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Can you be a sole trader while bankrupt?

Some business owners assume that, if they enter bankruptcy, they will not be able to trade.

However, there ARE still ways to run a business while bankrupt. Whilst you cannot be a director of a company, you can be a sole trader during bankruptcy.

If you are thinking of doing this, there are some guidelines to be aware of. The most important ones are covered below.

Dealing with customers & suppliers as a bankrupt sole trader

When dealing with your suppliers and customers, you must:

  • NOT obtain credit of more than $5,647 from any person without informing them of your bankruptcy. This includes ordering goods, issuing a cheque or accepting a customer order.
  • Operate the business under your own name. The impractical alternative is: if trading under a business name other than your own, you must inform every single person you deal with that you are an undischarged bankrupt.

Failing to do either of these things is an offence.

Money you are owed for pre-bankruptcy work

If, prior to declaring bankruptcy, you have done work as a sole trader and are yet to be paid for it by your customers, the money that you’re entitled to will not be collected by your bankruptcy trustee.

These monies will be deemed as income and included in your income assessment (if collected).

If you’re considering bankruptcy and have outstanding money owed to you by customers, speak to us about the effect your bankruptcy will have on these monies. 

Trading your business during bankruptcy

During the bankruptcy period of trading, there are three main points to note about any business you do:

 1. You are entitled to retain all profits from the business, subject to you making income contributions in accordance with the Bankruptcy Act. Your business net profit is then the amount deemed as your income for assessment purposes. The threshold amounts that you are allowed to earn before having to pay funds to your bankruptcy trustee can be seen here.

Example: You have no dependants and earn $100,000 net profit during your first year of bankruptcy. You will be required to pay $22,081.20 to your bankruptcy trustees (half of the difference between your net profit of $100,000 and the threshold of $55,837.60).

You may use our Income Contribution Calculator to estimate the income contributions you are liable for.

 2. You are personally liable for debts and liabilities you incur after the date of your bankruptcy. Such debts are not provable debts in your bankruptcy and recovery action may be taken against you outside of your bankruptcy if they are not paid.

 3. You MUST keep accurate books and accounts and be able to explain any income and expenditure for the period of your bankruptcy. It is an offence not to. Accurate books and accounts include (at the very least):

  • Bank statements
  • General ledger
  • Profit and loss statement
  • Balance sheet
  • Income tax returns

 What happens if your sole trader business fails?

Hopefully, you’ve learned some lessons and your sole trader business will succeed.

If, however, you run into trouble again, you may become bankrupt a second time, even while the first is ongoing.

We believe everyone deserves a second chance. From our experience of dealing with bankrupt sole traders, many small businesses are able to get back on their feet.

To find out more right now, just pop your query in the live chat window (bottom right) on our website and we can help you consider the best option.

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