For many people, the idea of being bankrupt has only ever been a fear they’ve faced in an intense game of Monopoly. However, unfortunately for some people, declaring bankruptcy becomes necessary when they can no longer afford to pay their debts. Bankruptcy is a legal process that insolvent individuals can apply for, whereby they are legally declared unable to pay outstanding debts to creditors, releasing the debtor of their obligation to pay certain debts, and stopping debt collectors. Bankruptcy typically lasts 3 years and one day. While it can provide relief from debt, there are also financial consequences for declaring bankruptcy, such as the appointment of a legally required trustee to manage your bankruptcy and pay debts to certain creditors on your behalf. This article will provide more information about what bankruptcy covers to help insolvent individuals understand the consequences of this national debt solution and the often-misunderstood legal process.
What Is Bankruptcy?
Bankruptcy is the process where an individual is legally declared to be unable to meet their debts. By applying for bankruptcy, an individual becomes released from most of the debts they owe. Because of this, bankrupts find relief from being contacted by most (but not all) debt collectors and legal actions. Bankruptcy can be entered into voluntarily by filing a Debtor’s Petition. Sometimes this is the most common-sense step for people to take. Under certain circumstances, creditors can issue a Creditor’s Petition and file a Sequestration Order with the Federal Circuit Court, to legally force a person into bankruptcy (which adds more legal fees to your debt!). Thus, bankruptcy has consequences, pros, and cons, and it is not a step to be taken lightly. The best course of action is to speak with a debt advisor or financial counsellor to discuss whether bankruptcy is the best financial decision. Once you do declare bankruptcy, you will remain “bankrupt” for a minimum of three (3) years and one (1) day. However, if you fail to fulfil certain obligations under bankruptcy, the amount of time you remain “bankrupt” can be extended. During this time, a trustee looks after your financial affairs – they are legally obliged to sell off some of your assets (such as cars, real estate, bank accounts, tools, winnings, inheritances and jewellery) and use these funds to repay your debts, and they will notify creditors that you are bankrupt. As a bankrupt, you are legally obliged to provide accurate and correct information to your Trustee about your current assets, debts and income, and make compulsory repayments if you exceed the income threshold (indexed amount) set by AFSA.
Five of the Most Common Questions We Receive About Declaring Bankruptcy
1. Will I Ever Leave Australia Again?
Many people come to us believing that once they file for bankruptcy, they will never be able to leave the country again. This is not the case. However, if you wish to go overseas during the term (three years) of your bankruptcy, you will first need to seek approval from your Trustee. This rule exists so that people don’t escape to another country to avoid repaying their debt obligation! Many trustees do not approve travel if you have declared bankruptcy as part of a criminal investigation or fraudulent activities.
2. Will I lose my home?
In many cases, people who declare bankruptcy lose their homes; however, it is not always the case. In most instances, people are allowed to keep their household belongings. If you need to declare bankruptcy, don’t let the chance of losing your home be a deterrent. Instead, discuss it with us to help you tackle financial strain and not lose your home. Our experienced staff can explain the alternatives to bankruptcy to you, so you are aware of all the available options.
3. Will I lose my car?
It is rare for someone declaring bankruptcy to lose their car; however, we will let you know if you are likely to lose yours before filing. Last we checked, a bankrupt person may own a vehicle valued at no more than $8100.
4. Can I have savings, and will I ever be able to borrow money again?
When your bankruptcy commences, Trustees can take most of your cash. Still, they are required to leave you with a small amount to cover your usual living expenses, which is similar to what you would earn as a Centrelink recipient. During your bankruptcy, you can still save – just remember, if you make an income, most of this money will be used to cover your debts, so you probably won’t be saving much during your bankruptcy!
You can still apply for credit whilst you are bankrupt. However, above the credit limit ($5969 last we checked), you are legally obliged to disclose that you are bankrupt. Also, note that when you become bankrupt, your name will be permanently listed on the NPII (National Personal Insolvency Index). The NPII is a public register that lenders can search, which may also impede your ability to obtain credit. After five years from the date you became bankrupt or two years from discharge (whichever is later), you will be able to get loans, but you may not get the best interest rates available. After four years of being discharged from bankruptcy, your credit history will be cleared, and you will be able to get much better rates on loans.
5. What debts won’t declaring bankruptcy remove?
Contrary to popular belief, bankruptcy does not eliminate all debts. HECS, HELP or other student loans, Centrelink and child support payments and court-imposed fines like speeding fines will not be eliminated. It will, however, remove unsecured debts like credit cards, personal loans, buy now pay later services, cash advances and payday loans.
6. How will my bankruptcy affect my wife/husband/partner/spouse?
Usually, bankruptcy won’t affect your partner, but some circumstances might indirectly impact them! Where your name appears as the registered owner of an asset, consider that your Trustee in Bankruptcy is now legally in charge. Therefore, if your partner uses an asset you own, your partner will no longer maintain full financial autonomy over the asset and must obtain the Trustee’s permission to use or discharge such assets in any way. If a jointly owned asset is repossessed, your partner may submit an offer to the Trustee to purchase the asset (and pay out your ownership share). Importantly, your spouse’s credit rating won’t be affected by the fact that you are bankrupt. However, shared debt repayments will still need to be maintained by your partner. Notably, unless they can cover the shortfall of your default, assets with arrears are more likely to be repossessed.
Our staff are all trained to give you the best advice, support, and answers to help you navigate debt-related issues and make sure you are aware of all the alternatives to bankruptcy (such as a Debt Agreement or Personal Insolvency Agreement) before declaring bankruptcy. Our aim is to help you become debt-free. Please give us a call on 1300 003 328 to discuss your particular situation.