If you own a commercial property, it is likely to act as a good source of income. A commercial property might also be your biggest asset. However, there may be a point where external circumstances cause you to be bankrupt or close to bankruptcy. Alternatively, your commercial tenant might be bankrupt and cannot pay rent. This article will outline some legal tips to ensure your commercial property is protected if you or your tenant becomes bankrupt.
What is Bankruptcy?
Bankruptcy is a process by which someone unable to pay their debts can seek relief from them. If you declare bankruptcy, the Official Assignee will take control over all of your assets, and they can sell them to pay off your debts. Once bankruptcy is declared, creditors cannot ask for payments, and you are free from any obligations. However, bankruptcy is not a get out of jail free card, as it has severe consequences. Therefore, you should only undertake it if there are no other options available.
What Are the Ramifications of Bankruptcy?
Once you declare bankruptcy, it will last for three years. During this time, you will struggle to make any transactions on credit, such as renting a house or buying a car. Your bankruptcy will also appear on a register that the public is free to use. This means you may struggle to find employment, and providers of services such as gas and electricity may not supply you. This is because they may not think you will be able to pay them on time.
Continue reading this article below the formOther Options for Bankruptcy
You should only undertake bankruptcy if you have a high debt that you can not pay back. However, there are other options available if you do not owe a significant amount of debt. These are a:
- no-asset procedure; or
- debt repayment order.
You should undertake a no-asset procedure if you owe less than $50,000 and have no assets. A no-asset procedure only lasts for one year compared to bankruptcy, which lasts three years. A no-asset procedure is better because there are fewer restrictions on you when compared to bankruptcy. However, it can only be undertaken if a creditor does not get a better outcome if you declare bankruptcy.
A debt repayment order allows you more time to pay back any debts you owe. Again, you can only undertake it if you owe less than $50,000. They are suitable if you cannot pay back debt now but may be able to in the future. Additionally, a debt repayment order is only available for unsecured debt. This means that secured debt, such as a student loan, is not encompassed by the order and you will have to find another way to pay these off.
Commercial Trusts
A trust is where somebody else holds an asset on behalf of another group of people. The people who hold the asset become the trustees and the people for who the asset is being held become the beneficiaries. Once you put an asset into a trust, the trustees become the legal owners of the assets. Therefore, putting your commercial property in a trust is a good way of protecting it from any insolvency procedures.
However, it is essential to note that you are not the full beneficial owner of the commercial property once you put it into a trust unless you become a trustee. This means that if you have independent trustees, they are under obligation to only act in the interests of the beneficiaries.
It is also essential that the intention of the trust is honest when you create the trust. If the trust intends to mislead, the trust can be declared a sham and voidable. It is also important that you do not transfer your assets to a trust if you are on the brink of bankruptcy, as this can be seen as fraudulent.
Key Takeaways
Bankruptcy is a last resort situation that allows you to clear your debts if you cannot do so in a regular manner. You should only undertake bankruptcy if you have no other options. This is because it will become harder for you to do basic tasks, such as buying assets or providing utilities. There are options other than bankruptcy that allow you to clear your debts if you are unable to. These are either a:
- no asset procedure; or
- debt repayment order.
However, there are certain restrictions on these procedures. If you own a commercial asset, the best thing you can do is put it into trust. This is because it absolves you of ownership but still allows you to gain any profits if you are a beneficiary. If you need any legal assistance with trusts or bankruptcy, contact LegalVision’s disputes lawyers on 0800 005 570 or fill out the form on this page.
Frequently Asked Questions
Usually, you ask the court to declare bankruptcy if you are unable to pay your debts. Alternatively, a creditor can ask the court to declare you bankrupt.
No, your creditors do not get paid, and they lose out on whatever they are owed.
As long as your trust is not declared a sham or fraudulent, then your assets will be protected in a trust.
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