Perhaps you have clicked on this story because you find yourself owing money and facing debts that you’re unable to pay. Maybe you are looking for solutions or wondering whether bankruptcy is the thing for you, but you aren’t quite sure you fit the definition.
Our guide aims to break down the bankruptcy process and help readers identify whether they are eligible to file for it.
What is Bankruptcy?
The Australian Financial and Security Authority (AFSA) defines bankruptcy as a legal process where you’re declared unable to pay your debts. It can release you from most debts, provide relief, and allow you to make a fresh start.
‘Whilst this definition is accurate, there are a number of pros and cons to consider because it’s not quite as simple as wiping the slate clean and immediately getting back to borrowing money and going into more fresh debt.
It is important to remember that bankruptcy is a case-by-case approach, each individual experiences a tailored process.
Is bankruptcy the right option for me?
Seeking professional advice prior to taking any action is critical if you suspect you are facing significant financial issues. As a Registered Trustee, I will meet with you, discuss your situation and provide the most effective pathway to alleviate your financial difficulties. I will be able to guide you through the bankruptcy process if bankruptcy is the right choice for you. If Bankruptcy isn’t the right thing for you, there may be other options that are available to you.
The common warning signs that bankruptcy may be the best option for your situation, can include:
- Unable to pay creditors by due date (bank, bills, invoices)
- Asking to borrow money from family or friends
- Applying for further credit or finance
- Receiving letters of demand or late payment notices
- Receiving calls from debt collectors
- Court notices
What causes bankruptcy?
When an individual is unable to pay all their debts, bankruptcy can often be the result. Creditors, debt collectors, or lawyers may send a variety of notices and summonses to you indicating that they are experiencing financial difficulties. Bankruptcy proceedings may be initiated if an individual fails to respond to these notices. Similarly, bankruptcy may occur if a company’s debt is guaranteed by an individual.
If creditors can prove that an individual has at least $10,000 in debt owing and that a bankruptcy notice has expired, the Court may declare the individual bankrupt.
How long does bankruptcy last?
Bankruptcy typically lasts for three years and one day. During this time (and sometimes long afterwards), your ability to get credit, travel overseas or gain some types of employment can be affected. The bankrupt person is ‘discharged’ at the end of the bankruptcy period.
Credit agencies will keep a record of your bankruptcy for five years from the date you became bankrupt or two years from when your bankruptcy ends, whichever is later. In other words, your ability to secure credit will be impacted beyond the three year term of your bankruptcy.
Your name and personal details will also be permanently recorded on a public register called the National Personal Insolvency Index (NPII).
It’s worthwhile weighing up the ramifications for your circumstances and researching what other options may be available and most suitable to your circumstances. We will be more than happy to discuss the alternatives with you.
What is a Trustee?
When you become bankrupt, a Trustee is appointed to your Bankrupt Estate, which is a person who manages your bankruptcy. The trustee can be either be nominated by you, a Registered Trustee, or the Official Trustee from AFSA (the official trustee).
How can a person become bankrupt?
A person with unmanageable debt can enter into voluntary bankruptcy by filling out and submitting a Bankruptcy Form. A creditor (person or business you owe money to) can also apply to have you declared bankrupt through the court system if you owe them $10,000 or more.
What do you need to do before declaring bankruptcy?
First and foremost, you need to seek professional help from an independent financial adviser who can be either someone of your choosing (like a Registered Trustee) or assigned to you through the National Debt Hotline.
They can advise you of your options and which might be most suitable for your circumstances. The options are:
- Temporary debt protection (TDP) provides a 21-day protection period from being pursued by unsecured creditors while you seek help and decide how to proceed.
- Bankruptcy lasts just over three years, but at the end, you are released from most debts.
- Debt agreements are binding agreements between you and your creditors to pay a sum you can afford.
- Personal insolvency agreements are between you and your creditors to pay an agreed amount in instalments or lump sum.
It is important to note, not all options are available to all people. A registered Trustee ora financial adviser will take you through all the available options for your circumstances. You should always ensure you speak with a qualified professional.
What is the bankruptcy process?
If you apply for voluntary bankruptcy, you must first complete a bankruptcy form which is lodged with AFSA. This details your personal information and financial affairs including your current asset and liabilities. It’s critical to have sought advice from an insolvency professional so you understand the information required.
You must include all debts when applying for bankruptcy. Notify your trustee straight away if you forget to include any.
Once you are declared bankrupt, you must provide details of your debts, income, and assets to your trustee, who will notify your creditors that you’re bankrupt, which stops most creditors from contacting you about your debt.
Do you still need to pay off your debt if declared bankrupt?
Your trustee can sell assets to cover part of the debt or compel you to make compulsory payments to the estate if you earn over $66,639.30.
They can also recover any money in your bank account to meet your debt obligations (but will allocate you enough for modest living expenses).
Bankruptcy will cover the following types of debt:
- unsecured personal loans and payday loans
- gas, electricity, phone and internet bills
- credit cards and store cards
- overdrawn bank accounts and unpaid rent
- medical, legal & accounting fees.
It will not cover the following:
- penalties and fines issued by a court
- child support & maintenance
- Government Student Loans
- Debts created after you have been declared bankrupt
- unliquidated debts, where the amount has not been specified.
You must continue making repayments on secured debts such as your house, car or any hire/purchase agreements where an asset is the collateral in a loan. If you don’t make repayments, a creditor has the right to sell that asset. You must contact your secured creditors to discuss your intentions with the debt and the asset subject to their security.
If you have a joint debt with another person and become bankrupt, the other party assumes 100% responsibility for the debt. Guarantors for a loan also take on the full liability of any outstanding debt if you have been declared bankrupt.
If your debts are overseas, your creditors can’t pursue you in Australia, but if you return to the country of the debt, then it may be possible for them to take further action.
Can I keep my car or house in bankruptcy?
The Bankruptcy Act provides that vehicles used primarily for transportation are protected, assuming that the value of the vehicles, minus what is owed under finance (if applicable), is not greater than a predetermined limit.
If you own or have an interest in any assets that are not protected in bankruptcy, they will be vested in your bankruptcy trustee after you declare bankruptcy. ‘Vesting’ and ‘coming into ownership of’ are synonyms, so when a bankruptcy matter is commenced, it means that your interest in any unprotected assets will form part of the bankrupt estate and your trustee may sell them.
When your bankruptcy trustee acquires an asset, he or she must sell the asset and collect the proceeds for the benefit of your bankrupt estate.
It is possible to retain an asset that is not protected in bankruptcy if you own it or have an interest in it. Your circumstances may determine the options available to you.
Where can I find help?
We understand unmanageable debt is a stressful experience. Bankruptcy is just one option to help manage personal insolvency and should only be considered after consulting a qualified and registered professional.
If you need more information on personal insolvency or bankruptcy proceedings, contact us today.