Most people will think that you cannot continue to run a business while in bankruptcy, which in reality, is simply not true. Yes, the bankruptcy may make matters a little bit more complicated at first, however, once you pass those initial stumbling blocks, everything should run the same as before.
It is important to first distinguish between a personal and business bankruptcy. In 99% of cases, when a business goes bankrupt, it stops running either right away or soon thereafter. When a person files a bankruptcy their life continues and they are able to move forward.
In a personal bankruptcy, individuals are still entitled to earn a living. If that person makes their living running a business, it would be unfair to take that possibility away. One of the main goals of the bankruptcy system in Canada is to give an honest, but unfortunate debtor a fresh start, which would be impossible if people were not allowed to work and generate income.
Before deciding to continue operating a business after filing a personal bankruptcy it is important to evaluate if the business is worthwhile. The purpose of filing bankruptcy is to eliminate debt and get your finances back on track; if the business continues to lose money, filing bankruptcy may be to no avail.
In the case of an unincorporated business, there really is no separation between the business and the person running it. Therefore, when meeting with a trustee the business assets and value will be taken into account. This means that any assets will be dealt with as personal assets belonging to the individual filing bankruptcy (not the business) and the revenue generated – net of deductions and taxes – will be counted as that individual’s personal revenue.
Once the bankruptcy is filed all accounts must begin fresh. Credit will likely not be available from suppliers because you may be seen as a lending risk until your finances are in order. Once your debts have been cleared in the bankruptcy and you’ve built up your credit score through by using tools such as a secured credit card, making regular payments and avoiding high interest borrowing options, your business opportunities open up and you can begin to reestablish relationships with lenders and suppliers.
In the case of an incorporated business, the shares or ownership of the separate legal person will be taken into account as an asset of the person filing a bankruptcy. In some cases, people who have filed a bankruptcy cannot be a director of an incorporated company; however, these must be reviewed on a case by case basis. The income that is withdrawn from the company, as salary or “profits” will be counted after personal income taxes, as the personal income of the individual filing a bankruptcy. It is important to remember that if the incorporated business has its own intrinsic dollar value, this will be counted as an asset and may have a value to the bankruptcy.
The incorporation should be unaffected by the filing of a personal bankruptcy by its owner, as it is a separate legal person and has not filed a bankruptcy. Certain partnerships or registered businesses can be automatically deemed bankrupt, should one or more individuals associated file a bankruptcy.
This area of bankruptcy law can be confusing. If your small business is struggling, and you are not sure whether you or your business needs to file for bankruptcy, contact a licensed Canadian bankruptcy trustee in your area. We will look at your unique situation and help you develop a plan, even one that may see you continuing to operate your business if that is what you want to do.
If an undischarged bankrupt is in business and a client does not pay for services can the bankrupt file a statement of claim in court? Or is that duty of his trustee?
Hi Al. In general, yes, the bankrupt could start legal action, but this is something they should discuss with their trustee first, because depending on the timing it may impact their bankruptcy.
Hi,
My limited business is in financial diffuculties and could not possibly pay its oblogations including taxes. Can a family member start a new limited company to start fresh while filing bankruptcy on my current one?
Yes, there is no reason a family member cannot start a new business. If your current business goes bankrupt and has assets, you will have to discuss with the trustee how to purchase those assets in the new business (it must be done at fair market value, and with creditor approval).
my problemm . i am having trouble getting a bank account for my already established sole propriortiship ( in British Columbia ) I am not looking for credit, just a business account to handle deposits and payents,dispursments etc. My poor credit rating is preventing this from happening I declared bankrupcy 2 weeks ago and as such am a undischarged bankrupt. it is not possible to run the business without the bank account or some other way to deposit cheques , pay my taxes etc. Do you have any advice you can give me?
Hi Roger. I would suggest that you contact your trustee and ask them to recommend a new bank for you. A bank is not allowed to not open a new bank account just because you have filed bankruptcy, so they should be able to refer you to a banker who can open a new account for you.
I have a client who runs a sole proprietorship trucking company. He is considering personal bankruptcy.
He wants to know if he can/should transfer the truck to his son, who is currently an employee driving for him, so that the business can continue, before declaring bankruptcy. He is concerned, of course, that his business continues, but does not want to appear to be hiding assets.
Also, his name is on the family home and mortgage thereof, along with his wife.
He wants to know if he should transfer the home entirely to his wife’s name.
As this is outside of my area, I need some help getting him some answers so that he proceeds correctly.
Thank you,
Mary Arif
All Points Bookkeeping
Hi Mary – it sounds to me like your client may be better served if you give a licenced insolvency trustee a call to discuss the specifics of this case in greater detail. I can tell you that transferring the truck and/or the house immediately before filing for bankruptcy protection may put your client at risk, as well as his wife and son. Use the links on this website to find a trustee in your area and give them a call.
My ex owns a small business he has a truck and a tanker and works in the oilfield. He has a large amount of personal debt as well as business debt.
If he declares bankruptcy could he still keep his truck , tanker and the house?
Without knowing a lot more about your ex’s situation I can’t tell you what he can and can’t keep if he files. If they have a loan outstanding on the truck and tanker then to keep them he will have to keep making the payments. The house is a bit more complicated -it depends on how much equity is in the house and where he lives. I suggest you use the links on this site to find a licenced insolvency trustee near you ex and set up an appointment. That way they will have specific answers about their situation (rather than my general comments).
I declared bankruptcy about 25 years ago with my former spouse. I am now looking to federally incorporate a business with my business partner. Will this prior bankruptcy be an issue?
Hi Krista. No, a previous bankruptcy should have no impact on whether or not you can incorporate a business. You should be good to go.
I have an incorporated company with assets worth 250,000.00 (commercial property). I am having trouble meeting my personal debt obligations. If I file a proposal or seek bankruptcy personally, will my business assets be seized and sold to settle my personal debts? I plan on keeping the business, if possible.
If you file a proposal or bankruptcy the value of your business will definitely impact the amount you have to repay to your creditors. In a proposal, your assets are not seized and sold (unless you want them to be), rather you make an offer to repay a portion of your debt based on how much money could be raised by selling off your assets. If you were to file for bankruptcy then the shares you own in the corporation would be transferred into you bankruptcy and (in most cases) the business would be immediately closed. Your personal bankruptcy has no right to run the business, but they are entitled to whatever the fair value of the business is. I suggest you go and speak to a licensed insolvency trustee sooner rather than later to discuss your situation and your options.
Whow do i file bankruptcy for my corporation ????? Do i need a trustee
Hi James. Yes, in Canada, to file bankruptcy, either for you personally or for your corporation you need a licensed insolvency trustee to administer the bankruptcy. All LITs provide a free initial consultation so you can fully understand your options before making a decision.
I filed a personal bankruptcy, and disolved my old incorporated company. I have received a conditional discharge from bankruptcy. Can I start a new incorporated company?
Certainly. Good luck.
I am asking for someone else. This person has been running a business for a long time, unincorporated. Although the business has always done well, it has gotten way behind on it’s taxes. The one owner is a 67 year old woman, and she is unable to retire as she feels that she has to keep the business going, and CRA is clawing back all of her CPP and OAS. The other owner is her daughter, who is a mother to three young sons. They could file for bankruptcy, but there are two houses at stake. The mothers house and the daughters. The mothers house has no mortgage on it. The daughters does, but has a fair amount of equity. Is there a way for them to file for bankruptcy without losing their homes? Can they separate their private finances from the business by incorporating the business now, or is it too late for that? The CRA does have a lien on the mother’s house. I’m not sure if they do on the daughters. They might. The amount owing to the government is very high. So high that they will never be able to pay it off, so what is their best option to get out of this mess? They don’t want to lose their homes. Is there any way that they can keep them while filing for bankruptcy?
It is too late to restructure the business and the home ownership if the mother and daughter already have debts to CRA. At some point CRAS will simply register tax liens against the properties to secure their debts. If the mother or daughter file for bankruptcy (or a proposal) they can keep their houses as long as they pay an amount equal to their equity into the bankruptcy (or proposal). CRA considers themselves an “involuntary creditor” – they didn’t agree to let the mother and daughter not pay their taxes so CRA has the right to try and collect the taxes in some other way. The short answer may be to refinance the houses to pay off the tax debts. Sorry, but the tax bill always come due. Not paying your taxes catches up with everyone eventually…
If one filed a personal bankruptcy and is not yet discharged can that person be a part of a corporation director/shareholder of an existing corporation with partner OR incorporate a new business and manage?
You are not permitted to be a director of a corporation while you are an undischarged bankrupt. Your trustee can give you more information on when you can become a director or shareholder.
Hello,
Similar to one of the questions asked above. If someone has filed a personal bankruptcy and is not yet discharged, (seems to be a back log due to the covid-19 pandemic). Are they allowed to open, and own/operate a sole proprietorship?
Certainly they are. In fact they can open/own a new corporation if they want to – but they cannot serve as a Director or Officer of the corporation.
If a former owner of a taxi company files bankruptcy for business taxes owed when she owned it how with this effect the business now?
If the business filed for bankruptcy then the taxes owed become part of the business bankruptcy. If the owner filed personal bankruptcy then the taxes will be included in the personal bankruptcy, but if the business was a corporation then it will still owe the taxes.
A Ontario corporation goes into receivership then bankruptcy. A receiver is appointed they then are discharged as receiver and a year later as trustee. What happens to the bankrupt corporation? If a single creditor exist do they own and control the bankrupt corporation.
No, the corporation remains undischarged forever (unless someone ever deals with the outstanding debts). If a creditor “wants” something the bankrupt corporation owned they need to deal with the trustee that was appointed. If the trustee has been discharged they are still the trustee of record so can deal with any such request, but of course the trustee is going to want to get paid…
Hello! I have am a sole proprietor with a small retail business, and I’m going to be filing for personal bankruptcy. I owe more taxes than the fair market value of my business, but have restructured in a way (no staff/overhead) that the business can be profitable moving forward. Is a family member allowed to purchase my inventory for fair market value, and employ me to manage the business, with the goal of me eventually buying it back from them? I don’t want want to break any laws, but I want to be able to carry on the same retail business now that I have learned how to make money with it.
You need to have this conversation with your trustee – too many variables and “what if’s” in your situation. There is nothing wrong with a family member buying your inventory for its fair value, or that person giving you a job. What can get you in trouble is if you are “under paid” during the bankruptcy. The cost to file is based on your income and it has to be fair. You can’t set it up so that you get paid minimum wage and someone else keeps all the profits from the business that would have been yours. Try not to get to “clever” – it can come back and bite you.