Can I Be a Sole Trader If I Am Bankrupt?
Whilst you can be a sole trader during bankruptcy in Australia, it’s essential to comply with specific legal obligations. As a bankrupt sole trader, you’re limited in acquiring credit above a certain threshold and must declare your bankruptcy status when seeking credit over AUD 5,000. It’s advisable to consult a financial advisor for navigating these restrictions effectively
Although bankruptcy is an extreme measure, it ultimately allows you to continue your life, free from most debts. For some people that means being free to carry on with their businesses. As a nation of business owners, Australia hosts some 2.3 million small enterprises.
Whether you are a sole trader or the director of a company, declaring bankruptcy can have an impact on your ability to work and continue trading. In this article, we will break down bankruptcy and the effects it has on running or starting a new business.
Running a Business During Bankruptcy
You are permitted to run a business during the bankruptcy period, although, there are some guidelines to be aware of.
This means that if you are a self-employed electrician who has declared bankruptcy, you could continue to work and operate your business while bankrupt. In a similar vein, you are permitted to establish a new business while bankrupt. In both cases, your business will be required to meet certain obligations:
- Your business name should contain your full name, allowing customers, partners and other stakeholders to search for your name on the National Personal Insolvency Index (NPII). You can change your business name to fulfil this obligation if you choose to do so.
- If your business name doesn’t contain your name, you are required to tell people you do business with that you are bankrupt.
During your bankruptcy, you may also be required to make compulsory payments towards repaying your creditors. The amount of money you pay depends on a variety of factors, including your annual income and the number of dependents you are responsible for.
Compulsory contributions are calculated so they don’t impact your reasonable living expenses, but your contributions could limit your ability to reinvest in your own business.
AFSA places no restrictions on your ability to work during a bankruptcy. However, some professional and licensing bodies may restrict your ability to work in certain industries, such as construction, accountancy and real estate. Speak to your trustee if you’re unsure about whether you can carry on your work as normal.
Running a Company During Bankruptcy
Under Australian regulations, companies are a distinct legal entity and are different to other types of businesses like sole traders. Public and private companies are owned by their shareholders and are required to be operated by one or more directors and secretaries.
During bankruptcy, you are not permitted to act as the director of a company. Similar to your other assets, any shares you own in the company will be passed to your bankruptcy trustee.
Depending on the circumstances and the value of the shares, your trustee may sell the shares to repay your creditors. In some cases, the trustee may also apply to have the company placed into court liquidation to realise the value of the shares and repay creditors.
You can resume your duties as a director once you have been discharged from bankruptcy or meet the terms of your personal insolvency agreement.
The Effects of Bankruptcy on Business Ownership
Once you have been discharged from bankruptcy, there are no restrictions on running a business or company. Bankruptcy typically lasts for 3 years and 1 day. While you are permitted to operate a business post-bankruptcy, you may face additional challenges.
A past bankruptcy may present two key obstacles to establishing a new business or carrying on an existing one:
- Listing on the NPII. If you become bankrupt, your details will be permanently listed on the National Personal Insolvency Index (NPII). The NPII is publicly searchable and contains key information about you and your bankruptcy. Future customers, partners, investors and other stakeholders may choose to search the NPII and base their business decisions on your listing.
- Obtaining new credit. Credit reporting agencies are permitted to keep your bankruptcy information on file for 5 years, or for 2 years following the end of your bankruptcy, whichever is later. This may affect your ability to obtain new sources of credit, such as small business loans or credit cards.
Seeking Advice About Your Financial Position? Contact SV Partners Today
Declaring bankruptcy can be a useful tool for discharging debts that you’re unable to pay. However, bankruptcy carries lasting effects that can impact your ability to carry on or establish new businesses and companies.
Before making any decisions, it’s important to seek professional advice. At SV Partners we offer advisory services to help you navigate financial strain and reach the best possible outcome. As experienced trustees, we understand the ins and outs of bankruptcy and personal insolvency, and our team can walk you through your available options.
You can contact us online to arrange an obligation free consultation, or call us on 1800 246 801 if you’d like to have a confidential discussion about your financial situation.