As a company director, struggling with out-of-control personal debt when managing a company can have serious consequences on both your private life and your business. If you are experiencing severe financial hardship and may be personally insolvent, Bankruptcy can provide you with a reprieve from your debts and offer you a fresh start. However, it’s vital to understand the consequences Bankruptcy poses on you as a company director.
What is Personal Insolvency?
Personal insolvency is a financial state where you are unable to afford to pay your debts when they fall due. Data from the Australian Financial Security Authority (AFSA) shows that total personal insolvencies fell by 15.1% in the 2018-19 financial year. Personal Insolvency can happen due to many reasons such as over-indebtedness, an unexpected medical expense or relationship breakdown. While personal insolvency is generally a temporary financial state for many, insolvency can lead to severe financial hardship if it is not acted upon quickly.
How does Bankruptcy Affect You as a Company Director?
Under the Corporations Act 2001, if you declare Bankruptcy as a director you are automatically disqualified from managing a company and are not allowed to be a director. Once you have declared Bankruptcy, a Registered Trustee is appointed to your estate. Any shares you own in the company pass on to your Bankruptcy Trustee and it is up to the trustee as to what happens to the company.
The Bankruptcy Trustee may need to put the company into Liquidation or sell shares if they believe they can realise money to pay back creditors during your Bankruptcy. To combat this, if you know Bankruptcy is the debt relief solution you need to take, you can avoid being disqualified by appointing another company director in your place before the Bankruptcy proceedings begin.
How does Bankruptcy Affect You as a Sole Trader?
You are allowed to keep trading as a sole trader if you declare Bankruptcy. During the bankruptcy period, you are allowed to retain all profits from the business as long as you continue to provide income contributions if your profits are over the specified threshold amounts. You can keep any tools or equipment you use for your business, up to the value of $3,800 and a vehicle up to the value of $8,000.
As a sole trader, you need to be aware that while you are Bankrupt you are unable to obtain any future credit over the threshold amount ($5,842) without disclosing your Bankruptcy to the lender. It is unlikely that you will be accepted for credit until after you have been discharged from Bankruptcy as personal insolvency affects your credit score. The Bankruptcy will be noted on your credit report for 5 years and your name will appear on the National Personal Insolvency Index (NPII) for life.
What are the Alternatives to Bankruptcy?
As a company director it is normal to be concerned about how applying for Bankruptcy may negatively impact you and your business. There are alternative debt relief options available to avoid the effects of Bankruptcy which can help you get out of debt and allow you to continue your role as a company director.
Part 9 Debt Agreement
A Debt Agreement is a formal arrangement between you and your creditors where you commit to pay a sum of money towards your debts over a 3 to 5 year period. Although there are still consequences involved when proposing a Debt Agreement, some of the major drawbacks of Bankruptcy are avoided. For example, you are still able to maintain your role as a company director if you enter a Part 9 Debt Agreement.
An Informal Agreement is a tailored solution which allows you to tackle your debt head-on while having little impact in other areas of your life. It is a private arrangement set up between you and your creditors which combines your debts into one, easy-to-manage payment based on your budget. Unlike a Debt Agreement, an Informal Agreement is not part of the Bankruptcy Act, does not have limiting criteria and won’t affect your credit file.
Worried About Your Finances?
If you’re experiencing financial distress or your business is in trouble, Revive Financial can assist. We provide a wide range of debt relief solutions to individuals, company directors and business owners in debt. If you are a company director and unsure which option is best for you, give our expert team a call today on 1800 534 534 for a free 30-minute consultation.