Managing Personal Bankruptcy as a Small Business Owner


Making the decision to file for bankruptcy isn’t an easy one. It is often used as a last resort for people who have fallen on hard times and feel like they have no other option available. The process is complicated and stressful enough as-is for the average person, but small business owners and the self-employed may find themselves even more overwhelmed as they have to consider a number of additional factors.

Thankfully, personal bankruptcy help is available for small business owners or the self-employed who need help navigating this difficult time in their life. A bankruptcy trustee will be able to manage the bankruptcy for you, but may also have other solutions to your problems that you may not have considered. Here is some of the advice that they will likely offer you.

Business vs. Personal Bankruptcy

First it’s important to understand the difference between business and personal bankruptcy.

  • Business Bankruptcy: If your business is incorporated, then as a legal entity it is the one that will file for bankruptcy.
  • Personal Bankruptcy: If your business is a sole proprietorship or partnership, then the individual is the one who will file for personal bankruptcy.

The advice discussed here will be relevant for those who are filing for personal bankruptcy as a self-employed person or unincorporated business.

Asset Exemptions

Depending on your location, there are exemptions for certain assets so that they do not have to be surrendered. This can include personal assets like vehicles, home equity, and personal belongings, as well as business-related assets like your “tools of the trade” (the equipment you use to earn a living).

Entitled to Earn Money

Despite what you may think, you are actually allowed to continue running your business while filing for personal bankruptcy. The question is whether or not you really should continue with it, especially if it is just losing money. Going through insolvency offers you an opportunity for a fresh start, so it might be time to cut your losses and seek other employment.

Difficult to Access Credit

Another reason you may want to cease running your business is because of how difficult it will be to get credit. Once you file for bankruptcy you will need to surrender your credit cards and your accounts at banks you owe money to will be frozen. Going forward, and prior to your discharge, you will also need to state on any credit application that you are an undischarged bankrupt, meaning that many creditors may be unwilling to lend you money. Some may, but it will likely be under unfavourable conditions, like very high interest rates.

Tax Debt and Bankruptcy

Income tax often accounts for the largest amount of debt that small business owners face. You should know that you can include tax debt on bankruptcy, though exceptions apply when tax debts exceed certain levels.

Alternative Options

Have you considered filing for a consumer proposal instead? A consumer proposal is a legally binding agreement between you and your unsecured creditors to settle your debts to them. Not only can you pay off your debt, you also may not have to surrender any of your assets. Talk to a local bankruptcy trustee to learn more.