How To Deal With Bankruptcy as a Small Business Owner.

• Author: Hoves, J. Doug
• Position: Feature: Low for Entrepreneurs

Considering bankruptcy is never easy. It's one of the most important--and difficult--financial decisions you will ever have to make. An added worry for some indebted Canadians might be what happens to their financial situation if they are self-employed or running a small business.

You may be surprised to learn that it's a common concern. At my firm, approximately 1 in 10 clients filing for insolvency are self-employed or own their own small business. If you're wondering about how to deal with bankruptcy as a small business owner, I've outlined six key points to help you better understand the process.

Business or Personal Bankruptcy?

First off let's start with an important distinction: Is your small business incorporated or not?

If your business is in financial trouble and is incorporated, then it is the business that will file bankruptcy because it's a legal entity. If your business is a sole proprietorship or partnership, then from a bankruptcy perspective, it is the individual who is filing personal bankruptcy, not the business.

In this article, I will focus on issues that affect someone who is filing personal bankruptcy as an unincorporated business or self-employed person.

Not All Assets Are Seizable

Filing for personal bankruptcy means you may lose some of your personal investments and assets related to the business. There are some assets that are exempt from seizure in a personal bankruptcy and these exemptions differ by province. In the case of a small business or self-employed worker in Ontario, there is an exemption for "tools of the trade" (equipment that you use to earn a living) for value of up to $11,300.

This can be important if you need to continue to use this equipment to operate your business going forward.

You Can Continue To Run Your Business During Bankruptcy

It might not be obvious, but you can continue to operate your business in a bankruptcy because you are still entitled to earn a living. The important point to consider would be is it worth maintaining your business after filing for bankruptcy. The main benefit to going through insolvency is to get debt relief. But, if your business continues to lose money, it won't allow you to have a fresh start financially.

If you do continue to run your business, there might be some issues you will face. For example, access to business credit may be difficult, and you are not permitted to serve as a director of an incorporated business while you are an undischarged bankrupt.

You...