Earlier this year, I provided an overview of insolvency as it pertains to corporate entities.
Now, I would like to explore the equivalent in the individual or personal area. Unfortunately, in the current environment, bankruptcies are rising.
The idea of bankruptcy is to give you a fresh start and a moratorium or some breathing space in regard to your creditors. Nevertheless, being bankrupt has serious consequences. Bankruptcy means that one cannot pay their debts when they are due.
One consequence of bankruptcy is that a trustee will be appointed who will take control over your finances. Their role is to ensure as far as they can, to achieve an equitable distribution to creditors. Where you are bankrupt, you have an obligation to supply books and all other records in regard to current financial affairs. The trustee can be one you choose, one you have one chosen for you or the default one chosen for you. Whether your bankruptcy is voluntary or involuntary (where your creditors, or one of your creditors, ‘makes’ you bankrupt), the consequences are similar.
Next, you will still need to make voluntary contributions to pay of your bankrupt estate once your income exceeds a certain threshold. There is a common misconception that you cannot earn an income whilst bankrupt. This is not the case. It is also not the case that you cannot travel overseas when you are bankrupt. You would probably have to seek the permission to travel overseas from your bankruptcy trustee. However, if there a good reason to travel, such permission can be granted.
Bankruptcy generally lasts for three years, but can be extended for up to eight years on application by the trustee.
A major limitation of being bankrupt is that it can be difficult to obtain credit. Your bankruptcy will be listed on the National Personal Insolvency Index which is searchable to the public. It also comes up when a potential financier or lender does a credit history or credit reference check. At the least, you need to disclose the fact that you are bankrupt when you apply for this credit. This obligation applies for another two years after the bankruptcy ends.
Another consequence of being bankrupt is that you have to let your bankruptcy trustee know if you change employment (or lose it) or if your income changes. Your trustee can (and often does) sell your assets in order to pay your creditors. There are though, certain assets that the trustee cannot grab hold of and sell. These include motor vehicles owned by the bankrupt and tools of trade.
There are two less formal processes related to bankruptcy but which don’t have the significant restrictions of it, called ‘Part IX (9) agreements’ and personal insolvency agreements. Part 9 agreements are a way to enter into a written agreement with creditors whereby the bankrupt puts a proposal forward as to what they pay back and where the creditors may accept such agreement. Entering into a part 9 agreement is not actually declaring that you are bankrupt, which is important.
A personal insolvency agreement (or Part 10 agreement) is also an agreement between the person and their creditors but a trustee is appointed to administer it and to take over control over the bankrupt’s property and whereby either all, or part of the full amount of debts is paid either in instalments or in a lump sum.
Bankruptcy can result from seemingly innocuous situations and can escalate to something catastrophic. A few years ago, I had a client where, on the eve of Easter, my advice was that in the absence of a lender who would lend the funds back for a buy back from the bankruptcy trustee the family home, this home would be lost forever. This started as a $5,000 credit card debt that was not paid back. The bank then sued, obtained default judgment, the matter was still not dealt with by the husband, further interest and costs continued to accrue, with the trustee in time seizing the family home (as they are entitled to do) who then made an offer to the couple to but back their own house! Since they did not have the funds to do this, the married couple with two children found themselves homeless shortly after Easter.
This story highlights what can happen where those in financial difficulty do not act quickly. By the time the husband sought professional assistance, it was too late.
The lesson is whilst bankruptcy relieves you from pressure of unpaid debts and gives you a fresh start financially, it does have consequences.
If you are being pursued for debts and do not wish to go bankrupt, you should act quickly.
By Paul Cott, Principal, Law on Lydiard
Paul Cott is a Principal Lawyer with approximately twelve years’ experience in the legal profession in building and commercial disputes throughout Australia. Mr. Cott has a Masters in Law (Commercial Litigation) with a Distinction average.Paul is admitted as a barrister and solicitor to the Supreme Court of Victoria and the High Court of Australia.