1. What are my options to avoid Bankruptcy?
With creditors pressing you for payment, you should consider the alternatives to bankruptcy before deciding that bankruptcy is best for you.
Alternatives to Bankruptcy
An Informal Arrangement with Creditors
If you have an income, we might be able to negotiate an informal arrangement with creditors to waive part of your debts or repay them over a period of time. There would be no publicity. Please note that an informal arrangement will only be binding on creditors who agree to it.
A Formal Agreement – Part IX Debt Agreement
If you qualify, this arrangement is binding on all creditors, even ones who are against it, can be made under Part IX of the Bankruptcy Act provided the majority vote in favour. You will need to have either a steady income, funds available from a family member, or assets to offer your creditors for such an arrangement to be acceptable. It is suggested you talk to a registered Debt Agreement Administrator (Call DebtFreedom on 1300 855 388 to learn more) and after discussion they will discuss whether an arrangement is practical. The result is a matter of public record, and bankruptcy is avoided. Fees are charged for this service.
A Formal Agreement – Part X Debt Agreement
If you don’t qualify for a Part IX Debt Agreement, a Part X Agreement is another option although it is somewhat costly.
21 day Protection Period
Not strictly speaking an alternative. However, if you are thinking about becoming bankrupt, the law allows for a 21 day period of protection from legal action taken by creditors. We can help you prepare the document for this and explain its full consequences. That will give you time to consider whether you ought to proceed with bankruptcy or opt for something better suited to your circumstances.
2. What Assets can I keep?
You can keep protected assets as listed in the Bankruptcy Act. If the assets are not in the protected class of assets, the trustee (AFSA or a registered Trustee) can sell them. Or if the assets are subject to security, the secured creditor can sell them if you are in default.
Assets include anything of value belonging to you at the date of bankruptcy together with assets acquired by you before your discharge including lottery wins, prizes of value etc. Assets also include your interest in the family home, land, money in bank accounts, vehicles exceeding the indexed amount ($8,000.00) in value, stocks and shares, antiques and other personal property of saleable value. Any interest you have or acquire during bankruptcy as a beneficiary of a deceased estate belongs to the trustee.
The assets protected by the Bankruptcy Act includes necessary household furniture, personal effects, limited tools of trade (up to $3,800.00), life insurance and superannuation policies and vehicles up to the indexed amount ($8,000.00) in value (e.g. car or motor bike).
3. Will I lose my House?
The trustee has to deal with any equity or interest you have in a property, for the benefit of your creditors. This may or may not mean that the property has to be sold. If the property is jointly owned the trustee will talk to the parties as to the options that can avoid sale. A house that is subject to a Defence Service Homes mortgage cannot be sold by the trustee without the approval of the Secretary of the Department of Veterans’ Affairs.
A secured creditor can sell your property if you are unable to meet the mortgage repayments. Any shortfall will be a debt in your bankruptcy. If a surplus exists following sale, your share of this money will be paid to your trustee.
4. Will I Lose my Car?
Once you become bankrupt, a vehicle which is used primarily as a means of transport (e.g. car or motor bike), is protected up to a certain indexed amount ($8,000.00). Where the interest in the vehicle is valued at more than the indexed amount, the trustee has an interest in the car. For example, if it is sold, the trustee will give back to you the value of the indexed amount and retain the balance for the benefit of your creditors. If the vehicle is jointly owned by two bankrupts the relevant value is double the indexed amount. If the value of your car is above the indexed amount, you should talk to your trustee about how you can keep it.
5. How Does Bankruptcy Affect my Employment?
Bankruptcy generally does not prevent you from working. However, if you are engaged in particular trades or professions there may be certain restrictions imposed by professional associations or licensing authorities. You should contact your professional association or licensing authority to confirm whether there is any effect on your membership or ability to practice a particular trade.
Your employer is not normally notified of your bankruptcy. However, the trustee can garnishee your wages if you earn above a certain indexed amount so that you have to pay income contributions into your bankrupt estate. How much you have to pay, if anything, also depends upon the number of your dependants and the amount of Child Support you pay.
The trustee can also write to your employer if you fail to provide information about your income.
It is your responsibility to lodge taxation returns for any income earned during the period of your bankruptcy.
6. What Happens to my Credit Rating?
Your name will be listed for 5 years from the commencement of your bankruptcy and only in exceptional circumstances for 7 years.
7. Should I go Bankrupt now or Should I Hang on as long as Possible?
If you have to go bankrupt, it is best to do it now and get your three years out of the way rather than hang on for one or two years before the inevitable happens. There is no point to the additional stress. You will also want your credit rating restored as soon as possible.
8. Can a Creditor Still Contact Me Insisting on Payment once I have Become Bankrupt?
No. The Bankruptcy Act prevents most creditors from recovering money from you. An exception is a secured creditor with whom you have made arrangements to retain secured property as per paragraph 6. If other creditors attempt to recover money from you, you should advise them of your bankruptcy, and if they continue to insist you should notify your trustee. If physical harassment occurs, you should contact the police.
9. How do I Become Bankrupt?
You can become bankrupt voluntarily or you can become bankrupt on the actions of a creditor. If you have considered the alternatives and have decided that voluntary bankruptcy is your best option you will need to complete the bankruptcy paperwork. We can help you with this as under certain circumstances there are severe penalties for making false statements in the paperwork.
10. Is there a Minimum Amount I Need to Owe before I can File for Bankruptcy Myself?
No. You can become bankrupt voluntarily owing any amount. On the other hand, a creditor cannot make you bankrupt unless your debts are $5,000 or more (although the Federal Government is increasing this amount temporarily to $20,000 or more because of the corona virus crisis).
11. How Long would I be Bankrupt?
The normal period of a bankruptcy is 3 years from the date the bankruptcy paperwork is filed. This period may be extended by an objection entered by the trustee although it is relatively uncommon. Your bankruptcy can be extended as follows:
To 5 years from filing the bankruptcy paperwork for the following reasons:
- making a void transfer against the trustee because of Section 120/122 of the Bankruptcy Act (undervalued transactions and preference payments).
- continuing to manage a corporation.
- engaging in misleading conduct and amount exceeds the current limits.
- failing to disclose to the trustee, a liability that existed at the date of bankruptcy.
- failing to notify a change of address or daytime telephone number.
- failing to advise the trustee of any material change to the information disclosed on bankruptcy paperwork.
- failing to attend a creditors’ meeting without written approval from the trustee.
- failing to attend an interview or examination.
- failing to disclose any beneficial interest in any property.
To 5 years from the date of returning to Australia:
- leaving Australia and not returning.
To 8 years from the date of filing bankruptcy paperwork if a bankrupt:
- making a void transfer against the trustee because of Section 121 of the Bankruptcy Act (transfers to defeat creditors).
- failing to provide details of property and income when requested.
- after the date of bankruptcy, deliberately providing false or misleading information to the trustee.
- failing to disclose detail of income or expected income.
- failing to pay contributions as assessed.
- failing to adequately explain how money was spent or assets were disposed of.
- failing to disclose to the trustee, a liability that existed at the date of bankruptcy.
- failing or refuses to sign a document when required.
- intentionally failing to disclose to the trustee, a beneficial interest in a property.
To 8 years from the date of returning to Australia:
- failing to return to Australia when requested.
12. Is my Bankruptcy Advertised?
Generally no. Your trustee will only ever advertise a meeting of creditors and that is rare.
13. Will I have to Appear in Court?
Very rarely. An example is where the trustee requires you as a witness in court.
14. What if I am Due a Tax Refund?
If the tax office is a creditor of your bankruptcy, any refund you are entitled to during the period of bankruptcy may be retained by the tax office to offset the amount owing. Tax refunds attributable to income earned by you prior to the date of your bankruptcy (irrespective of when received by you) are an asset that vests in your bankrupt estate and can be claimed by the trustee. Tax refunds attributable to income earned during your bankruptcy you can keep but they will be treated as income for income assessment purposes. After discharge, any tax debt still outstanding to the tax office which formed part of your bankruptcy cannot be recovered by the tax office. Tax refunds after discharge may be retained by you. Regardless of bankruptcy you are still responsible for lodging your income tax returns.
15. What Happens if I Transferred my House or another Asset of Value to my Spouse Prior to Bankruptcy?
Under certain circumstances, the trustee has the power to void transactions made within a period of 5 years prior to the bankruptcy and possibly longer. The trustee will investigate and consider, for example, if the consideration for the transfer was less than the market value or if the transfer was to defeat creditors. The trustee can also recover money payments to creditors within 6 months of bankruptcy if they qualify as preferences. Disposing or transferring property prior bankruptcy with the intent to defeat your creditors may be an offence under the Bankruptcy Act.
16. What Happens to my Debts after Bankruptcy?
After bankruptcy you are discharged from all provable debts. Provable debts are debts for which a claim can be made in your bankruptcy.
An unsecured debt is a debt that is not secured by any assets, e.g. your credit card, personal loans. Unsecured creditors generally do not have the right to take back the item you purchased from the funds advanced by them. They can take no further action against you to recover the debts and may lodge claims in the bankruptcy.
A secured debt is a debt secured by an asset that entitles the secured creditor to take and sell the asset if you fall behind in payments.
For example, creditors who hold security over your assets (such as mortgages, bills of sale) and creditors for hire purchase or lease agreements, can recover the property and sell it. They are then entitled to lodge a claim for any loss incurred. If you wish to continue to use these assets you will need to negotiate with the secured creditors and make regular payments to these creditors. If the value of the asset exceeds the debt secured by the asset, the trustee may sell the asset with certain exceptions.
Debts Not Covered by Bankruptcy
Very important exceptions are fines for breaches of the law, debts arising from fraud, maintenance payments and Child Support. Debts due to the Department of Social Security (Centrelink) may or may not be covered by bankruptcy and should be confirmed with Centrelink. Bankruptcy does not protect you from payment of these debts, and you are still liable for these. The other exceptions are secured creditors (details above), accumulated HECS (Higher Education Contribution Scheme) debts which had been raised before your bankruptcy and Student Supplement Loans – Ask the Australian Tax Office if you need more information.
If you have unpaid accounts relating to housing or essential services such as electricity, telephone or gas the supplier may require payment of the account or a bond for the service to be maintained.
17. What Happens if Someone has Guaranteed some of my Debts?
Bankruptcy does not affect the rights of a creditor to claim under a guarantee. The creditor is entitled to recover payment from the guarantor. Once payment has been made, the guarantor steps in the shoes of the creditor and is able to lodge a claim in your bankruptcy for the debt paid.
18. Someone else also signed the Loan Agreement. Will they have to pay if I Declare myself Bankrupt?
Generally, yes. They will still have a liability for the total amount outstanding on all debts incurred in joint names.
19. What about Debts Incurred just before Bankruptcy?
If you are already insolvent, that is you cannot pay your debts, you should not incur further credit because if you become bankrupt it may be an offence under the Bankruptcy Act, and you may be prosecuted.
20. What Happens to a Debt I Forgot about at the Time of Becoming Bankrupt?
If you forgot about a debt and remember it later, you should contact your trustee as soon as possible so that it may be added to your list of creditors. Failure to disclose debts could result in an extension of your bankruptcy.
21. What about Debts Incurred after Bankruptcy?
If you become bankrupt you will be responsible for any debts incurred by you after the date of your bankruptcy.
22. Can I Continue to Use my Credit Cards after Bankruptcy?
It is a matter for the issuing bank or finance company as to whether they are prepared to continue to extend credit to you. All creditors at the date of bankruptcy should be listed on your bankruptcy paperwork and they will be notified of your bankruptcy. It is an offence for you to incur credit over a set limit from any particular creditor without disclosing to creditor person you are dealing with that you are an undischarged bankrupt. Please ring us as to find out the limit as it is indexed and so changes over time.
23. If I Had a Car Accident and the Owner of the Other Car is asking Me for the Repair Costs, will the Debt be Covered by Bankruptcy?
The debt is covered by bankruptcy only if, for example, a court judgment has been obtained or you agreed to the amount required to repair the car prior to bankruptcy.
24. Can I have a Bank or Cheque Account?
In most cases, yes, with the agreement of the financial institution.
25. Can I lose my Job if the Trustee Garnishees my Wages?
A trustee garnisheeing a bankrupt’s wages is rare. Even so, it is an offence for an employer to dismiss a bankrupt because the trustee has garnisheed his or her wages.
26. What if I leave my Employment during Bankruptcy?
Should you terminate your employment during the period of your bankruptcy, the trustee will treat the lump sum termination payments as wages and assess how much you have to pay into your bankruptcy.
27. What Happens to any Assets that have not been Sold by the Trustee at the Date of my Discharge?
Your discharge from bankruptcy does not return those assets to you. The trustee may sell such assets after the date of your discharge.
28. What are my Rights and Responsibilities Once Bankrupt?
The following is a number of the more common questions raised about this.
When borrowing money, purchasing goods on credit or incurring credit in any way, it is an offence to borrow over an indexed amount unless you inform the person you are dealing with that you are an undischarged bankrupt.
Operating a Business
You can still operate a business while bankrupt. There are some requirements regarding disclosure. The simplest way is for your name to be part of your trading name. You cannot be a director of a company or be involved in its management without the permission of the Court (Corporations Law).
Change of Name, Address and Overseas Travel
You are required to notify your trustee of all changes of name and/or address. If you wish to travel overseas you must obtain the permission of the court if you are required to make compulsory contributions otherwise you require the written approval of the trustee administering your estate.
29. When are the Creditors Notified of my Bankruptcy?
The creditors are notified in writing as soon as possible by the trustee and informed of the assets and liabilities disclosed by you on your bankruptcy paperwork.
A creditor has the right to on sell your debt to another agency. Creditors have a tendency to onsell debts in bulk and do not always inform the purchasing agency which debts are covered by an existing bankruptcy or other formal arrangement under the Bankruptcy Act. As a consequence, bankrupts, discharged bankrupts and/or debtors will receive a letter of demand or telephone call requiring payment from the purchasing agency. Should this occur, it is important that the purchasing agency is provided with your bankruptcy or formal arrangement details (ie Part X, Part IX) and/or have the purchasing agency contact the originating creditor to confirm the information.
30. Are there Offences Related to Bankruptcy?
Yes, there are a number although most bankrupts are not affected. The following is some of the more common that require attention:
- disposing of property before bankruptcy with intent to defeat your creditors.
- failure to disclose assets.
- the deliberate obtaining of credit when you know you cannot pay.
- gambling and speculation which results in bankruptcy.
- incurring debts during bankruptcy for over a set limit* without disclosing that you are bankrupt.
- operating a business under an assumed name, without advising your bankruptcy.
- leaving Australia without the trustee’s permission.
The maximum penalty for offences varies from 6 months to 5 years’ imprisonment upon conviction.
31. What Happens to my ABN or can I Apply for an ABN now that I am Bankrupt?
If you have an existing ABN when you become bankrupt, the trustee will advise the Deputy Commissioner of Taxation of your bankruptcy. The Tax Office will note the date of your bankruptcy against the ABN. If you wish to continue to use the ABN you should contact the tax office. Regardless of bankruptcy you will still be responsible for lodging your BAS Statement.
There is no restriction on applying for an ABN after becoming a bankrupt.
32. I have been Served with a Summons to Attend Court for an Oral Examination. Do I still Have to Attend now that I am Bankrupt?
Yes. However, if you notify the creditor or its solicitors of your bankruptcy, they might say that you don’t have to attend anymore.