Put simply bankruptcy is the process where you obtain protection from creditors when you are unable to pay your outstanding debts and you are unable to reach an agreement with those creditors to discharge yourself from your repayment obligations, creditors are the people that you owe money to for example banks, financial institutions, suppliers, the tax office. If you go into bankruptcy and the bankruptcy trustee who is a licensed professional who overseas your period of bankruptcy will be appointed, generally your bankruptcy will last for three years however this period can be extended to five or eight years. There are two ways to become bankrupt:

1. Where a creditor, who is owed $2,000 or more obtains a court order against you; or
2. You voluntarily declare yourself bankrupt

Declaring yourself bankrupt is relatively straightforward the process involves completing the following documents then lodging them with either the Insolvency Services Australia  (ITSA) or a registered trustee:

• A Debtor’s Petition;
• A Statement of Affairs; and
• An acknowledgment that the prescribed information has been received and read.
• It is always advisable to seek professional help before declaring yourself bankrupt however people generally consider themselves bankrupt when:
• If, in making repayments to creditors, you do not have sufficient money to meet general living expense (you are broke);
• You do not have assets that you could sell in order to generate the cash to repay your creditors
• You can survive with the restriction on access to credit

If you declare yourself bankrupt there are various consequences however the main reason why people declare themselves bankrupt is to avoid paying their creditors. Once you are declared bankrupt creditors are generally unable to commence or continue with action to recover debts that you owe them. However, exceptions apply with respect to the following amounts:

• Fines or penalties imposed by a court
• HECS/HELP obligations;
• Social Security overpayments; and
• Child support

Also secured creditors will be able to repossess there secured assets. Bankruptcy imposes limits on your earning capacity you are required to make compulsory contributions to your bankruptcy trustee if you earn over the following amounts per year. The amounts are based on the number of dependents you have.

Refer to table
 

* Compulsory contributions are paid at the rate of 50 cents in every dollar over the above thresholds for each year of your bankruptcy

Also upon being declared bankrupt the law also imposes certain limits on the type and value of assets that you permitted to own. Under the law, you are restricted to owning:

• A vehicle not exceeding $6,500 in value;
• Tools not exceeding $3,250 in value;
• Necessary household property and clothes; and
• Money or property purchased with compensation payments, as a result of personal injuries

Credit
While you are bankrupt you are able to apply for a loan, however if you apply to borrow more than $4,623, you must inform the lender that you are bankrupt.

In terms of your credit rating, there are two points to note. Firstly, your name and personal details will be recorded on various credit reference agencies databases and will remain there for a period of seven years, which is generally the maximum bankruptcy period. After seven years, your details will be stricken from these databases. Secondly, your name and personal details will be recorded on the National Personal Insolvency Index, and will remain there indefinitely. This index is a Commonwealth government database, which is a public record that can be accessed by any person or organisation on the payment of a fee.

Therefore, after you are discharged from bankruptcy, there will be a permanent record of your former status. Obliviously this can have ongoing effects in terms of being able to secure future finance.

Employment Restrictions
Note that a bankrupt will typically not be employed in certain industries, such as the police force or a security guard. In addition to this, unless a court approval is given, a bankrupt cannot, until they are discharged from bankruptcy, be a company director.

Asset Shifting
Gifting assets to other parties e.g. spouses and housing assets (and the proceeds from the sale of those assets) in superannuation are common methods of asset protection. However, recent changes to the bankruptcy laws increase the ability of bankruptcy Trustees to claw back assets that are moved prior to bankruptcy. Effective from 31st May 2006, amendments to the Bankruptcy Act gave greater power to the trustee to recover property owned by a spouse or a family trust, in circumstances where the bankrupt wither previously owned the property or substantially funded the acquisition of that property.

The changed include:

1. Voiding a transfer of property in circumstances where the party receiving the property from the (soon-to-be) bankrupt should or should reasonably have inferred that the bankrupt’s main purpose in making the transfer was to defeat creditors; and
2. Giving the trustee a right to recover property from a third-party where the (soon to be) bankrupt has transferred property for consideration to a transferee, but directs that the consideration be paid to the third-party.

In such circumstances, the legislation deems that the property was transferred from the bankrupt to the third-party, and allows the trustee to recover the consideration from the third-party.

Superannuation Contributions
Effective from 27th July 2007, a further change to the law guards against bankrupts using their superannuation funds to avoid creditors. Under the changes, a creditor can claw back superannuation contributions made by a person for the purpose of defeating a creditor’s claim, if that person later becomes bankrupt.

In conclusion while bankruptcy provides relatively comprehensive protection from creditors, being declared bankrupt can have serious consequences, especially in terms of your ability to obtain future credit. Anyone considering filing for bankruptcy should weigh the above factors and speak at length with their financial advisor.

 

Disclaimer: This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in this article is for guidance only and should not be relied upon without obtaining professional advice having regard to your specific circumstances.
“Liability limited by a scheme approved under Professional Standards Legislation”