Bankruptcy and You
Deciding whether or not you should apply for bankruptcy can often be a confusing and daunting task, and there is much to consider. It is integral that you understand what implications you may face and make an informed decision.
This article will explain what bankruptcy is and some of the common advantages and disadvantages of declaring bankruptcy.
It is important to note that this is for general purposes only, and we recommend involving a solicitor and financial counsellor in the preparation for declaring bankruptcy.
What is Bankruptcy?
Bankruptcy is a legal process you or your creditors can apply for which, if successful, declares that you are unable to pay your debts to creditors.
The two common methods by which someone becomes bankrupt are as follows:
Voluntary Bankruptcy – this is where you submit a Bankruptcy Form to the Australian Financial Security Authority (AFSA) to make yourself bankrupt; and
Court Sequestration Order – this is where a creditor can make you bankrupt by bringing a creditor’s petition to the court and obtaining a sequestration order, which is an order that declares you bankrupt.
Advantages to Bankruptcy
There are a lot of stereotypes surrounding being bankrupt, however there can be advantages in doing so. Some of those advantages include:
✅ Bankruptcy can essentially give you a 'fresh start' and stops most creditors from pursuing you for unpaid debts. This also means that correspondence and lawsuits surrounding debts owed to unsecured creditors, will likely also stop.
✅ There is an end date to the bankruptcy and it will not last forever. Typically, a bankruptcy will end 3 years and 1 day after the Bankruptcy Form or your statement of affairs (if bankrupt from sequestration order) is accepted by AFSA. In some circumstances this can be extended.
✅ You can still earn an income and save money during a bankruptcy.
✅ Essential household belongings of a specified value, such as furniture and effects, can be retained by you despite being bankrupt.
✅ Your superannuation is protected during the process.
✅ With permission, you can still travel overseas.
Disadvantages to Bankruptcy
Some of the key disadvantages include:
❌ It will have an impact on your credit score.
❌ If you earn over the prescribed amount, you will have to pay a certain percentage of all additional earnings to the bankruptcy trustee.
❌ Bankruptcy will not discharge fines and penalties imposed by a court.
❌ Certain debts will not be dealt with and remain outstanding, such as some tax debt, child support debt and student loan debt.
❌ During the bankruptcy, you will have to provide details of your debts, income and assets. This may be uncomfortable or time consuming for some people but is a requirement.
❌ Your assets may be sold to help pay your debts. This includes unprotected assets such as boats, caravans and houses. It also includes any “windfall gains” such as inheritance or lottery wins.
❌ The bankruptcy will be on the public record.
❌ It can impact your ability to obtain work in certain professions.
Conclusion
Bankruptcy is just one of the options available when you are faced with mounting personal debt. There are many alternative options which can be explored prior to making the decision of whether you should become bankrupt or not and you should obtain advice on those options before making the decision to enter bankruptcy.
If you need expert advice regarding the negotiation of debts or you are contemplating whether bankruptcy is an option for you, please contact us.