What Do Sole Traders Need to Know About Bankruptcy?
A sole trader structure is the most straightforward and popular choice when beginning a firm. They alone are responsible for all of the company’s debts, just as they are the only ones who earn any profits.
As a single proprietor, you and your company are effectively one and the same thing in legal terms. What does it imply if your company is unable to pay its obligations, then?
Insolvent or bankrupt?
A corporation that is unable to pay its debts to creditors is said to be “insolvent.” Company assets will be used to pay off these obligations.
The comparable word for a lone proprietor’s firm is “bankrupt.” This will happen when the company is unable to pay its debts, just like insolvency.
All of the debt must come from the lone trader’s assets, though, as the firm is completely dependent on their revenue. The Australian Financial Security Authority (AFSA) handles bankruptcy whereas ASIC deals with insolvency.
How is insolvency declared?
There are two options for a solo proprietor to file for bankruptcy:
- They formally proclaim it (volunteer)
- Creditors may request the bankruptcy declaration of a debtor (the single proprietor).
It is possible to file for bankruptcy regardless of the amount of debt. It simply needs that you reside in Australia or carry out business there and that you are unable to pay it.
Paying of debts
- Business Debts
Once bankruptcy is filed, a trustee is chosen to handle the person’s money. The single proprietor may propose this trustee, or AFSA may appoint them.
They will create a fair procedure to pay back all outstanding business obligations by collaborating with the bankrupt individual and the creditors. They may accomplish this by selling the person’s assets, such as real estate, and creating payment arrangements using anticipated future income.
What property can be claimed, nevertheless, is subject to restrictions. What can and cannot be confiscated is outlined in the government’s threshold guideline.
The trustee will then suggest a debt deal after that. The bankrupt person will always give the trustee all pertinent records, including balance sheets, bank statements, and ledgers, as needed.
- Individual Debts
You will be liberated from unsecured obligations as a result of filing for bankruptcy. These consist of:
- Bank cards
- Expired utility bills
- Overdrawn accounts in banks
- Medical, accounting, and legal fees
Other debts, however, might not be paid in full. These include items such as:
- HECS/HELP
- child support obligations
- Fines levied by the court
It is crucial to establish with each debt’s specific creditor what has been and has not been cleared.
Similarly, certain service providers could decline your request while the debt is still open. In situations like this, you might voluntarily pay off your debt to keep the service running.
You will still be responsible for paying secured obligations.
How will bankruptcy impact a person personally?
An individual’s life will be impacted by bankruptcy in a number of ways. These consist of:
- Being prohibited from leading or managing a business
- Being at risk of being unable to serve as a superfund trustee
- Requiring the trustee to approve their international travel
- Your ability to file a lawsuit might be lost.
- Permanent inclusion of your name on the national personal insolvency index (NPII)
The NPII registration will probably have the most impact on your future business as a sole proprietor. Running your own business while in bankruptcy is not illegal. The good news is that you can continue to operate as a sole proprietor.
However, legally speaking, the name of your company must include your complete name so that it can be searched up in the NPII while you are in bankruptcy. If not, you are legally required to disclose your bankruptcy to anybody with whom you have business.
Bankruptcy typically lasts for three years and one day once it is approved. This may be prolonged by the trustee for a maximum of eight years.
Additionally, since your name is permanently registered, it may be searched even after the bankruptcy term. Prior to any agreements, most creditors are likely to act in this way.
When should you file for bankruptcy?
First thing to do is get in touch with a financial planner. They can evaluate your circumstances and present all of your possibilities. There are other options besides bankruptcy.
There are various possibilities for debt agreements and declarations of purpose.
The next step is to speak with a bankruptcy attorney if filing for bankruptcy sounds like the best course of action.
In conclusion, bankruptcy is a last choice for single proprietors who regrettably find themselves in an unmanageable debt situation. While it alleviates a lot of pressure, it also places limitations on you that can interfere with your capacity to run a single proprietorship. Before applying, weigh your alternatives carefully.
