Every year tens of thousands of Australians become a bankruptcy statistic however the reasons for, and implications of, filing for bankruptcy are not well understood. Megan Shannon shares “The Facts about Bankruptcy”.
Last month we looked at company insolvency, this month we turn the spotlight on personal insolvency, more commonly known as bankruptcy. Bankruptcy is the process whereby people who are unable to pay their debts receive protection under the Bankruptcy Act 1966 and their affairs are administered by a trustee. The Bankruptcy Act relates only to individuals. Companies which cannot pay their bills are dealt with under the Corporations Act 2001, as discussed last month.
According to the latest figures from the Australian Financial Security Authority (ASFA), there were 30,822 instances of personal insolvencies for 2012-13. These statistics include Bankruptcy, Debt Agreements and Personal Insolvency Agreements. This represents a 2.17% decrease from the 2011-12 period.
Bankruptcy and the formal alternatives to bankruptcy are overseen by the Australian Financial Security Authority.
You can declare yourself bankrupt or a creditor to whom you owe more than $5,000 may apply to the court to have you made bankrupt. For bankruptcy to be considered, you must be insolvent. When you declare yourself bankrupt, and advise your creditors, they may no longer pursue you for payment of outstanding debt.
Bankruptcy is overseen by a trustee. A trustee acts to recover funds to pay creditors. These funds may be recovered by way of:
- Sale of certain assets
- Recovery of income over a certain limit
- Recovery of property transferred to a 3rd party prior to bankruptcy
Typically, bankruptcy lasts for a period of three years, however under some circumstances your trustee may raise an objection and seek to have the period of bankruptcy extended by up to five years.
Consequences of Bankruptcy
Bankruptcy should be considered the last resort when facing personal financial hardship as it has far reaching consequences, including:
- You will be listed on the National Personal Insolvency Index, permanently. It should also be noted that a Debt Agreement and a Personal Insolvency Agreement will result in listing on this index.
- Your credit will be impacted as you will be listed on a credit report for 7 years, which most credit providers will access in determining if they will extend credit.
- Assets may be seized and sold to repay debts
- Your employment may be impacted as many professional bodies have their own regulations regarding bankruptcy, which are not subject to the provisions of the Bankruptcy Act.
- You will be unable to manage a corporation as this is expressly prohibited under the Corporations Act.
- You will be unable to travel overseas as you will be required to surrender your passport to your trustee.
Alternatives to bankruptcy
For those in the midst of financial hardship, bankruptcy may seem to be the only way to stop creditors chasing them. However, there are other options which are worth considering and discussing with a financial counsellor, before choosing bankruptcy. These options include:
Many creditors are agreeable to come to an arrangement allowing additional time to pay, or regular payment instalments. The key to any creditor accepting an arrangement is early identification of a problem, proactive contact and a genuine effort to repay.
A debt agreement is a legally binding proposal between you and your creditors, which, if accepted by the majority (in dollar terms) gives protection without having to file for bankruptcy. Examples of debts agreements include:
- Paying a portion of your unsecured debt, rather than the whole amount, ie less than 100 cents in the dollar.
- A moratorium on debts, ie recovery action ceases
- Regular payments to creditors from your income
- Property being sold or transferred to creditors to partially or completely extinguish debts
Not everyone in financial distress has the option of a debt agreement. There are regulations in terms of previous bankruptcy history, debt amounts and after tax income.
A person is released from a debt agreement when all obligations and payments have been met. Typically, a debt agreement does not run longer than four years.
Personal Insolvency Agreement
A Personal Insolvency Agreement is another legally binding agreement between you and your creditors, however, unlike Debt Agreements, there are no limitations in terms of debt or income. A Personal Insolvency Agreement may be accepted when the majority of creditors, representing at least 75% of the debt, agree.
As with bankruptcy each of these agreements may be listed on credit reports. For more information on formal options listed above visit the AFSA website.
Some people may be embarrassed at their inability to meet their financial commitments; however, often the triggers of financial hardship can be completely unexpected and frequently out of your control. For example, a relationship breakdown, sudden unemployment, protracted illness, or even fraud. The key to managing financial hardship is to act early. Don’t hope that the debt will suddenly disappear or that your creditors will cease pursuing you for payment.
Before deciding on your course of action, speak with a financial counsellor to discuss your options and understand what will work best for your circumstances. For more information on financial counselling or to find a financial counsellor in your state go to Financial Counselling Australia or ASIC’s MoneySmart site.
This information does not take into account your personal circumstances or situation or needs.