Yahoo Finance Bankruptcy explained: What happens next when you can't pay your debts?
No one is immune to the possibility of going bankrupt, but do you know how it works?
The consequences of bankruptcy can be devastating. Whether it was through a job loss, steep medical bills, mortgage debt, or a combination of factors – filing for bankruptcy is often discouraged and viewed as a last resort.
No one is immune to the possibility of going bankrupt, as seen in several high-profile cases involving celebrities like Mike Tyson, 50 Cent, and Lil’ Kim.
What does it actually mean to be bankrupt?
Bankruptcy is often considered a dirty word, but it is simply the legal process where you are declared unable to pay your debts.
“Bankruptcy allows people in financial distress to get a fresh start. It also safeguards the credit system, providing a remedy for those who are owed money and preventing future financial difficulty,” Tim Beresford, Australian Financial Security Authority (AFSA) Chief Executive and Inspector-General in Bankruptcy and Registrar of Personal Property Securities explained, adding that: “declaring bankruptcy is not a one-size-fits-all process.”
“It looks different for every debtor and creditor,” the chief executive said.
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Voluntary vs involuntary bankruptcy
Bankruptcy can happen in two ways. A person can choose to apply for voluntary bankruptcy, or they can be made involuntarily bankrupt by a creditor.
When a person is made bankrupt involuntarily, the creditor applies to the court – which has the power to issue a sequestration order – to make the debtor bankrupt.
Bankruptcy normally lasts for at least three years and one day.
Is there anything good about bankruptcy?
Bankruptcy can provide relief and allow a debtor to make a fresh start.
As soon as a person is declared bankrupt, creditors have to stop contacting the debtor.
Most debts are cancelled
While bankruptcy won’t release a person from all debts, it will permanently cancel most of their unsecured debt such as personal loans and credit card debt. It will not however, extinguish certain debt such as court-imposed fines, HECS loans, child support liabilities, or debt incurred after bankruptcy begins.
Secured debt such as home and car loans still need to be repaid to prevent these assets from being repossessed by creditors.
No limit on income and savings
Bankruptcy does not put a limit on how much a person can earn, nor does it affect the superannuation that has been accumulated over time. There is also no limit to the amount of money one can save, and it does not stop a bankrupt person from starting or continuing to run a sole trader business, although this would be subject to some restrictions.
You get to keep some things
Bankruptcy also allows a person to keep most ordinary household items of reasonable value, such as furniture, TVs and computers, and appliances. Other items can be kept if they are below a set value, such as cars and tools used to earn a living.
What are the negatives?
It is no surprise that being bankrupt has some serious consequences.
You will have a trustee
Once a person is bankrupt, a trustee may be appointed to managed their estate, however it is also possible for a person to choose a registered trustee before they apply for bankruptcy.
Your trustee controls your assets
During bankruptcy, the trustee has the right to take control of and sell assets. The bankrupt person is not allowed to deal with assets that are in control of their trustee.
While a bankrupt person is still able to earn income, this is assessed by the trustee each year of the bankruptcy. If a person earns over a certain value, they may be required to contribute part of their income over this threshold to their trustee.
Your name will appear in a public listing
Going bankrupt also means the debtor’s name will permanently appear on a searchable public register listing insolvency called the National Personal Insolvency Index (NPPI).
It will affect your credit score and ability to travel
Bankruptcy also affects a person’s ability to obtain future credit and travel overseas. Written permission from the trustee is required if a debtor wants leave Australia during this period.
Other restrictions
The debtor is automatically disqualified under section 202A of the Corporations Act 2001 from being a director, alternative director or secretary of any company registered in Australia. Being bankrupt also prevents a person from holding some public positions such as roles in parliament.
Are there other options other than filing for bankruptcy?
If a person is having difficulty making repayments, they may want to try to reach an agreement with their creditors.
Creditors may be willing to give a person more time to pay their debts, give them a lower interest rate, or charge fewer penalties. A person may also be able to apply for a hardship variation with their creditor. Financial counsellors may be able to assist in this process.
There are also other formal options available to a person under the Bankruptcy Act 1966, each with its own legal consequences, but the AFSA encourages people to seek trustworthy independent advice before making any decision.
“If you’re in financial difficulty, we encourage you to be informed about the options available,” Beresford advised. “Seek pre-insolvency advice from trusted organisations. There are bad actors who seek to take advantage of those who are most vulnerable. As a firm and fair regulator, we help safeguard the personal insolvency system and stamp out bad actors.”
“Advice from a financial counsellor or registered insolvency professional increases your options and ensures you can make the best decision for your circumstances,” he added and that information about support services is also available on their website.
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