.
Protects Assets and Jobs
Small business owners often feel responsible not only for their livelihood but also for their employees. A proposal allows them to keep staff employed and assets intact.
Halts Creditor Action
Once the proposal is filed, all creditor actions, including lawsuits, collection calls, and garnishments, stop immediately.
Reputation Preservation
While insolvency carries stigma, creditors often see a proposal as a proactive step toward repayment, not avoidance.
Improved Cash Flow
Restructuring debt into a manageable plan allows owners to focus on running their business instead of juggling overdue bills.
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Rebuilding Your Small Business Toward Financial Stability
Completing a Division 1 Proposal is more than just a financial fix; it’s a chance to reset. Many small business owners emerge from the process with lighter debt loads and stronger financial practices:
- Better Cash Flow Planning: Learning to forecast revenue and expenses more accurately.
- Smarter Credit Use: Avoiding reliance on high-interest credit lines and using financing more strategically.
- Emergency Funds: Building reserves to cushion future downturns.
- Professional Guidance: Maintaining ongoing relationships with accountants, financial advisors, or Trustees to stay on track.
Small Businesses Can Recover Without Bankruptcy
For a small business owner, the stress of unmanageable debt can feel like the end of a dream. But insolvency doesn’t always mean closure. A Division 1 Proposal offers a path to stability, allowing entrepreneurs to protect their businesses, preserve jobs, and rebuild financial health.
Maria’s bakery and John’s retail company are just two examples of how this process can provide hope and a fresh start. With the right guidance and commitment, financial difficulty can become a turning point toward resilience and future success.
If you’re a small business owner facing overwhelming debt, know that you’re not alone. Reaching out to a Licensed Insolvency Trustee may be the first step in transforming a financial crisis into financial recovery.
There is a clear path through your businesses financial challenges.
Book your free consultation with our expert Trustees now.
