It is understandable to fear the idea of bankruptcy and everything it may entail due to its ‘end of the world’ stigma. The path towards bankruptcy is not an easy one and should not be taken lightly due to the negative consequences involved. However, it can offer relief, release you from debts and allow you to look to new beginnings.
What is bankruptcy?
Bankruptcy is a legal process that occurs when you are declared unable to pay your debts and releases you from them. You can enter bankruptcy voluntarily or you may be made bankrupt by a sequestration order issued by the Court. Bankruptcy lasts three years and 1 day from the day the Australian Financial Security Authority (AFSA) accept your bankruptcy application, or if a creditor makes you bankrupt, from the date you file a statement of affairs that AFSA accept. Once the timeline is up, you are no longer declared bankrupt and can start afresh.
Advantages of bankruptcy
There are several advantages to becoming bankrupt which include:
- receiving protection against creditors who seek legal action against you;
- a chance to reduce financial stress; and
- when the 3 years and 1 day of bankruptcy are completed, you are released from most of your debts (which are noted below).
However, there are also serious consequences that must be considered.
Consequences of bankruptcy
Once you are declared bankrupt, an appointed trustee will take over your financial affairs to pay creditors. They can sell your non-protected assets; recover income you have earned and investigate your financial affairs. This means they can recover property you have transferred to someone else before becoming bankrupt. Whilst the financial burden may be alleviated, there are serious consequences for becoming bankrupt:
- some debts may not be included in bankruptcy such as:
- student assistance or supplement loans;
- debts incurred after being declared bankrupt;
- court imposed penalties; and
- debts liable to be paid due to wrongdoing (e.g. a compensation claim for an injury) where the payable amount is not fixed (unliquidated damages).
- your bankruptcy is permanently recorded on the National Personal Insolvency Index;
- your bankruptcy is listed on your credit record for 5 years;
- your ability to borrow money or purchase things on credit may be affected;
- you will require written permission from your trustee to travel overseas;
- possibly having your left-over unprotected assets sold; and
- you will be unable to hold certain public positions and be restricted from continuing in certain trades and professions.
Assets you can keep
When you become bankrupt, there are certain assets that cannot be taken by the trustee. They include:
- your vehicle used for transport up to a set amount. It is only when the value of the vehicle exceeds the set amount that it becomes available to creditors;
- assets held by you in trust for someone else;
- awards or trophies with sentimental value;
- life insurance policies;
- household items;
- tools used to earn income to an indexed amount;
- most regulated superannuation balances and payments received from superannuation; and
- compensation for a personal injury and anything purchased with that compensation.
How we can help
If you have recently become bankrupt or are considering whether it’s the correct path for you, obtaining legal advice is the next critical step. This is particularly important where you are struggling to pay a loan and there is a mortgage over your home, or you have received a notice that your creditor is going to repossess your home or other assets.
At Cohen Legal, we can walk you through the bankruptcy process and assist you to understand your options.