Bankruptcy can be a very daunting option to consider and more often than not our firm encounters individuals who, rather than facing bankruptcy head on (and reaching out for help), will continue to try and ‘dig themselves out of the hole’.
In doing so, these individuals will likely subject themselves to further mental and financial distress, which could have been avoided by just reaching out.
Below I have set out a brief summary of some of the common queries we receive from distressed individuals considering bankruptcy.
How do I become a bankrupt?
There are two ways in which you may become a bankrupt.
Firstly, you may voluntarily petition yourself to become a bankrupt (known as a ‘Debtor’s Petition’), or a creditor may petition to make you a bankrupt (subject to you owing them $10,000 or more that you cannot repay) (known as a ‘Creditor’s Petition’).
The benefit to a Debtor’s Petition, apart from being in control to some degree, is that you can nominate a registered trustee to manage your bankrupt estate, whereas in a Creditor’s Petition, the petitioning creditor has the right to nominate the registered trustee of their choosing to manage your bankrupt estate.
In either case, should a registered trustee fail to be nominated, the Official Trustee at the Australian Financial Security Authority (‘AFSA’) will act as the trustee in your bankrupt estate.
Once a bankruptcy commences, there is no difference in terms of how the process is conducted, be it by a trustee that you nominate via a Debtor’s Petiton, or trustee nominated by a creditor or by the Official Trustee.
Further details regarding the petitioning of a bankrupt can be found below:
What happens to my assets upon becoming bankrupt?
Once you become a bankrupt, all divisible assets within your bankrupt estate will vest with you bankruptcy trustee. These include, but are not limited to:
- Motor vehicles (subject to its current market value exceeding the statutory threshold amount – currently $8,150);
- Real estate (your equitable interest);
- Cash or money in bank accounts (although sufficient funds for modest living expenses will often not be claimed by a bankruptcy trustee);
- Income (if earning over a threshold amount);
- Tools of trade (subject to their current market value exceeding the statutory threshold amount – currently $3,800);
- Money owed to you; and
- Certain monies received during bankruptcy (including inheritance, prizes, lottery winnings and gifts of money).
Any assets which vest with your bankruptcy trustee will be realised for the benefit of creditors and to also cover the costs of administering your bankruptcy.
Further information in relation to assets which can be taken and sold in bankruptcy is available on the AFSA website.
What happens to my income during bankruptcy?
During your bankruptcy, your bankruptcy trustee will monitor your income earned.
Should your after-tax income exceed the threshold amount, you may have to make compulsory payments to your bankruptcy trustee (‘Compulsory Income Payments’).
Compulsory Income Payments are:
- 50% of the amount you earn above the income threshold amount (updated bi-annually).
- Paid by you to the bankruptcy trustee.
- Calculated by your bankruptcy trustee to determine the amount you need to pay, if any.
Compulsory Income Payments are realised for the benefit of creditors and to also cover the costs of administering your bankruptcy.
Further information in relation to your income and employment is available on the AFSA website.
Greg Quin from our office also wrote this article dealing with the income contribution regime.
What happens to my debts upon becoming bankrupt?
The majority of your unsecured pre-bankruptcy debts will be addressed (and extinguished) by your bankruptcy.
Examples of pre-bankruptcy debts which are addressed (and extinguished) by bankruptcy include:
- Utility debts (if the debt is not repaid, the service provider may cease supply or elect not to provide a service);
- Credit cards;
- Unsecured personal loans;
- Tax debts;
- Mechanic and storage debts (if the debt is not repaid and the assets are still in the possession of the mechanic or storage facility, a ‘lien’ will be enforceable by the creditor until payment is received);
- Overdrawn accounts; and
- Trade creditors.
There are, however, pre-bankruptcy debts which will continue to exist (until payment) post-bankruptcy. Examples include:
- House mortgage (if house retained by bankrupt);
- Chattel mortgages / Hire-purchase agreements (if asset retained by bankrupt);
- Court imposed fines and penalties;
- Government student loans (HECS / HELP fees);
- Council and local government rates;
- Unliquidated debts; and
- Child support / child maintenance / spousal maintenance.
The above lists are in no way exhaustive and further information detailing which of your debts are covered in bankruptcy can be found on the AFSA website.
It is important to note that any debts incurred after the commencement of your bankruptcy are not addressed within any current bankruptcy. As such, these debts will continue to exist past the finalisation of you bankruptcy.
What can and can’t I do during my bankruptcy?
During the period in which you are a bankrupt, you will be unable to:
- Be a director of a company;
- Apply for credit over a set amount (without advising the lender that you are a bankrupt); and
- Travel overseas (without the permission of your bankruptcy trustee).
For further information regarding the consequences of bankruptcy can be found on the AFSA website.
How will bankruptcy affect my ability to obtain credit in the future?
Your credit file will usually only list your bankruptcy for a period of five years from the date in which you become bankrupt, or two years from when you were discharged from bankruptcy (whichever is later).
To enable you to obtain the best possible credit score post-bankruptcy, you should ensure that, moving forward, you pay any bills on time, avoid any unnecessary debts, and pay back any loans quickly.
It should be noted, however, that once you become bankrupt, your name and details will be permanently listed on the National Insolvency Index.
For further information please see the AFSA website.
If you or your client are considering bankruptcy or would just like to chat regarding potential options, please contact our office to arrange an obligation free meeting with our staff.
About the author
Benjamin Mitchell is a Senior Insolvency Accountant at HLB Mann Judd Insolvency WA. Benjamin assists the Partners with the many Corporate and Personal insolvency appointments managed by the HLB Insolvency team.
If you have any queries about insolvency matters, please feel free to contact the team on 08 9215 7900.