Can I Start a Small Business while Bankrupt or in a Proposal?

| Category: Bankruptcy FAQ
Category: Bankruptcy FAQ | Leave a comment

start a business while bankrupt - fbThere are a lot of misconceptions surrounding bankruptcy, consumer proposals, and being self-employed. Informed by rumours, sources for this misinformation are usually third hand accounts: ‘a friend of a friend’. Yet, this information is not reliable: half of it is wrong and the other half is half-truths and out-of-context statements. If you’re self employed and struggling with debt, know there is one place to get reliable, factual information: an Ontario licensed insolvency trustee.

Common Misconceptions about Debt and Self Employment

Some people believe that you can’t have a job and be bankrupt, while others think that you can’t run a business and be bankrupt. These statements are not true. These misconceptions are rooted in the general confusion of just what it means to be bankrupt. You can be unable to pay your bills, buried in tax debt and still not be bankrupt. Becoming bankrupt is a legal process through which a person who owes too much debt can be freed from it. For individuals, bankruptcy is something you choose to do to eliminate your debt, and not something that someone does to you to make you pay. Once bankrupt, you are safe from the legal actions of your creditors to enforce payment. Additionally, being bankrupt doesn’t mean that you can’t earn a living. You can work, get paid, and support yourself while bankrupt. You can also continue to be self employed, or start a small business on the side.

Limitations on a Bankrupt Person

There are some limitations on a bankrupt person. For example, you cannot incorporate a company in your name while bankrupt as it would become an asset and it would have to vest with the trustee. Once it vests with the trustee, you would lose control of your business. Moreover, you cannot be a director of an incorporated company or have fiduciary duties (be in possession of or responsible for money belonging to another person), as an incorporated company is legally like another person, and being bankrupt sets you outside the ability to be responsible for the finances of this entity.

Lastly, as required by the Bankruptcy and Insolvency Act, you must inform anyone who is offering you credit in excess of $1000, or any person you do business with, that you are a bankrupt person. People you do business with may vest you with property or be inclined to offer you credit to facilitate the business transaction; if they know you are bankrupt, they may not choose to do so. Failure to inform these individuals is an offense under the act.

What if you already own an incorporated business?

If you already own an incorporated company, or must be incorporated to deal with your clients, bankruptcy is not the best debt relief option. Instead, a consumer proposal would deal with your debts and allow you to be a director of an incorporated company. In fact, there are no restrictions on owning and running an incorporated company while in a proposal. Similarly, you can also start a business, open a company, and earn income through self employment without restriction.

The most important thing to understand is that bankruptcy or consumer proposal will not impede your ability to earn a living, even if you are self employed. Consumer proposals enable small businesses to continue, even in the face of crippling personal debt, allowing self employed professionals to become debt free. As everyone’s situation is unique, I recommend booking a free consultation with a Licensed Insolvency Trustee. They will review your situation, discuss your options, and help you develop a plan to deal with your debt without damaging your business.

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