Process of Declaring Bankruptcy
What is Bankruptcy?
When a person is unable to pay their debts or reach a suitable agreement to repay their debts to creditors (a creditor is a company or person who is owed money), they are deemed to be insolvent. Bankruptcy is a legal process which provides protection to people who are insolvent and can provide relief through release from most debts, allowing the person to make a clean start (learn more here).
How do you enter Bankruptcy?
Bankruptcy can either be entered into voluntarily or through an application to the courts by a creditor (a company or person to whom money is owed).
Should you no longer be able to pay all your debts, you may enter voluntary bankruptcy (also known as a Debtor’s Petition) by completing and submitting a Bankruptcy Form or engaging directly with a personal insolvency specialist.
To be eligible for bankruptcy, a person must meet the below requirements:
- be unable to pay debts when they are due
- be present in Australia or have a residential or business connection in Australia
Creditors which are owed $10,000 or more can apply to the court to have a person made bankrupt. This is known as a Creditor’s Petition and also requires that proof is presented on the act of bankruptcy which has been committed within six months prior to the application. These acts are listed in the Bankruptcy Act 1966 and can be found here.
When a person becomes bankrupt, a trustee is appointed to manage the bankruptcy process. The trustee will investigate the bankrupt’s affairs and recover and sell assets in order to repay the debts owed by the bankrupt. Once the bankruptcy has occurred, there are restrictions and obligations which must be met by the individual.
It’s important to understand what options are available before entering into any formal or informal arrangement. Some alternative formal options available include Temporary Debt Protection, Debt Agreements or Personal Insolvency Agreements. To learn more about what options may be available, contact Business Savers.
What are some common warning signs of Bankruptcy?
With any financial stress management, It’s always best to meet with a professional to discuss your situation and obtain an objective opinion. There are however some common warning signs that could suggest that bankruptcy may be a suitable option for you.
- Denial of your situation
- Unable to meet payment deadlines for credit cards, bills or bank loans
- Borrowing money from close friends or family to cover costs due to a lack of savings
- Applying for additional credit or finance or being denied for more credit
- Receiving payment demands, overdue or late payment notices and bankruptcy notices from debt collectors or solicitors
What happens during a Bankruptcy?
Once a trustee is appointed, they will notify creditors and take control of the Bankrupt’s finances allowing for debts to managed and paid fairly. In order to satisfy the debts owed, the trustee may need to sell assets to recover the necessary funds. A trustee can sell any divisible assets such as vehicles, property, shares, jewellery or similar.
There are certain exclusions to the debt relief which the bankruptcy process provides including:
- child support
- court penalties or fines
- Government student loans
- debts incurred after the bankruptcy commences
It’s best to speak to a professional to get a better understanding, but most unsecured debts (debts which have no collateral attached to them) are covered in bankruptcy.
The Bankrupt has a legal obligation to be upfront and honest with the controlling trustee and provide all information relating to a change of circumstance in regards to employment status, income and business statements. Should income levels exceed the prescribed limits (up to date amounts can be found here), the bankrupt may need to make compulsory income contributions.
Bankruptcy will affect the ability for a Bankrupt to travel overseas and will require a request for permission from the trustee to do so. It is an offence to travel overseas without written consent and can have significant ramifications.
Bankruptcy normally lasts 3 years and 1 day but can be extended if the bankrupt does not meet their obligations. In this case, the Trustee will lodge an ‘objection to discharge’, sighting the bankrupt’s failure to comply with legal obligations. A bankruptcy could be extended to a term of up to 8 years in some circumstances.
How long does Bankruptcy stay on file in Australia?
Once bankruptcy occurs, an individual will be listed on the National Personal Insolvency Index (NPII). This is a permanent record, with information publicly accessible via a paid search on the index.
The information recorded on the index includes:
- Date of birth
- Residential address
- Previous names
- Trustee contact information and details of the bankruptcy
- Current status of the bankruptcy
The credit file of the bankrupt will also have a record of the bankruptcy and will remain on file for 5 years from when the person becomes bankrupt or 2 years from when the bankruptcy ends (whichever is later).
Is Bankruptcy the right option for you?
Depending on your circumstances, Bankruptcy may be the most suitable solution for you. If you are dealing with financial stress, we strongly encourage you to reach out to a professional as early as possible. Doing so will mean that more options to deal with the situation may be available and will generally result in a better outcome for all parties involved. Take the first step to your recovery now and book an appointment with our team today.