1. What are my options to avoid Bankruptcy?
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With creditors pressing you for payment, bankruptcy may seem attractive, however it should be avoided if at all possible. Once bankrupt there is no going back.
Alternatives to Bankruptcy
An Informal Arrangement with Creditors
If you have an income, agreement could be made to repay debts over a period of time. There would be no publicity. This type of informal arrangement may not be binding on creditors, some creditors may change their minds or you might default on the payments, all of which could result in creditors continuing to pursue you for the debts. We can help you with doing this.
A Formal Agreement – Part IX Debt Agreement
An arrangement which is binding on creditors can be made under Part IX of the Bankruptcy Act. 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.
Cooling Off Period
If you are thinking about becoming bankrupt the law allows for a 7 day “cooling off” period to minimize the chance of mistaken or unintended bankruptcy. The option of this 7 day “cooling off” period is only available to you once in a 12 month period. You sign a statement declaring your intention to petition for bankruptcy at the Australian Financial Security Authority (AFSA), in your local area. This gives you a 7 day period to consider your position and obtain advice. Creditors can take no further direct action to recover their debt during the 7 days. You then consult your creditors to see if you can come to a repayment arrangement that you can afford. You are under no obligation to become bankrupt at the end of this period.
2. 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 a Debtor’s Petition and Statement of Affairs. This is a service that we offer.
You will need the name, address, and amount owed to each of your creditors. You must show all debts for which you are personally liable, whether business or personal. There are severe penalties including imprisonment for failure to disclose property or concealment or unlawful disposal of property or any item of value. You will need full details of your income, personal property which includes such things as house, car, bank accounts, shares, and any money owed to you. After the forms are accepted by the Official Receiver in Bankruptcy you become bankrupt.
3. Is there a Minimum amount I need to owe before I can go bankrupt?
No. You can become bankrupt voluntarily owing any amount. A creditor cannot make you bankrupt unless the debt is $5,000 or more.
4. How long would I be bankrupt?
The period of a bankruptcy is 3 years from the date a statement of affairs is filed. This period may be extended by an objection entered by the trustee.
Objections will extend bankruptcy for additional years from the date of filing a statement of affairs if a bankrupt:
- made a void transfer against the trustee because of Section 120/122 of the Bankruptcy Act 1966 (under valued transactions and preference payments).
- continued to manage a corporation.
- engaged in misleading conduct and amount exceeds the current limits.
- fails to disclose to the trustee, a liability that existed at the date of bankruptcy.
- fails to notify a change of address or daytime telephone number.
- fails to advise the trustee of any material change to the information disclosed on their statement of affairs.
- fails to attend a creditors’ meeting without written approval from the trustee.
- fails to attend an interview or examination.
- fails to disclose any beneficial interest in any property.
To 5 years from the date of returning to Australia:
- leaves Australia and does not return.
To 8 years from the date of filing a statement of affairs if a bankrupt:
- made a void transfer against the trustee because of Section 121 of the Bankruptcy Act 1966 (transfers to defeat creditors).
- fails to provide details of property and income when requested.
- after the date of bankruptcy, the bankrupt deliberately provided false or misleading information to the trustee.
- fails to disclose detail of income or expected income.
- fails to pay contributions as assessed.
- fails to adequately explain how money was spent or assets were disposed of.
- fails to disclose to the trustee, a liability that existed at the date of bankruptcy.
- fails 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:
- fails to return to Australia when requested.
5. 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, eg 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 amount required to finalize the agreement, during your bankruptcy, the trustee may sell the asset.
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.
6. 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.
7. 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.
8. 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.
9. 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 extend your bankruptcy to 5 years.
10. What about Debts Incurred after Bankruptcy?
If you become bankrupt you will be responsible for any debts incurred by you after bankruptcy.
11. Can a creditor still contact me insisting on payment once I have become bankrupt?
No. The Bankruptcy Act prevents 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.
12. 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 Statement of Affairs and they will be notified of your bankruptcy. It is an offense for you to incur credit over a set limit* (see Current Amounts) without disclosing to the person you are dealing with that you are an undischarged bankrupt.
13. Will I lose my assets?
Once bankrupt you can no longer sell or deal with most of your assets or items of value, the exceptions being property protected under the Bankruptcy Act, as shown below. Only the trustee (AFSA or a registered Trustee), or a secured creditor is able to do so. The Trustee may dispose of your property for the benefit of creditors. See paragraph 6.
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. Your interest in the family home, land, money in bank accounts, vehicles exceeding the prescribed amount ($7,350.00) in value, stocks and shares, antiques and other personal property of saleable value are all included. Any interest you have or acquire during bankruptcy as a beneficiary of a deceased estate belongs to the trustee.
Certain assets are protected by the Bankruptcy Act which means they cannot be sold by your trustee to pay creditors. The property protected by the Bankruptcy Act includes necessary household furniture, personal effects, limited tools of trade (up to $3,500), life insurance and superannuation policies and the primary means of transport up to the prescribed amount ($7,350.00) in value (eg. car or motor bike).
14. 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 a court judgment has been obtained, or you have admitted responsibility for the debt in writing or started paying for repairs prior to bankruptcy.
15. 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 mean that the property has to be sold. If the property is jointly owned the trustee may consider selling his interest in your property to a non-bankrupt joint owner. A house property that is subject to a Defense Service Homes mortgage cannot be sold by the trustee without the approval of the Secretary of the Department of Veterans’ Affairs.
A secured creditor could sell your property should you be unable to meet the mortgage repayments. Any shortfall will be a debt in your bankruptcy. If a surplus exists following sale, these monies will be paid to your trustee.
16. What if I have a car?
Once you become bankrupt, a vehicle which is used primarily as a means of transport (eg. car or motor bike), is protected and can be retained by you where your interest in the vehicle is less than the prescribed amount ($7,350.00). Where the interest in the vehicle is valued at more than the prescribed amount, the trustee is required to sell, and give back to you the value of the prescribed 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 prescribed amount.
17. Can I have a bank/cheque account?
In most cases, yes, with the agreement of the financial institution. However, any substantial funds accumulated in a bank or similar account may vest in the trustee as an after-acquired asset.
18. 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 unless you owe him/her money or unless you have failed to pay compulsory contributions. It is still your responsibility to lodge taxation returns for any income earned during the period of your bankruptcy.
19. Do I have to make payments from my income to the Trustee?
One effect of bankruptcy is to take the pressure off you to make payments to most of your creditors. If you earn an income you are obliged to make regular payments or “contributions” to the trustee for the benefit of creditors (contact us for current income threshold amounts). By law contributions are enforceable if your income is in excess of a statutory amount and may be directly deducted from your income if payments are not made.
It is an offense for an employer to dismiss a bankrupt because the trustee has issued the employer with a notice to forward payment from the bankrupt’s wages. In order to assess the contribution payable, a bankrupt’s income is broadly defined to include money received from their employer and any other benefit, for example the private use of a motor vehicle or subsidized housing. Other factors are then considered and include the amount of income tax payable, maintenance payable, and the number of your dependents.
20. What if I leave my employment during bankruptcy?
Should you terminate your employment during the period of your bankruptcy any lump sum termination payments due to you will be claimed by your trustee.
21. 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.
22. What are my rights and responsibilities once bankrupt?
When borrowing money, purchasing goods on credit or incurring credit in any way, it is an offense to borrow over a set limit* unless you inform the person you are dealing with that you are an undischarged bankrupt. For limit see Current Amounts
Operating a Business
You can still operate a business while bankrupt. If you trade under an assumed name or business name either as a sole trader or in partnership, you have to disclose to all, your bankrupt status. 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.
23. 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 statement of affairs.
A creditor has the right to on sell your debt to another agency. Creditors have a tendency to on sell 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, 1966. 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.
24. Is my bankruptcy advertised?
Generally no, however your trustee may choose to do so.
25. Will I have to appear in Court?
People who voluntarily go bankrupt and don’t provide false information are extremely unlikely to have to appear in court.
26. Are there offences under bankruptcy?
Yes. A list of the most important:
- 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 penalties for these offences vary from 6 months to 3 years imprisonment upon conviction.
27. What happens to my Credit Rating?
Defaults are listed for 5 years on a commercial credit reference record, however, bankruptcy and other serious credit infringements are recorded for 7 years. Your name will be listed for 7 years from the commencement of your bankruptcy even if your bankruptcy has been discharged. Lenders may limit your ability to borrow money or buy things on credit and you may find it hard to rent, or get electricity, water or the telephone connected, without paying a bond.
28. 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 will need to contact the Tax Office and arrange to have your ABN reactivated. 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.
29. What if I get 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 it is received by you) is an asset that vests in your bankrupt estate and can be claimed by the trustee. Tax refunds attributable to income earned during your bankruptcy will be treated as income for income assessment purposes. After discharge, any debt still outstanding to the tax office which formed part of the 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.
30. What happens if I have transferred my house or another asset of value to my spouse prior to bankruptcy?
The trustee has the power to void transactions made within a period of 5 years prior to the bankruptcy. The trustee will investigate the transfer and may recover the asset if the transfer was to defeat creditors. Or if the consideration for the transfer was less than the market value. Or even if it was in preference to other creditors. Disposing or transferring property prior bankruptcy with intent to defeat your creditors is an offence under the Bankruptcy Act.
31. 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. It is recommended that you still attend the court on the day and advise them of you bankruptcy. You may be required to produce a copy of the trustee’s letter confirming your bankruptcy.