Protect yourself against bankruptcy

With bankruptcies on the rise, DGI Founder and CEO Dominique Grubisa explains how with seeking help early and carefully structuring your finances, You can avoid becoming any one of the over 32,000 personal insolvencies in 2017-18, with bankruptcies accounting for 16,811 of them alone in Australia.

Almost no-one sets out in life with the intention of going bankrupt.

With the exception of a few charlatans, people will generally do anything they can to avoid the humiliation of having their assets liquidated and their credit rating ruined. And yet Australia is now in the grip of something of a bankruptcy epidemic.

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Rates of personal insolvencies have risen consistently since the GFC, with more than 32,000 individuals being declaring in the 2018 financial year according to a recent report by data registry and analytics business, illion.

It’s a startling figure and one that is even more alarming when you drill down into who has been affected. The most highly represented group tended to be young families who simply couldn’t meet the pressures of paying their bills.

What’s behind the trend? The illion report found rising household debt, low wages and falling house prices had combined to place enormous stress on people. On top of this, on average, Australian households owe twice what they make each year.

Mortgage stress – where a household pays more than 30 percent of its income on housing – now affects one-third of Australians, and that’s with interest rates at record lows. Imagine what the impact of a rate rise would be.

Few people make the decision to go bankrupt lightly; they do it because they feel there’s no other option and the idea of ending the struggle to pay major debts is appealing.

However, there’s a high cost.

Declaring Bankruptcy Cons

Here are some potential negative outcomes of filing for bankruptcy.

A bankruptcy lasts three years but will be on your credit record for five years. This also means that a Trustee will be appointed to manage your financial affairs, decide how much of your wages you keep if your income exceeds the prescribed income threshold, and if you can or cannot travel overseas.

Your financial situation is audited annually for three years and the bankruptcy period can be extended by order of that Trustee, and any secured loans such as mortgages and car loans are not an extension of the period of bankruptcy from 3 years to 8 years, can be initiated by the trustee in bankruptcy under specific circumstances, and any shortfalls will become part of the bankruptcy. Any extension is reviewable by the Inspector General in Bankruptcy.

On top of all that,  in the future you will struggle to borrow any money or get any credit, any unprotected property it can be seized, you can not work as a company director, and any future earnings could be reduced from the reputational damage.

If there’s one take-away from all that, it’s that bankruptcy should be avoided wherever possible.

What can you do to reduce financial risk and ensure your financial future is healthy?

1) Get good financial advice

The best way to avoid financial trouble in the long run is to start out on the right foot. It can pay to get professional advice about strategies for saving, building wealth, and reducing your mortgage burden.

If you do run into trouble, there’s no need to do it alone. Seek professional advice on the alternatives to bankruptcy such as debt agreements and personal insolvency agreements.

While these options still require you to keep up repayments to meet debt agreements, they are nowhere near as restrictive as bankruptcy. You can still earn pay rises and travel overseas and may not have assets seized.

2) Approach your creditors if you’re in trouble

Almost everyone from time to time has cash flow problems. Even major businesses. The National Credit Code is a set of rules and regulations that apply to lenders that are designed to make life easier for consumers.

The code stipulates that lenders are obliged to enter into hardship arrangements with you if you inform them of your difficulties and make an agreement to repay.

You may also be able to reduce the amount you are required to repay. Common sense applies here – pursuing legal action against you is a creditor’s last resort. They’d rather get something from you than spend money on solicitors only to get a reduced sum.

3) Protect your assets

For secured debts, like a mortgage, the lender can repossess your asset – your home. But if your debts are unsecured, for example credit card debt, the creditor can obtain a court judgement against you ordering you to pay.

One of the smartest options is to protect your assets by setting up a trust and assigning all your assets to a trustee of your choosing so that in effect you own nothing of value. Depending on how this is set up, it could mean your assets remain protected in the event of bankruptcy.

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