Bankruptcy – Your Tools of Trade - Nicholls Co

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Bankruptcy – Your Tools of Trade

Bankruptcy – Your Tools of Trade

Will I be able to keep my Tools of Trade?

When you become bankrupt there are rules in place to help protect your tools of trade. They are outlined below:

  • When you become bankrupt, you may worry that your tools and equipment will be sold off to pay creditors. This is inaccurate, the tools that you need to complete your work are safeguarded from the estate up to an auction value of $3,800. This value is adjusted yearly for CPI.
  • You may worry that your tools are worth much more than $3,800. We often find that this is rarely the case as it is based on their auction value. Second-hand equipment usually sells for a small percentage of what you paid for it.
  • While you are bankrupt you are still able to buy and replace equipment as needed. The amount you pay for these items is not relevant when monitoring whether the collective value of your tools is below the tools of trade $3,800 threshold. It is the auction value of the tool that is relevant, not the amount you paid. For example, if you purchased a computer for $1200 and its auction value is $250, the bankruptcy recognises its value as $250. Which is well below the threshold, so you have nothing to worry about.

Business Tools of Trade Over Threshold Limit

If you do find yourself in the predicament that your tools exceed the $3,800 threshold, there is a way around this so you can continue to keep your equipment. Depending on your situation, it could be possible for a family member or friend to make up the difference (value of the tools less threshold value) to the bankrupt estate to enable you to the keep equipment you need for your work.

Tools of Trade under Finance What you need to know

If you have plant & equipment that is being purchased by hire purchase or lease, you do not use the auction value of the item for the tools of trade threshold calculation. You use the amount the auction value of the item exceeds the loan payout amount. For example, if the auction value is $27,000 and the hire purchase payout is $25,000, then the relevant amount to be added to the auction value of your other tools for your tools of trade threshold calculation is $2,000. If the hire purchase payout amount is greater than the auction value of the item, then it has a value of $0 for your tools of trade threshold calculation.

We should mention that in situations where the loan payout amount is greater than the auction value of the item, from our experience in most cases the lender will be agreeable to you making the monthly payments for you to continue using the item.

In the alternative, if you no longer wish to keep the items subject to hire purchase or lease and the loan payout amount exceeds the value of the goods, these items can be handed back to the lender, and you will not be required to pay the shortfall amount. The shortfall liability amount will be captured by your bankruptcy.

Regardless of bankruptcy, the maintenance and insurance of your tools of trade is still your responsibility.

Public Liability Insurance

If you are intending to work as a sole trader throughout your bankruptcy, it is your job to organise public liability insurance. We know people in the past have found it difficult to get public liability insurance when they become bankrupt. We suggest talking to your insurance company ahead of time to be safe if there are delays or issues regarding your insurance requirements.

Financed Tools of Trade with Balloon Payments

If you currently have financed equipment during your bankruptcy term, it is worth checking to see if it has a balloon payment at the end of the contract. If you are wanting to keep using the equipment when the loan agreement finishes this could be applicable to you. The financier may be unfavourable when it comes to organising a payment arrangement for the balloon payment because of your bankruptcy. It may not happen but there is a chance. When this has happened in the past, we have seen people receive family support for them to retain the use of their equipment. Support could look like a family member saving and/or borrowing to pay the balloon payment on your behalf. As such then allowing you to continue using the equipment.

Once you have completed your bankruptcy, and are discharged, your tools of trade will continue to be your property.

Bankruptcy – Further Reading

  • For good information on bankruptcy, we recommend our article ‘What Happens When You Declare Bankruptcy’ which can be accessed here.
  • To learn more about what can be done to save your home we recommend our article ‘Your Home and Bankruptcy’ which can be accessed here.
  • Learn how income contributions work we read the article ‘Bankruptcy – what happens to your income during bankruptcy’ access here.
  • Understand what happens to your tax debt when you become bankrupt, read ‘Your Tax Debt and Bankruptcy’ which can be accessed here.

If you have any questions on anything to do with bankruptcy, you are welcome to give our help desk a call on 1300 060 122 or email helpdesk@nichollsco.com.au