Top 5 Bankruptcy Issues for Small Business Owners

Top 5 Bankruptcy Issues for Small Business Owners

Meta description: Learn about the five biggest issues that face Canadian small business owners during and after they file for bankruptcy. 

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Small businesses can sometimes go bankrupt. And when they do, it can create issues for their owners. Therefore, those contemplating bankruptcy need to consider the ramifications that it could have on their lives. 


Here are five issues that might crop up. 


Paying Taxes After You File For Bankruptcy


For small businesses, tax debt is often a significant component of the overall money they owe. Income taxes and HST can balloon, especially when firms can’t meet their other costs, and the owner must dip into their reserves. Under Canadian law, bankruptcy can absolve you of tax debt obligations, but only the debt you accumulate before the date of bankruptcy. You must still pay tax on any income you generate afterwards. 


If you’re in financial difficulties, it is essential to remember this point. The Canadian Revenue Service will continue to expect you to make out cheques to them according to the tax code. Therefore, after you file, you should hire a bookkeeper who understands bankruptcy tax law.


Continuing Your Business


Canadian law says that you can continue to operate your business after you file for bankruptcy. However, the legal nature of your company must change. 


First, you must switch to sole proprietorship if you are already incorporated. You cannot continue to operate under limited liability. 


Second, you must resign as director. Under Canadian law, you cannot be the director of a company and declared bankrupt at the same time. 


Surplus Income Payments


Your income plays a role in your bankruptcy terms. If you make more than the surplus income threshold, the court will order you to pay fifty percent of this to your creditors until you can discharge your bankruptcy. 


The amount of income you pay as a sole proprietor depends on your net costs. Salaried workers will simply pay 50 percent of their wages above the relevant surplus income threshold. But if you continue running your business, you will pay 50 percent above your net monthly cash position, after you deduct expenses. The person managing your bankruptcy will work out how much money, on average, you should be paying every month. 


Losing Your Assets


When you declare bankruptcy as a small business owner, there is a risk that you’ll lose some of your assets to repay creditors. However, the law provides an exemption for “tools of the trade” up to a value of $11,300 in Ontario. Lenders cannot seize these in bankruptcy proceedings up to the threshold, allowing you to continue operating. Please note, though, that if the liquidation value of the tools exceeds $11,300, you’ll be liable for the difference if you want to keep them. 


Problems Accessing Credit


Small business owner income streams can fluctuate wildly throughout the year. Access to credit, therefore, is vital. However, if you file for bankruptcy, you may no longer be able to access lines of credit or other facilities to tide you over. Furthermore, Canadian law demands that you declare you are bankrupt whenever you apply for a loan, so lenders may be unwilling to provide you with cash. 




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