There are many attributes a person needs to own and run a small business. One of them is an almost overpowering desire to own and run a business. Sometimes, as a result of this desire, owners ignore the warning signs and continue in a business that is making losses to the point of their financial ruin.
Q. We have been running a small business for more than 20 years that has been struggling.
Over that time we have sold and downsized our home three times using the excess cash produced to pay off business debt and keep it afloat. We are now renting and our business owes in excess of $120,000 on credit cards. Someone has suggested we should go into voluntary bankruptcy. What will this mean for us?
A. There are two ways that a person can go into bankruptcy. The first is when they choose to do it themselves by filing a debtor's petition and a statement of affairs with the Official Receiver.
The second occurs after a person has been sued for a debt, judgment has been obtained against them, they have subsequently been served with a bankruptcy notice, and then the person or company that is owed money makes application to the Federal Court to make them bankrupt.
Once a person has been made bankrupt a trustee is appointed to administer their estate (assets). While they remain an undischarged bankrupt they cannot act as a company officer or obtain credit of more than $5155 without telling the lender that they are a bankrupt.
In addition they cannot trade under a registered business name unless they advise all they deal with that they are bankrupt. They must also surrender their passports, only undertake limited overseas travel, and make available to the trustee all books, records, and financial statements.
Apart from some exceptions all assets a bankrupt owns must be made available to their trustee. Assets excluded include:
- Necessary clothing and household items;
- Tools of trade up to $3220 in value;
- A motor vehicle not exceeding $7220 in value;
- Life assurance or endowment policies;
- Some damages and compensation payments;
- Sentimental property, and
A bankrupt is still able to earn income but once they exceed an indexed threshold excess income will be used to repay amounts owing related to the bankruptcy. For the 2013 year the indexed income level is $48,840.
Where the bankrupt co-operates with their trustee they will remain in bankruptcy for a period of three years. Where a trustee believes the bankrupt has acted improperly they can make application to the court to extend the period of bankruptcy for up to five years.
In most cases debts included in the bankruptcy are wiped clean once the period of bankruptcy ceases. An exception to this are amounts owing to the tax office. In this situation the ATO takes any future tax refunds until the tax debt is repaid.
Insolvency and bankruptcy is highly technical specialised field. Before doing anything you should seek professional advice from someone practicing in this area.
Questions on small business tax or other issues can be emailed to email@example.com "Tax for small business, a survival guide", by Max Newnham is available in bookstores and as an ebook.