What is bankruptcy?
Bankruptcy is a legal process that releases a person from their debts.
You can apply to become bankrupt voluntarily if you have a debt of any amount you cannot pay. When you are a voluntary bankrupt, a trustee appointed by the Insolvency Trustee Service of Australia (ITSA) will manage your financial affairs. A fee may be charged depending on your income level.
ITSA will advise you of when you are officially bankrupt. They will nominate a trustee to manage your financial affairs within two weeks of when you lodge your application with them. Bankruptcy lasts for three years from the day it is declared.
Alternatively, creditors who have tried unsuccessfully to recover debts you owe that together total at least $2,000 can force you into bankruptcy. In this situation, a private trustee will manage your financial affairs and may charge high fees for this service.
Back to top
Bankruptcy - a fresh start
The financial consequences of bankruptcy may affect you immediately and into the future, however it can also offer you a fresh start. Depending on your circumstances, bankruptcy may:
- have little impact on your life and provide you with a fresh start financially,
OR
- have significant consequences including making it difficult for you to obtain credit for a considerable time, limiting your future employment options, the loss of your home and other significant assets.
You need to act quickly if you are being pursued for debts and you wish to avoid bankruptcy. It’s essential that you get professional advice on your debt management options, or speak to a financial counsellor.
You must consider all of the advantages and disadvantages of bankruptcy if you are thinking about this option to deal with debts you cannot pay -- even those advantages and disadvantages that do not currently apply to you.
Back to top
The effects of bankruptcy
When you become bankrupt:
- you can keep household goods and personal effects like a television, computer and furniture of reasonable value; and
- the fact of your bankruptcy will appear on your credit report for seven years and on a public record known as the National Personal Insolvency Index for life; and
- you may lose some of your assets (see next section) including your house and a car worth more than $6,500; and
- you can earn an income (a base rate in excess of 45K) however if your after-tax income exceeds a certain amount you will have to pay contributions to your trustee (does not apply to low-income earners); and
- you must continue to pay your Child support, Centrelink and Higher Education debts, and any court fines.
Back to top
What happens to your assets when you are bankrupt?
Assets that are safe*
- household goods of reasonable value, like furniture, a television and a computer
- a car in which you have less than $6,850* equity
- tools of trade to the value of $3,400*
- up to $1,000 in bank accounts (deemed to be for living expenses)
- superannuation, life insurance policies and personal injury compensation payments
Assets you will probably lose
- real estate including houses and land
- cars in which you have more than $6,700* equity
- personal effects such as antiques and luxury electronic items
- tools of trade over the value of $3,350*
- artworks of significant value and some jewellery
- any inheritance, tax refund or winnings
- money in bank accounts in excess of $1,000
* Values are as at 9 Feb 2011. Information on current thresholds.
Back to top
What employment restrictions apply to bankrupts?
Operating a business
You will be able to operate a business unless the terms of the agreement provide otherwise. If trading under a business name or assumed name (whether alone or in partnership) the debt agreemenr must be disclosed to all people dealing with the business.
Director of a company
There are no restrictions on being the director of otherwise managing a company.
Other employment restrictions
Professional bodies and/or trade associations have certain conditions of membership for the duration of the agreement. There may be restrictions on holding some statutory positions during the period of the agreement.
Back to top
Case study 1
Amanda was working in a contract role on a project with an engineering company and earning $1,200 a week for almost 12 months. It was a large, long-term project and Amanda believed she’d be in the role for the foreseeable future. She decided to purchase a home unit for $260,000 and a good second-hand car for $16,000.
Read the entire case study
Case study 2
Barry owed $1,800 on his credit card and fell behind with his house payments when he was retrenched. He didn’t know he could ask his bank for a hardship variation or about any of the other programs to assist people who are having difficulty paying their debts. He felt embarrassed by his situation and he decided to ignore his problems because thinking about the debts made him feel very stressed.
Read the entire case study