1. What Are Your Options for Avoiding Bankruptcy?
With creditors pressing you for payment, bankruptcy may seem attractive. However, you should consider other financial options before deciding bankruptcy is right for you.
Alternatives to Bankruptcy
An Informal Arrangement with Creditors
If you are earning income, it might be possible 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 the creditors who agree to it.
Part IX Debt Agreement
This formal arrangement under the Bankruptcy Act is designed to help people with a limited amount of debts, assets and income. If you qualify and the majority of creditors vote in favour, it will be binding on all creditors. You will need to have either a steady income, funds available from a family member, or assets to make an offer attractive enough to creditors to vote in its favour. It requires a registered Debt Agreement Administrator or Registered Trustee to administer. Call us on 1300 855 388 to learn more and we will give you a better idea of whether you qualify as the qualification criteria are indexed and so regularly change. While it avoids bankruptcy, entering this formal arrangement is a matter of public record. Fees are charged for this service.
Part X Agreement
If you don’t qualify for a Part IX Debt Agreement because your debts, assets or income are too high, a Part X Agreement under the Bankruptcy Act is another option. Although it has similarities to the Part IX Debt Agreement, it is more costly. It will require a Registered Trustee to administer.
Declaration of Intention to Present a Debtor’s Petition
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 by creditors (extended to 6 months’ protection because of Covid-19 until 25 September 2020). We can help you prepare the document for this and explain its full consequences. You will then have time to consider whether you ought to proceed with bankruptcy or opt for something better suited to your circumstances.
2. What Assets Can You Keep?
Secured creditors retain their rights in bankruptcy. Otherwise, what types of assets you can keep are listed in the Bankruptcy Act. The trustee (AFSA or a Registered Trustee) can sell anything else.
Assets include anything of value belonging to you as at the date of bankruptcy together with assets acquired by you before your discharge (including lottery prizes, inheritances, etc.). In other words, assets include your interest in the family home, land, money in bank accounts, motor vehicles exceeding the indexed value ($8,000.00), shares, antiques and other personal property of saleable value.
The assets you can keep include necessary household furniture, personal effects, limited tools of trade up to the indexed value ($3,800.00), life insurance policies, superannuation policies and motor vehicles up to the indexed value ($8,000.00) (e.g. car or motor bike).
3. Will You Lose Your House?
The trustee has to deal with any interest you have in a house for the benefit of your creditors. This may or may not mean that your house will be sold. If your house is jointly owned and the equity is limited, the trustee will talk to any interested parties about the options which might avoid a sale.
What is not in the control of the trustee is what a secured creditor will do. A secured creditor’s rights do not change with bankruptcy. For example, it 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 the net proceeds of sale will be paid to your trustee. On the other hand, most secured creditors will not to want to sell your property if you continue to pay the mortgage during bankruptcy, particularly if it is your family home.
A house that is subject to a Defence Service Homes mortgage cannot be sold by a trustee without the approval of the Secretary of the Department of Veterans’ Affairs.
4. Will You Lose Your Car?
Once you become a bankrupt, a motor vehicle used primarily as a means of transport (e.g. car or motor bike) is protected up to a certain indexed value ($8,000.00). If your interest in the motor vehicle is greater than the indexed value, your trustee will have an interest in your motor vehicle. As a bankrupt, you can talk to your trustee as to how you can keep your motor vehicle. Otherwise if it is sold, your trustee will give back to you the indexed value from the net proceeds of sale. If your motor vehicle is jointly owned with another bankrupt (such as your wife or husband), the relevant value is double the indexed value.
5. How Does Bankruptcy Affect Your 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, your trustee can garnish 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 will depend on not only how much you earn but also on other factors such as the number of your dependants or the amount of Child Support you pay.
The other time when trustee might write to your employer is if you fail to provide information about your income to your trustee.
6. What Happens to Your Credit Rating?
Your bankruptcy will normally be recorded on your credit file for the 3 years of your bankruptcy. Once you are discharged, the fact of your discharge from bankruptcy will be recorded on your credit file for 2 years before it is wiped clean. If your bankruptcy is extended for some reason, naturally your bankruptcy will be recorded for longer.
7. Should You Become Bankrupt Now? Or Should You Hang on as Long as Possible?
If you have to go bankrupt, it is usually best to do it now and get your 3 years out of the way rather than hang on for one or two years before the inevitable happens. The benefits of doing that include clearing your credit file sooner and avoiding the additional stress.
8. Can a Creditor Still Contact You Insisting on Payment Once You Have Become Bankrupt?
No. The Bankruptcy Act prevents most unsecured creditors from recovering money from you. An important exception is Child Support. Secured creditors are still able to sell their security if there is default in payment. If unsecured creditors attempt to recover money from you when they have no right to, you should advise them of your bankruptcy, and if they continue to insist you should notify your trustee.
9. How Do You Become Bankrupt?
You can become bankrupt voluntarily or you can become bankrupt as a result of legal action by 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. It is important to prepare your bankruptcy paperwork correctly as there are possible penalties for making false statements.
10. Is there a Minimum Amount You Need to Owe Before Filing for Bankruptcy?
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 Covid-19 crisis).
11. How Long Will You Be a Bankrupt?
The normal period of a bankruptcy is 3 years from the date the bankruptcy paperwork is filed and processed. Your bankruptcy may be extended by your trustee for valid reasons although it is relatively uncommon (see below).
To 5 years 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 for the following reasons:
- 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 Your Bankruptcy Advertised?
Generally no. Your trustee can advertise a meeting of creditors but that is rare. Your trustee can also advertise a proposed distribution to creditors but that is also uncommon.
13. Will You Have to Appear in Court During Bankruptcy?
Very rare. An example is where the trustee requires you as a witness in court.
14. What If You Are Due a Tax Refund?
If you don’t have a tax debt, any tax refund that relates to the period before your bankruptcy is kept by the trustee while you keep all other tax refunds.
If you do have a tax debt, the tax office will keep any tax refund until the tax debt is paid.
15. What Happens If You Transferred Your House or Another Asset of Value to Your Spouse Prior to Bankruptcy?
The trustee has the power to undo certain transfers 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 intended 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 Your 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 estate.
Unsecured Debts
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 with the funds advanced by them. They can take no further action against you to recover the debts. They must lodge claim in your bankrupt estate.
Secured Debts
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
Apart from secured debts, bankruptcy does not protect you from the payment of a limited number of debts. Important exceptions are fines for breaches of the law, debts arising from fraud, maintenance payments and Child Support. Debts due to Centrelink may or may not be covered by bankruptcy. Other exceptions include HECS and Student Supplement Loans.
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 Else Has Guaranteed Some of Your 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 into 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 That Person Have to Pay If You File for Bankruptcy?
If the debt is joint, the other person will be liable for the whole amount outstanding.
19. What Happens to Debts You Incurred Just Before Bankruptcy?
If you are already unable to pay your debts, you should not be incurring further credit because if you become bankrupt it may be an offence under the Bankruptcy Act. They otherwise go into your bankruptcy.
20. What Happens to a Debt You Forgot to Disclose in Your Bankruptcy Paperwork?
This will still go into your bankruptcy. 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 Happens to Debts You 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 You Continue to Use Your Credit Cards After Bankruptcy?
All creditors as at the date of bankruptcy should be listed on your bankruptcy paperwork and they will be notified of your bankruptcy. From there, it is a matter for the creditor as to whether they are prepared to continue to extend credit to you.
There is a rule that it is an offence for you to incur credit over a set limit from any particular creditor without disclosing to the creditor 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 You Had a Car Accident and the Owner of the Other Car Is Demanding Payment of the Repair Costs, Will the Debt be Covered by Bankruptcy?
The debt is covered by bankruptcy only if a court has entered judgment against you or you contractually agreed to the amount required to repair the car prior to bankruptcy.
24. Can You Have a Bank Account During Bankruptcy?
Although this is a matter for the financial institution, there is normally no issue with having a bank account during bankruptcy.
25. Can You Lose Your Job If Your Trustee Garnishes Your Wages?
A trustee garnishing a bankrupt’s wages is rare. Even so, it is an offence for an employer to dismiss a bankrupt because the trustee has garnished his or her wages.
26. What If You Leave Your Job During Bankruptcy?
If you leave your job during bankruptcy, the trustee will treat any lump sum termination payments as wages and assess how much you have to pay (if anything) into your bankruptcy.
27. What Happens to Any Assets Not Yet Sold by the Trustee as at the Date of Your Discharge?
Your trustee will continue to have the right to sell your assets even though you are discharged from bankruptcy.
28. What Are Your Rights and Responsibilities Once Bankrupt?
The following is a number of the more common questions raised about this.
Borrowing Money
When incurring credit in any way, it is an offence to incur credit above 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. However, 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.
Change of Name, Address and Overseas Travel
You are required to notify your trustee of all changes of your name and/or address. If you wish to travel overseas you must obtain the permission of your trustee.
29. When Are Your Creditors Notified of Your Bankruptcy?
The creditors are notified in writing by your trustee shortly after appointment. They will also receive a government notice before then.
30. Are There Any Offences Relating to Bankruptcy?
Yes, there are a number of offences although most bankrupts steer clear of them without too much trouble. The following is some of the more common that require attention:
- failing to notify your trustee of a change of name or address
- failing to provide evidence of your income to your trustee
- concealing property with the intent of defrauding your creditors
- disposing of property before bankruptcy with the intent of defeating your creditors
- failing to disclose assets to your trustee with the intent of defrauding your creditors
- obtaining property by fraud after bankruptcy
- obtaining credit above a certain amount without disclosing bankruptcy
- operating a business under an assumed name without disclosing 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 Your ABN Once You Become a Bankrupt?
If you have an existing ABN when you become bankrupt, the trustee will notify the tax office 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 continue to be be responsible for lodging your Business Activity Statement.
32. Once You Are a Bankrupt, Can You Apply for an ABN If You Do Not Already Have One?
There is no restriction on applying for an ABN after becoming a bankrupt if you do not already have one.
32. You Were Served with a Summons to Attend Court for an Oral Examination. Do You Still Have to Attend Now That Are a Bankrupt?
Yes. However, if you notify the creditor or its solicitors of your bankruptcy, they are likely to say that you don’t have to attend anymore.
