Bankruptcy is a legal process whereby the debtors give up their assets and control of their finances in exchange for protection from legal action by their creditors and has important ramifications for both creditors and debtors. There are strict rules when it comes to declaring yourself bankrupt and a bankruptcy case may only be heard by the Federal Court or the Federal Magistrates Court.
Generally, a bankruptcy lasts a minimum of three years if you consistently meet your obligations, although there are cases when this period may be extended to eight years.
There are two ways in which a person or business may be made bankrupt and these are: voluntary, by completing and filing the necessary paperwork; or involuntary, by order of a court usually at the instigation of a creditor who is owed $2000 or more.
Is bankruptcy the right option?
As a debtor, you can only consider filing for bankruptcy when you’ve exhausted all other means or options first. When you file for bankruptcy, all your details get recorded on a government database known as the National Personal Insolvency Index or NPII. Creditors will always consult the NPII first before lending anyone money or approving credit card applications.
How does the court declare someone bankrupt?
Anyone who claims that you owe them money can go to a Federal Court or Federal Magistrates Court to declare you bankrupt. This application is often called a Creditor’s Petition and a copy will be handed to you. This copy will include the date and time for you to attend court so you can prove that you have committed an act of bankruptcy. An example is when you have failed to follow the instructions in a bankruptcy notice issued by the Insolvency and Trustee Service Australia (ITSA). When this happens, your main instruction is that you pay the amount of a judgment debt within the time specified in the notice.
Other things the Court will take into consideration:
- You owe the person money
- The amount specified in the bankruptcy notice is correct
- You are able to pay your debts.
If you disagree to being made bankrupt, you will need to file the necessary paperwork and submit them to the Court at least three days before the hearing.
How do you declare bankruptcy?
You will only need a debtor’s petition, statement of affairs, and acknowledgement that you have received and read over the ‘prescribed information’. These must be lodged with a registered trustee or directly with the ITSA. Although free, registered trustees are entitled to remuneration. The fees can be taken out of the proceeds of a property sale as long as there is consent from the creditors.
What are the consequences of bankruptcy?
Once you are bankrupt, your unsecured creditors will stop contacting you. This includes any legal action taken against you in relation to your debts. But this will only happen if you list all of your unsecured creditors in your statement of affairs. Unsecured debtors will not be able to continue debt recovery actions against you, but secured creditors may be able to seize your property if you don’t meet your loan payments. But you are still liable for the following:
- HECS payments
- Court fines/penalties
- Child support
- Council and water rates
- Unliquidated damages from accidents e.g. car accidents may be an exemption
- Student assistance/supplement loans and HELP debts
What happens to your assets?
You assets can be retained because they are protected property and some of them can even be recovered by your trustee and sold. What you may keep, however, are:
- Most of your ordinary household or personal items
- Tools of trade used to earn an income up to a set limit
- Vehicles (e.g. cars or motorbikes) up to a set limit
- Most funds in a complying superannuation fund
- Life insurance policies
- Compensation for a personal injury
- Centrelink payments are also protected
Some of the assets which your trustee can recover include:
- Houses; apartments; land; business and any other real property
- Motor vehicles which are not exempt
- Shares and other investments
- Any tax refund for income earned before you became a bankrupt
- Proceeds from a deceased estate where the person died before or during your bankruptcy
- Lottery winnings
What are your rights and responsibilities once bankrupt?
You can never borrow money or purchase anything on credit. This is an offence unless you inform the people you are dealing with that you are an undischarged bankrupt.
You can still operate a business while bankrupt, but you will always have to disclose your bankrupt status. You can also not be the director of the company or involved in management without the permission of the Court.
You are required to notify your trustee of all the changes you have made to your name or address. You will also need to obtain a written approval of the trustee if you are going to travel overseas.
Will bankruptcy affect your credit report?
According to ITSA, when you become a bankrupt your name will be on the public record (NPII) forever. Your name will be on a commercial credit reference for 7 years even if your bankruptcy has been discharged. Lenders may limit your ability to borrow money or buy things on credit. You may also find it hard to rent a property, or get any utilities connected without paying a bond and some banks will not let you operate an account or will restrict how you can use your account. If you have any queries regarding your credit report you should contact Veda Advantage.
Other possibilities to declaring bankruptcy
- Informal agreement. You may be able to reach an agreement with your creditors to repay your debts over a feasible time period if you have an income. This can be private and documented, but not necessarily legally binding.
- Formal agreement. This is legally binding for you and your creditors. You will need a reliable source of income or assets to exchange with your creditors so that they will write off your debt.