Life During Bankruptcy – Your Tools of Trade
Below is what you need to know regarding how your tools of trade are protected for you during bankruptcy:
It is common for people to be concerned that they will lose the tools and equipment they need to earn their living when they become bankrupt. This is not the case, the tools you need for your work are protected up to an auction value of $3,800 This amount is adjusted for CPI increases.
It is also common for people to be concerned that their tools and equipment are worth more than $3,800 but we find that these concerns are rarely founded. The reason for this is the $3,800 is based on auction value and not the value your equipment has for you. Second-hand tools, computer equipment, etc sell for very low amounts at auction.
During bankruptcy, you can replace and buy new equipment. It is the auction value of the new item that is relevant to the tools of trade threshold amount during bankruptcy – not the amount you paid for the goods. For example, if you were to buy a new desk for $450 and its auction value is $40, the relevant amount for your tools of trade threshold amount is $40.
If your work requires you to use equipment and the total value of your equipment has an auction value that is greater than the threshold amount of $3,800, do not worry, it may be possible for you to continue using the equipment. Depending on your circumstances, sometimes it is possible for a family member or friend to pay the difference (value of tools less threshold value) to your bankrupt estate to enable you to continue using the equipment and earn a living.
If you use equipment that is subject to a lease or hire purchase the relevant amount to look at when considering whether your tools are within the threshold amount is not the value of the item, but the amount the auction value of the item exceeds the loan payout. This is the amount that will be added to the auction value of your other tools of trade to check if the total value of your tools of trade is within the threshold amount. For example, if the auction value of a tractor is $10,000 and the loan payout amount is $9,800, then the amount relevant for the tractor is $10,000 less $9,800 = $200.
If you need to keep using equipment that is subject to a lease or hire purchase and the value of the goods is less than the payout value of the loan, with the lender's consent you can continue making the monthly payments and using the equipment. This commonly happens. Also, these goods will have no impact on your tools of trade threshold value as the goods are worth less than the contract loan payout amount.
If you hand back to the lender financed equipment before or when you become bankrupt, any shortfall incurred by the lender will be caught by your bankruptcy.
You are responsible for maintaining and insuring your tools of trade.
If you intend to operate as a sole trader during bankruptcy, you will need to organise public liability insurance. We have received feedback from some people that they struggled to get public liability insurance when they became bankrupt. We recommend you talk to your insurance company in advance in case there are delays or issues regarding your insurance requirements.
If you intend to continue using your financed equipment during bankruptcy, check to see if it has a balloon payment at the end of the contract term. This can be relevant if you are wanting to continue using the equipment once the period of the loan agreement finishes. Your bankruptcy may negatively impact the financier being prepared to finance a payment arrangement for the balloon payment. We are not saying this will happen, but it could happen. We have seen people in this situation receive support from family for them to retain the use of their equipment. This involves a family member saving and/or borrowing to pay the balloon payment and then allowing you to continue having the use of the equipment.
When you are discharged from bankruptcy, your tools of trade continue to be your property.
To get further insight into how bankruptcy works, we recommend our article Getting On With Daily Life which can be accessed here