Published 4:22 am 11 Aug 2020
Unfortunately, bankruptcy numbers in Australia are likely to rise due to the economic fallout from the COVID-19 pandemic. Here, DG Institute Founder Dominique Grubisa outlines the key things you need to know about bankruptcy.
What is bankruptcy?
- How to declare bankruptcy
- What happens when you are declared bankrupt
- Consequences of bankruptcy in Australia
- Alternative options to bankruptcy
- Bankruptcy advice
What it means to be bankrupt
Bankruptcy is a legal term. If you are declared bankrupt, it has been formally declared by the Australia Financial Security Authority (AFSA) and/or a court that you are unable to pay your debts.
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It means you no longer have to repay most of your debts, including:
- personal loans,
- credit cards
- utility bills (electricity, gas, phone, internet)
- unpaid rent
- car loans
- hire purchase agreements
- your share of any joint debt you may have with a partner
However, certain specified assets may be seized and sold and income contributions may be payable over a threshold amount to help repay some of the debts you owe. If you have secured assets under finance, there may be circumstances where you can retain those assets in bankruptcy and continue to make repayments and the assets will not necessarily be sold by the secured creditor.
It’s important to understand that being declared bankrupt doesn’t protect you from some debts, including:
- child support
- court penalties and fines
- government student loans (HECS and HELP)
How long does bankruptcy last in Australia?
Bankruptcy in Australia lasts for three years. The date bankruptcy ends depends upon whether you voluntarily apply for bankruptcy or a creditor applies to make you bankrupt.
If you voluntarily apply for bankruptcy to the AFSA, your bankruptcy will end three years and one day after your application is accepted.
If one or more of your creditors applies to the Courts to have you declared bankrupt, your bankruptcy will end three years and one day after the AFSA accepts your statement of affairs. This is a document that outlines your financial situation and other personal details.
How to declare bankruptcy
You can either:
- voluntarily apply for bankruptcy to AFSA
- a creditor can apply to have you declared bankrupt via a court process.
There is no fee to voluntarily apply for bankruptcy, and you don’t need to meet any minimum debt thresholds. You will be declared bankrupt by AFSA if you meet the following two requirements:
1) you are unable to pay your debts when they are due. The technical term for this is that you are ‘insolvent’.
2) you currently reside in Australia, or you have either a residence or a business registered in Australia.
If you don’t voluntarily apply for bankruptcy, a creditor can apply to make you bankrupt if you owe them more than $20,000 (at the time of writing during temporary COVID amendments to the laws although the threshold may return to $5,000 in due course) and the debt is less than six years old.
Your creditor/s (or their legal representative) must:
1) get a court judgment to verify the debt
2) apply for a bankruptcy notice with AFSA (this notice will give you six months to repay your debt/s – at the time of writing during temporary COVID amendments – however the repayment period may revert to 21 days in due course)
3) arrange for you to be served with the bankruptcy notice (if you fail to repay your outstanding debt/s)
4) file a creditor’s petition with a court. If the court accepts this petition, they will grant a sequestration order that legally makes you bankrupt.
What happens when you are declared bankrupt
If you are declared bankrupt, your name will immediately and permanently be placed on the National Personal Insolvency Index. Any one individual or organisation can conduct a search of the Index if they pay a fee of just $15.
If you are declared bankrupt, you must also provide details of all your debts, income, assets and any other information requested by a registered bankruptcy trustee. If you don’t appoint a bankruptcy trustee or your petitioning creditor does not nominate one, AFSA will become the trustee.
Your bankruptcy trustee may immediately take possession of certain assets (although there are many assets such as household items that are exempt from seizure and sale by a trustee) to the end of selling those assets seized to raise money to repay creditors. It is the trustee’s job to try and achieve a fair outcome for all parties involved, including your creditors.
You must keep your trustee informed of any future changes to your situation while you are an undischarged bankrupt.
Consequences of bankruptcy in Australia
Bankruptcy has serious consequences. It impacts (or potentially impacts):
- certain assets you own
- your partner’s assets in circumstances where you have helped pay for those assets
- your ability to borrow money
- the type of work you can do
- how you spend your income to the extent that it exceeds the prescribed threshold (including your super)
- your self-managed super fund
- your tax situation
- your ability to travel overseas
We’ll now look at each of these potential consequences in turn.
How bankruptcy affects your assets
Your bankruptcy trustee has the right to sell your assets, including your home, to help repay your creditors. You are only allowed to keep:
- essential household items (like a fridge and washing machine)
- tools that you use to earn an income up to a total threshold value of $3,800
- motor vehicle up to the value of $8,000
The trustee will prioritise making payments from the sales proceeds to any secured creditors. A secured creditor has one of your assets as security for the amount you owe—for example, the title to your motor vehicle.
If you have unsecured debts, they are the trustee’s lowest priority to repay, and they will most likely be written off. Examples of unsecured debts are credit cards and utility bills (such as gas, electricity and mobile phone accounts). However, you may find yourself cut off from these essential services, and it may be difficult for you to find a new provider.
Your bankruptcy won’t affect any unclaimed super that you have because Australia’s superannuation legislation protects it from creditor claims. It also won’t affect any lump sum super payments you receive after you are declared bankrupt.
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How bankruptcy affects your partner’s assets
Your partner’s assets may also be affected by your bankruptcy. The trustee may also be able to sell them to repay your debts in any of the following situations:
- If you and your partner jointly own assets, your bankruptcy trustee can claim your share and force a sale of the relevant asset.
- They own assets that you helped to pay for (such as a home or car), even if these assets aren’t registered in your name – if it is deemed that you contributed to their acquisition or maintenance eg you helped with mortgage payments. If you previously owned these assets and transferred them into your partner’s name, the trustee will be likely to investigate the circumstances of the transfer, including the date it happened and when your relationship started.
How bankruptcy affects your credit rating
It is considered to be a crime to apply for credit above the prescribed limit without disclosing bankruptcy, and if you do so, your trustee can lodge an objection against the loan. Many lenders simply won’t approve you for credit if you are bankrupt (or if they do, you’ll be charged very high-interest rates).
It’s important to understand too that every time you apply for credit, a lender will look at your credit rating. This rating is compiled by credit reporting agencies. Even if you are a discharged bankrupt after three years, your bankruptcy will be recorded on your credit file for a further two years from the date your bankruptcy ends.
How bankruptcy can affect your employment
Bankruptcy can affect your employment if:
- It restricts you from getting a professional licence that you need to operate in your chosen profession.
- You’re a company director or manager (unless you gain formal permission from a court).
- You’re a member of parliament. You cannot be a politicianif you’re an undischarged bankrupt.
- You’re a sole trader. If you want to run a business as a sole trader while you’re bankrupt, you must either:
- inform all your clients that you are currently bankrupt, or
- Include your full name in your business name so that people can search for your details on the National Personal Insolvency Index.
How bankruptcy can affect how you spend your income
If you earn over certain threshold amounts while you are an undischarged bankrupt, you’ll be required to continue paying half of the income that exceeds the threshold to your creditors.
The bankruptcy income threshold amount varies depending on how many dependents you have, but it currently starts at an after-tax income of $59,031.70 for a person with no dependants. This amount progressively rises to $80, 283.11 for a person with four or more dependants.
It’s important to understand that if you receive a super income (pension) stream while you are bankrupt, it will be regarded as income, and it will count towards your threshold limit.
How bankruptcy can affect your self-managed super fund
If you have a self-managed super fund (SMSF), it is a legal requirement for you to be a trustee of your fund. However, you cannot legally be an SMSF trustee if you are a registered bankrupt. You must notify the ATO within 28 days of being declared bankrupt and remove yourself as a trustee of the fund. This will mean that either:
- your SMSF will need to be wound up if you are the only member, or
- you will need to roll over all of your super to another public super fund so that you are no longer a member of your SMSF (if you have other members who wish to remain in your SMSF).
How bankruptcy can affect your tax situation
After you become bankrupt, you still have to file a tax return if you earn taxable income. You must keep your trustee informed of any notices of assessment that you receive from the ATO (including any tax refunds). As part of their arrangements with your creditor/s, they may claim some or all of any refund that you may receive.
The ATO may also keep any refund that you may be due in order to repay any outstanding tax or HECS debts that you may have.
How bankruptcy can affect your overseas travel plans
You must ask your trustee for permission to travel overseas, and you must get their consent in writing. If you don’t, it is a criminal offence. Your trustee may also refuse your request.
Alternative options to bankruptcy
Declaring bankruptcy should be a last resort. You should seek professional advice before declaring bankruptcy as you may have the following alternative options:
- Informal debt negotiation
- temporary debt protection
- entering into a debt agreement
- entering into a personal insolvency agreement
We’ll now look at each of these options (bankruptcy solutions) in turn.
Informal Debt Negotiation
This is basically going to creditors one by one and negotiating an arrangement – this may be varying loans or repayments, payment plans or lump sum reduced pay-outs for example.
Temporary debt protection
If you want to stop creditors harassing you, temporary debt protection is an option to consider. Temporary debt protection gives you protection for six months against being pursued by unsecured creditors. A temporary debt protection order doesn’t give you any protection from secured creditors.
However, applying for temporary debt protection can give you time to get your affairs in order, rather than declaring bankruptcy straight away.
A debt agreement sets out a formal partial debt repayment arrangement over time with your creditors that they will accept and that you can afford. Once you make all the repayments in your debt agreement, the remaining debt is written off. A debt agreement can be better for a creditor than receiving no payment at all.
It’s important to understand that debt agreements are legally binding. If you don’t make your repayments, bankruptcy will be the next step. You should thoroughly evaluate the impact of a debt agreement on both you and your family before you enter into one.
Personal insolvency agreement
A personal insolvency agreement involves a registered trustee being appointed to take control of all your assets and making either a partial or full repayment offer to each of your creditors. Each offer could include a lump sum or instalment repayments.
Seeking advice from a debt specialist
If you’re having debt problems, it’s important to seek advice from a debt specialist before you make any decisions. They will take the time to understand your individual situation and help you to evaluate your options. As we’ve outlined in this article, the consequences of bankruptcy can be severe. It should be a last resort or as the result of a creditor actioning it and is not a “get out of jail free” card.
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