Bankruptcy is a way of clearing your debts and gaining a fresh start.
It’s an effective form of debt relief and in some cases, it’s the best thing you could do. For some people however, there are alternatives, so in this article we’ll look at:
- What’s involved in a bankruptcy
- What the consequences of going bankrupt are
- How to avoid the pitfalls
- Some alternatives to bankruptcy
What’s involved in a Bankruptcy?
Under a bankruptcy, all of your eligible debts are cleared. The only debts that can’t be cleared by a bankruptcy are court imposed fines, HECS debt and child support payments. These will need to be paid separately.
In order to go bankrupt, you need to submit a range of legal documents stating your financial position, which can be prepared for you by a debt administrator if needed. Once these documents have been accepted and approved by the Insolvency Trustee Services Australia (a Federal Government Agency) you will be issued a bankruptcy number and your financial affairs will be monitored by a bankruptcy trustee until you are discharged (which usually happens after 3 years).
During this time, you will also be subject to a range of restrictions which we’ll now explore in more detail.
What are the consequences of going bankrupt?
Bankruptcy can affect your financial affairs and lifestyle in various ways. These effects vary depending on your income, assets and number of dependents.
The below restrictions apply until you’re discharged.
When you go bankrupt, you can lose major assets such as a home, car or other vehicles, which may be taken to help repay your debts. Your trustee will be allowed to sell your home anytime within a 10 year period as part of this process.
With regards to vehicles, you will be allowed to keep a car upto the value of $7050 if you own it outright. If you don’t own it outright, your trustee will look to see if a sale will result in at least $7050 profit, which will be returned to you to buy a new car and anything above this amount will be paid towards your debts.
You can keep normal household items such as a TV, fridge and furniture but any item of extraordinary value, such as an expensive painting or jewellery may be taken.
Once you’re bankrupt, you can only earn a certain net income each week without making a contribution towards your debts. This amount varies according to the table below. For every dollar you earn above the threshold, half will be taken to repay your creditors.
Number of Dependents Income Limit
0 $47, 693.10
2 $60, 570.24
3 $62, 594.89
Over 4 $64,862.62
Whilst bankrupt, you can only hold upto $1000 in savings over an extended period of time. You may temporarily exceed this amount (for instance after a pay check has been received) but this is the base level of savings allowed. Anything above that can be taken by your trustee to repay your creditors.
During your bankruptcy, you will need to apply for permission to leave the country and this will usually only be granted for family emergencies or essential work travel (not usually for holidays).
Your trustee can refuse permission if they believe the travel will not be in the interests of your creditors.
Whilst bankrupt, you will not be allowed to be the director of a company. You can however operate as a sole trader or as part of a partnership, although your own name will need to be included in the business name. e.g. John Smith trading as Sparkles Pet Care.
When you go bankrupt, you will be prevented from entering certain professions. It’s best to consult your industry body to determine if this is the case for your industry, but some professions that are affected by this restriction include Accountants, Real Estate Principals, Security Guards, Magistrates, Police Officers and MPs.
How to avoid the pitfalls of bankruptcy
Bankruptcy is an effective way to clear your debts and provided you act in a transparent and fair way, you have nothing to be worried about. However, every year, dozens of people are prosecuted for acting dishonestly prior to or during their bankruptcy, so it’s important to be aware of how you should act.
Below are some key principles to follow if you are considering a bankruptcy.
Avoid Spending Sprees. If you are considering bankruptcy it’s important to not go on any outlandish spending sprees using your credit cards or a personal loan, knowing the debt will never be repaid.
Don’t try to shift assets around in a way that could be seen as cheating your creditors. Selling the family home to your uncle for a few thousand dollars, or transferring a car in your name to a family friend just before a bankruptcy may fall into this category. When you go bankrupt, all your major transactions over the last 5 years will be looked at. Any that are fraudulent or seem designed to keep money away from your creditors can be reversed and you could find yourself facing prosecution.
Make sure you comply with the restrictions placed by your trustee. Once bankrupt, make sure you comply with all the restrictions placed on you by your trustee (including the major ones listed earlier in this article). If you try to undertake work you’re not entitled to or don’t declare your bankrupt status when you should, you could face prosecution.
If you follow the above principles and act fairly and transparently towards your creditors, your bankruptcy should go much more smoothly.
Alternatives to bankruptcy
Whilst we’ve been talking about bankruptcy, it’s important to note at this point that that there are some alternatives that may be more suitable to you. For instance, under a Part 9 Debt Agreement or Part 10 Insolvency Agreement, you will make repayments towards your debts, but you will avoid many of the restrictions that occur with a bankruptcy. Click on the links for more information on each of these options.
If you’re struggling with debt, bankruptcy can be a very effective way to break free. In some cases, it may even be your only real option.
To discuss the full range of options available to you, please contact one of our friendly and experienced consultants on 1300 802 905.