What is bankruptcy?
Bankruptcy is a legal process that releases a person from almost all of 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 Australian Financial Security Authority (AFSA) will manage your financial affairs. A fee may be charged where you have assets or earn above your income threshold amount (see information on the AFSA website for current thresholds).
AFSA 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.
Creditors who have tried unsuccessfully to recover debts you owe that together total at least $5,000 can force you into bankruptcy. In this situation, a private trustee will manage your financial affairs and charge very high fees for this service.
- Bankruptcy - a fresh start
- The effects of bankruptcy
- What happens to your assets when you are bankrupt?
- What employment restrictions apply to bankrupts?
- Case study 1
Bankruptcy - a fresh start
The financial consequences of bankruptcy may adversely affect you immediately and into the future, however it can also offer you a fresh start. Depending on your circumstances, bankruptcy may:
- have a positive impact on your life and provide you with a fresh start financially,
- 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 independent advice on your debt management options by speaking to a face to face financial counsellor or calling MoneyHelp. 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.
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;
- the fact of your bankruptcy will appear on your credit report for five years and on a public record known as the National Personal Insolvency Index for life (in practical terms though, you will find it difficult to obtain credit for five years, only the same time as for listed bad debts);
- you may lose some of your assets (see next section) including your house and a car worth more than $7,700;
- you can earn an income (a rate of $54,736.50 after tax for a person with no dependants and $69,515.12 for a person with two dependants) however if your after-tax income exceeds the amount applicable to you, you will need to pay contributions to your trustee for your creditors; and
- you may need to continue to pay your Child support, Centrelink and Higher Education debts, and any court fines. Seek advice on this from a financial counsellor.
What happens to your assets when you are bankrupt?
Assets that are safe*
- ordinary household goods such as furniture, a television and a computer
- a car in which you have less than $7,700* equity
- tools of trade to the value of $3,750*
- 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 $7,700* equity
- personal effects such as antiques and luxury electronic items
- tools of trade over the value of $3,750*
- 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 December 2017. Information on current thresholds.
What employment restrictions apply to bankrupts?
Director of a company
You cannot be a director of a company or be involved in its management without the permission of the Court during the term of your bankruptcy.
Other employment restrictions
Professional bodies and/or trade associations have certain conditions of membership for the duration of a bankruptcy. There may be restrictions on holding some statutory positions during this period. Consumers should contact the relevant peak body of their trade or profession to see if there are any restrictions during and/or after bankruptcy.
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 $360,000 and a good second-hand car for $16,000.
The company put the project on hold because of financial uncertainty. Amanda’s role was not required and she became unemployed. Because she worked on contract she was not entitled to a redundancy payment from the company.
Amanda had thought she would find another job without too much trouble, and applied for a number of roles but without success.
Managing her mortgage, car loan and car insurance premiums soon became a challenge. She felt too intimidated to go to Centrelink and check her eligibility for benefits, and started relying on her credit card. She used it to pay her loans and insurance and got another card to pay for her everyday needs. Within three months she had run up debt of $12,000 on her cards, and couldn’t make the payments for her unit and her car.
Amanda became depressed about her situation and sought the help of a financial counsellor when both her home unit and car were repossessed.
The counsellor convinced Amanda of her right to register with Centrelink. This immediately gave her an income and a Health Care Card. The financial counsellor then did a thorough assessment of her financial situation (as well as the $12,000 owing on her credit card, Amanda had $80,000 still owing on her home and car loans) and after careful consideration, advised her to declare herself bankrupt.
While bankruptcy may seem like a drastic step, it provided Amanda with a way out of her debt crisis and her depression and left her to make a fresh financial start and gain some control over her life.