Merchant Advance Blog

Blog Article: Bankruptcy: The Myths and the Facts

Filing for bankruptcy is the absolute last resort for a business that cannot find other avenues to clear up its debts and keep itself running. It can be a difficult, highly charged and emotional decision – especially for sole proprietorships or partnerships. While we would prefer never to see businesses have to file for bankruptcy, it helps to be informed about a few the common misconceptions about this process.

1. Bankruptcy Means The End of Your Business

When a business goes bankrupt, the majority owners chalk it up as a failed effort and move on. However, it is possible to continue a business that has undergone bankruptcy – though it can be exceedingly difficult to retain credit with your suppliers and other key business partners. Before deciding to continue operating a business after filing bankruptcy it is important to evaluate if the business is worthwhile. The decision as to whether or not to continue is highly personal. The purpose of filing bankruptcy is to eliminate debt and get your finances back on track despite taking a significant short-term loss; if the business continues but is not able to turn around and make money, filing bankruptcy may be to no avail.

2. Business Bankruptcies Can Be Separated From Personal Finances

Strictly speaking, as the Canada Business Network points out, assets of a sole proprietorship or partnership are not considered separate from personal assets, meaning that when a sole proprietorship or partnership goes bankrupt it is essentially a personal bankruptcy. Sole proprietors or partners must take the effect on their personal finances into account before making the decision to declare bankruptcy.

Running an incorporated business gives a small business owner liability protection; it is the business’ assets that are forfeit, not the individual’s. The exception to this is when the business owners(s) have pledged personal assets as security for the debt (such as mortgages on personal property, etc.).

3. Bankruptcy Creates a Clean Slate For Debts

While it is true that bankruptcy will eliminate some debts, there are certain debts that cannot be discharged through bankruptcy. Secured debts, such as mortgages and auto loans, for example, will not disappear with a bankruptcy. Likewise, debts stemming from student loans, spousal maintenance, child support, or certain personal injury claims typically cannot be discharged through bankruptcy. Directors and parties related to the bankrupt may still be held personally liable for certain tax debts, and directors can be held accountable for other liabilities.

4. Bankruptcy Is Your Only Option

There are many alternatives to entering bankruptcy, and almost all of them are preferable. These include:

  • Debt Consolidation Loans
  • Debt Management Program (Payment Consolidation/Debt Counselling)
  • Orderly Payment of Debts (OPD)
  • Consumer Proposal
  • Sale of Assets
  • Renegotiation with Creditors
  • Making Budgetary Revisions
  • Division 1 Proposal
  • Debt Settlement Negotiation

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