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As a sole trader, you are responsible for running your own business. Unlike the director of a company or a trustee, you are personally responsible for your business’ debt. If you are currently in debt, you may be considering declaring bankruptcy. However, entering bankruptcy is an incredibly serious step to take. You should consider all other options before you declare personal bankruptcy. This article will:

  • outline what these other options are; and
  • explain when you should declare bankruptcy as a sole trader.

Evaluate Your Debt

If you are in debt, the first step you should take is to evaluate the extent of your business debt. It is best practice to prepare a budget that lists your:

  • earnings; 
  • business expenses; and
  • any debt owed.

Doing so will ensure that you know:

  • the amount of money you owe;
  • the creditor or creditors to whom you owe this money; and
  • what you will have to earn to repay these amounts.

If your spending is currently more than your earnings, it may be best to contemplate what changes you can make to have surplus income to repay your creditors. You may be able to reduce or completely cut certain costs to aid in this repayment. However, it may also not be possible to make these payments to your creditors in full and on time. If this is the case, you should immediately get in touch with your creditors. Your creditors may be able to restructure your payments to be more manageable to ensure that you avoid having to enter into more formal insolvency procedures. 

However, this restructuring may not be possible, and you may have to consider other options for your sole trader business. 

Debt Repayment Order

A Debt Repayment Order (DRO) is a formal insolvency procedure in which you enter into a debt repayment plan with your unsecured creditors. Once you have applied for a DRO, you will sign up with a supervisor who will work with you, the Official Assignee (a government official) and your creditors to arrange a unique repayment plan.

A Debt Repayment Order provides you with more time than you otherwise would have had to repay your creditors. A DRO will usually extend over three years. 

A DRO is the preferred formal insolvency procedure if:

  • your sole trader business owes less than $50,000 to your creditors;
  • you are still able to make repayments on your debts; and
  • this debt owed is unsecured. 

A debt will be unsecured if some security or a specific asset does not back it. For example, you may back a loan with a piece of machinery that your business uses. This is a secured debt. If you cannot make a repayment for this loan, the creditor is entitled to seize this machinery.  

No-Asset Procedure

A No-Asset Procedure (NAP) is another formal insolvency procedure in which your debts are cleared. Under a NAP, your creditors do not receive any repayment for the money they have lent you. 

A NAP is the preferred formal insolvency procedure if you have:

  • debt owed between $1,000 and $50,000 to your creditors;
  • debt that does not include student loans, court fines or reparations; 
  • no other way to repay your creditors; 
  • nothing that you could sell to help repay your debts (you are entitled to keep certain personal assets under a NAP, including tools you need for your work, specific household items and a vehicle that is worth up to $6,5000);
  • no additional money you could use to repay your creditors (you are may have a maximum of $1,300); and 
  • not completed a NAP before.

Similar to bankruptcy, a No-Asset Procedure should not be entered into lightly. A NAP can have long-term impacts on your credit rating and your future employment prospects. 

Bankruptcy

Bankruptcy can have a serious impact on your:

  • credit rating;
  • current and future employment prospects;
  • retirement savings; and
  • partner.

Given these repercussions, as a sole trader, you should only apply for bankruptcy if you have exhausted the above options or owe your creditors more than $50,000.

You can apply for bankruptcy yourself, or a creditor may ask the court to make you bankrupt. Once bankrupt, creditors cannot demand any debts or interest to the debts that were owed prior to the bankruptcy. These debts include all debts that you owed at the time you entered into bankruptcy except:

  • court fines and reparation;
  • secured debt; 
  • debt incurred fraudulently; and
  • child support or maintenance.

When you become bankrupt, your assets transfer to the Official Assignee who then can sell these to repay your debts. Similar to a NAP, you are entitled to keep certain assets, such as tools needed for your work. 

If you do apply for bankruptcy, you are obligated to:

  • assist the Official Assignee and provide any information you are asked for;
  • notify the Official Assignee if you change any key personal information, such as your name, address or employment;
  • keep filing tax returns; and
  • refrain from taking on any new debt over $1,000 without first notifying that creditor that you’re bankrupt. 

Key Takeaways

It can be stressful as a sole trader when your business starts to take on debt. However, there are a variety of ways in which you can deal with this debt, aside from bankruptcy. These alternatives include:

  • adapting your current spending;
  • entering into discussions with your creditors about restructuring your loan repayment plan;
  • applying for a Debt Repayment Order; or
  • entering into a No-Asset Procedure.

It is only once these alternatives have been exhausted that you should enter into bankruptcy. If you are a sole trader considering bankruptcy or having issues concerning your business’s debt, contact  Legalvision’s disputes and litigation lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can a sole trader go into liquidation?

A sole trader cannot go into liquidation. Only companies can go into liquidation when it can no longer repay its debts when they are due.

When should I declare bankruptcy?

As a sole trader, declaring bankruptcy is a serious step. You should consider all other alternatives before declaring bankruptcy, such as applying for a Debt Repayment Order or a No-Asset Procedure.

What is a Debt Repayment Order?

A Debt Repayment Order (DRO) is a formal insolvency procedure in which you enter into a debt repayment plan with your unsecured creditors.

What is a No-Asset Procedure?

A No-Asset Procedure (NAP) is another formal insolvency procedure in which your debts are cleared.

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