What are the effects of declaring bankruptcy and when may bankruptcy be the right choice for you?
People with large debts which may have been incurred as a result of a failed business venture or due to consumer spending on credit cards do need to consider whether in their circumstances a voluntary declaration of bankruptcy may be their best option to break free of insurmountable debt. Before deciding that bankruptcy is your best option, you should consider whether a less significant option may be better for you. Typically measures falling short of bankruptcy can be defined as follows:
Filing for hardship with your lender
The terms available under ‘hardship’ will vary between lenders but should give you some breathing space for a period of three to six months, and may provide for a temporary repayment break, interest-only payments or reduced or goodwill payments. Obtaining a hardship period from your lender will be a short-term solution and can be ideal for those between jobs or having to deal with a temporary income or cash flow problem.
Personal Insolvency Agreement (PIA) Part X(10) agreement
A personal Insolvency Agreement is a legal binding agreement between you and your creditors, and one of two formal agreement options available under the Bankruptcy Act, the other being a Part IX(9) agreement, discussed below. Personal Insolvency Agreements can be a flexible way to come to an arrangement to settle debts without declaring bankruptcy. A Personal Insolvency Agreement requires the appointment of a trustee to take control of your property and make an offer to your creditors. The offer may be to pay part or all of your debts by instalments or a lump sum. The length of your Personal Insolvency Agreement will depend on what you negotiate with your trustee and creditors. You will need to pay fees to your trustee to organise the Personal Insolvency Agreement. Personal Insolvency Agreements can allow you to retain your assets such as a house or car if the terms of the agreement allow.
Part IX(9) Debt agreements
A debt agreement is the second formal agreement option available and is formally known as a Part IX (9) agreement. It is a legally binding agreement between you and your creditors. It provides another means to come to an arrangement to settle debts without becoming bankrupt. Part 9 debt agreements involve a negotiation to pay a percentage of your combined debt that you can afford over a period of time. You agree to make repayments to your debt administrator, rather than individual payments to your creditors. After the payments and the agreement term ends, your creditors cannot recover any further monies you may owe. You will face increased borrowing costs such as higher interest rates, but providing you stick to the terms of the debt agreement, you are unlikely to be denied credit. You will need to pay your administrator an agreed fee for their services in administering your debts. Debt agreements are usually for terms of between 2 and 5 years depending on your circumstances.
Bankruptcy – The Advantages
If your debts are so large that they are insurmountable, bankruptcy maybe your best option. Some of the advantages of bankruptcy include that you will be discharged from the majority of your debts and you will get a fresh start, with the end of recovery action against you by your creditors. Any attempts to seize your property by sheriff’s officers will cease.
Some of your property will be protected from the bankruptcy process, including:
- a) Superannuation that has not been accessed prior to bankruptcy;
- b) Most household furniture and effects, excluding valuable art and antiques;
- c) Ordinary clothing;
- d) Tools of trade (where value is under the ITSA threshold);
- e) Property held in trusts (pending legal advice on your particular circumstances);
- f) Life insurance and compensation payments for personal injury;
- g) Property of a non-bankrupt who you live with is protected;
- h) Your motor vehicle up to a value of $7900, or if under finance having no more than $7900 positive equity.
Negative Consequences of Bankruptcy:
There are of course negative consequences to bankruptcy, such as once you earn above an amount set by the Bankruptcy Act, your wages may be garnished to repay your creditors. For example, if you’re earning $85,000 gross taxable income per year and have no dependents, your income contributions to your bankrupt estate would currently be around $286 per month.
Any property you own when you declare bankruptcy not mentioned above, may be sold by your trustee in bankruptcy to repay your creditors. If you jointly own property, the trustee in bankruptcy may agree to avoid foreclosing on the jointly owned property if the co-owner agrees to pay market rates for the bankrupt’s share of the property. Other assets including motor vehicles worth more than $7900, antiques, art-work, boats, shares and cryptocurrency will also be lost as they will vest in your trustee in bankruptcy who will sell them to repay creditors.
Your bankruptcy will be recorded permanently on the National Personal Insolvency Index, and your credit rating will show a bankruptcy listing for five years. Obtaining credit during that period may be impossible and will certainly be very difficult. Getting finance to buy property will be impossible. That said, if you were already leveraged to the hilt before declaring bankruptcy, your borrowing ability would already have been severely hampered.
You will not be permitted to act as a company director, without the express leave of the Court. Also, you are unable to be a member of any Self-Managed Super Fund (SMSF) while you are bankrupt. Usually, your employment should not be affected by bankruptcy, but with some professions there can be restrictions imposed – you should check with the governing body of your profession if you have any concerns.
Overseas travel will not be permitted during the term of your bankruptcy without the prior approval of your trustee in bankruptcy. If you decide bankruptcy is the best option for you, and wish to declare bankruptcy voluntarily, you will need to cover the costs of your trustee in bankruptcy. For individuals, you can expect to pay fees starting from around $7700 to cover the cost of your trustee in bankruptcy administering your bankrupt estate.
While many of these consequences may make bankruptcy seem unattractive, a voluntary declaration of bankruptcy does provide finality and means that you will not have to struggle to repay debts that you may not have the capacity to repay.
Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.