Bankruptcy: Release from debts - clean start
25 August 2016
Bankruptcy should be considered if you are experiencing difficulty paying your debts. It is vital that a bankrupt cooperates with his/her Trustee to avoid any further penalties or risk the period of bankruptcy being extended for up to 8 years.
How do I become bankrupt? There are 2 ways that a person can become bankrupt:
- Involuntary bankruptcy - A creditor may commence legal proceedings against an individual which ultimately result in a Court making a Sequestration Order; or
- Voluntary bankruptcy - A person may submit a Debtor's Petition to declare themselves bankrupt.
How long does bankruptcy last?
Bankruptcy commences on the date that a Sequestration Order is made or a Debtor's Petition is accepted by the Australian Financial Security Authority (AFSA). A bankrupt is required to complete and lodge with AFSA a document known as a Statement of Affairs that details assets and creditors.
For Debtor's Petitions the usual bankruptcy period is 3 years and 1 day, which commences from the date the Statement of Affairs is accepted by AFSA. You will be automatically discharged from bankruptcy after this period unless your Trustee has objected to your discharge which may extend the bankruptcy period to up to 8 years.
For Sequestration Orders, while you are bankrupt from the date of the order and the periods are the same, the countdown of the period to your discharge does not start until your Statement of Affairs is lodged with and accepted by AFSA.
- Upload any information as relevant to a FEG claim and/or requested by the Department including invoices or creditor reports;
- View all cases whether current or archived; and
- View cases for which an IP is appointed Liquidator or Trustee but not providing verification services.
Will I lose everything?
A bankrupt is entitled to keep certain assets up to a specified value which is indexed annually by AFSA. This is known as Protected Property and includes:
- Ordinary household goods
- Tools of trade used to earn an income, up to an indexed amount – currently $3,750
- Vehicles – with equity of $7,700 (current indexed amount) or less (equity refers to the market value of the vehicle less any amounts owing against the vehicle).
Other assets, including your house, may be sold by your Trustee. In determining whether to sell your house, your Trustee will determine the equity available – i.e. the market value of your house less any amounts owing to a secured creditor (being those creditors that hold a mortgage over your property). The property, or your share in the property, may be sold by your Trustee to related parties at market value if that is considered the best strategy to realise the equity in the property.
How will bankruptcy affect my work and income?
- If your income exceeds a certain limit, you will be required to make income contributions to your Trustee. The amounts are indexed and take into consideration the number of dependants you have. Currently the threshold with no dependants is $54,518.10 after income tax;
- You cannot be the Director of a company, pursuant to Section 206B(3) of the Corporations Act 2001 a person is disqualified from managing corporations if the person is an undischarged bankrupt;
- You are prohibited from managing a corporation unless you have permission of a court;
- Certain professional and licensing organisations may suspend or cancel your membership or license and restrict or prevent you from continuing in that trade or profession which may affect your ability to earn an income; and
- You may not be able to hold certain public positions.
Release from debts
Bankruptcy provides a release from most of your unsecured debts including credit cards, personal loans, tax, and store cards.
There are some debts which are excluded from bankruptcy which you will have to continue to pay including penalties, fines, child support debts and HECS/HELP/SFSS debts.
Debts owed to secured creditors for assets such as mortgages or vehicles must also be maintained by the bankrupt during the period of bankruptcy, otherwise a secured creditor may repossess and sell the asset. Any shortfall owed to a secured creditor for an asset that has been sold will be included as a debt of your bankruptcy.
- Your Trustee may require you to surrender your Passport and you may not be able to travel overseas unless you receive written permission from your Trustee.
- Your name will be entered on the National Personal Insolvency Index (NPII) and will remain on this register.
- It may be difficult for you to obtain credit in the future as credit reporting organisations will keep a record of your bankruptcy for up to 5 years (and longer in some cases), even after you have been discharged from bankruptcy.
Bankruptcy is final and there is no changing your mind once you have lodged a Debtor's Petition or a Sequestration Order has been made against you. It is important to consider all your options before deciding to declare yourself bankrupt – there may be other options available to you depending on your circumstances. If you are experiencing personal financial difficulty and would like to take advantage of the guidance and assistance of an experienced, independent advisor, call Rodgers Reidy now for a confidential discussion in relation to your specific circumstances.
Whilst bankruptcy may be seen as a negative it must be remembered that it is an opportunity to start afresh. Yes, one loses their divisible assets, but one also gets to start afresh withhold the stress of their outstanding creditors and the often associated telephone calls seeking repayment.
AFSA - Personal Insolvency Information for Debtors
AFSA - Consequences of bankruptcy
AFSA - Indexed Amounts