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Should I declare bankruptcy?

This fact sheet is for information only. It is recommended that you get legal advice about your situation.

CASE STUDY

Tony was in his late forties when he lost his job. After twelve months of looking for work he began to lose all hope. His creditors had also lost patience.

Despite several hardship variations in the first 6-8 months he was facing letters of demand, court documents and now the Sheriff had tagged his household goods for seizure.

He owed money on 3 credit cards, a car loan, a big mobile phone bill he couldn’t pay and a tax debt. His rent was about the only payment he was up to date with.

The sheriff suggested he talk to a financial counsellor about going bankrupt.

What is bankruptcy?

Bankruptcy involves an exchange. You hand over control of your property and finances to a trustee in exchange for protection from legal action by your creditors (the people/companies you owe money to).

You do not have to have a minimum amount of debts or property to enter bankruptcy, but you need to be insolvent (unable to pay your debts when they fall due).

You get to keep some basic personal property.

Bankruptcy can give you relief from debt collection and a fresh start (release from your debts), but it also involves many drawbacks.

The following is a brief summary of the advantages and disadvantages of bankruptcy. You need to get advice about your particular circumstances.

Consider the advantages

There are many advantages to going bankrupt:

  • Most creditors will stop contacting you;
  • Legal action against you to recover many types of debt will stop;
  • The Sheriff will not be able to take your essential household goods to pay debts covered by the bankruptcy (Note: In NSW, the sheriff cannot seize essential household goods or other items protected in bankruptcy);
  • Any garnishee of your wages or bank account will stop (except certain garnishees by the Australian Tax Office)
  • You can keep protected property such as essential household goods and a cheap motor vehicle (See Protected Property below);
  • You can still earn an income (with some exceptions – see disadvantages below);
  • You will be released from most debts when you are discharged from bankruptcy (most commonly after 3 years and 1 day).

You can keep protected property

If you are bankrupt you can keep the following property. But everything else will be taken and sold for the benefit of your creditors.

  • Ordinary clothing;
  • Necessary household property (such as furniture and appliances but not antiques or items of exceptional value);
  • Tools of trade up to the prescribed limit ($3,800 as at September 2020 – go to afsa.gov.au and select indexed amount for the latest amount);
  • A car worth no more than the prescribed amount ($8,100 as at September 2020 – go to afsa.gov.au and select indexed amount for the latest amount);
  • Superannuation (still in your super fund);
  • Life insurance policies;
  • Payments from life insurance or superannuation received on or after the date of the bankruptcy. Payments received before the date of the bankruptcy are not protected;
  • Compensation received directly by you for personal injury (or property purchased almost entirely with compensation money).

Consider the disadvantages of bankruptcy

Some of the main disadvantages of bankruptcy are:

  • Your property and assets are taken – Most of your assets (property you own) may be sold to pay your debts, including your home if you own it or are paying off a mortgage (unless it is Protected Property).
  • Your cash is taken – Any money, over a modest amount on which to live ($1,000-$2,000), that you have in a bank account or in cash will be taken to pay your debts.
  • You may have to pay contributions – You may have to pay contributions towards your debts if your annual income is over a certain amount ($59,031.70 (after tax) for a person with no dependents as at September 2020 – see www.afsa.gov.au for latest amount).
  • You will not be released from all types of debt – For example, you will not be released from court fines, council rates, penalties and fines imposed by a court, most HELP/HECS-type debts and student loans, Child Support debts, family law maintenance payments or debts incurred by fraud. You will still have to pay these debts. You will also not be released from unliquidated debts (See below).
  • You may be restricted from certain employment – You may not be able to continue working in some professions or licensed trades.
  • You may be restricted from overseas travel – You cannot travel overseas without the written permission of your trustee in bankruptcy. You may have to surrender your passport. If you need to travel, you need to apply for permission and pay a fee.
  • You may face problems accessing credit, rental property and other services – Bankruptcy will be listed on your credit report for 5 years or 2 years from your discharge, whichever is longer, and will be listed on a public record (which can be searched for a fee) called the National Personal Insolvency Index forever. This will make it difficult for you to borrow money, particularly while the listing is on your credit report. It may also have an effect on your ability to rent property, access telecommunications and other services or purchase insurance.
  • You may face restrictions on borrowing and trading – You will have a limit on how much you can borrow, accept goods on credit or hire purchase, or offer to supply goods or services without disclosing to the lender or customer that you are an undisclosed bankrupt ($5,882 as at September 2020 – go to www.afsa.gov.au and select indexed amount for the latest amount).
  • You are banned from being a company director – You cannot be a director of a company or otherwise actively involved in the management of a company.
  • Your money or property received while you are bankrupt may also be taken – If you inherit or win money or property while you are bankrupt it will be taken by the trustee in bankruptcy (up to the amount required to pay all your debts, interest and the costs of administering your bankruptcy – this can be much more than the total amount of your debts).
  • You may be restricted from taking or continuing legal proceedings – You will not be able to take or continue legal proceedings without the permission of your trustee except in relation to personal injury to you or your family.

WARNING: Travelling overseas without the trustee’s permission is an offence under the Bankruptcy Act for which you may be prosecuted.

If you have unliquidated debts, get legal advice before declaring bankruptcy

Some debts are not included in bankruptcy until they have been “liquidated” – liability admitted and the amount agreed upon (in writing or a judgment).

The most common example is a debt arising from a motor vehicle accident – such as damages to another person’s vehicle.

If you are considering bankruptcy and some of your debts are from an accident, or otherwise don’t arise from a contract (like a loan contract, for example), then you should get legal advice before going bankrupt.

Understanding how long bankruptcy may last

Bankruptcy usually lasts 3 years and 1 day but can be extended in some circumstances to 5 or 8 years.

How long it lasts depends on whether you behave honestly (tell the truth about all your property and debts): abide by the rules and co-operate with your trustee.

Your bankruptcy can also be extended for non-payment of income contributions.

You can continue paying secured debts, such as a mortgage on your home

You may continue paying secured debts in bankruptcy unless the trustee in bankruptcy decides to take and sell the asset (and repay the secured creditor).

This will usually only happen when your equity in the asset is enough to cover the costs of the sale and provide a return for creditors. Your equity is the value of the asset (eg your home) less the amount owed to the secured creditor (eg the amount of your mortgage).

This can happen at any time both during bankruptcy and for a long time afterwards. Sometimes, where there is no equity in an asset the trustee will allow you to retain it (for example where your mortgage is almost the same as, or more then, the value of your home).

Be aware that the home may still be sold later if the value goes up and/or the mortgage goes down. If the home has not been sold by the trustee by the time you are discharged from bankruptcy, you may be able to buy it back from the trustee.

WARNING: Your home may be taken and sold by the trustee at any time, even after you have been discharged from bankruptcy.

If you own property with someone else

You may own property with another person such as your spouse, de facto spouse or another family member.

if you declare bankruptcy, the other owner(s) will be given the option to buy your share of the property from the trustee in bankruptcy. If the other owner(s) cannot afford to do this, the property may be sold and the other owner(s) will be refunded an amount reflecting their share.

The trustee in bankruptcy may go after property you previously owned and gave away for less than its value

A trustee in bankruptcy has extensive powers to look back in time to recover property you may have given away or sold for less than it was worth.

You cannot simply give away property and then go bankrupt to avoid paying your creditors. Even innocent transactions, such as a large sum of money or property given to a family member when times were better, may be undone if it occurred in the years leading up to your bankruptcy.

If you have given away money or property or sold property for less than it was worth, particularly in the last 5 years or so, you need to get legal advice before going bankrupt.

Even transactions which occurred longer than 5 years ago can be challenged by the trustee if it can be shown you were trying to hide wealth from your creditors.

The Official Receiver might reject your debtor’s petition

There is no minimum amount of debt required for you, a debtor, to present a petition for bankruptcy.

But the Official Receiver can reject a debtor’s petition if it thinks you:

  • Would be able to pay the debts within a reasonable time; and that either:
    • You are unwilling to pay one or all of his/her debts; or
    • You have been previously bankrupt on a debtor’s petition at least 3 times or at least once in the past 5 years.

WARNING: You should think very carefully before going bankrupt for very small debts because of the long term consequences.

CASE STUDY

Jodhi went bankrupt on a $5,000 credit card debt. Two years later she inherited $40,000 when her grandfather died.

By then the cost of annulling the bankruptcy (paying debt including interest, plus all the expenses and fees of the trustee) was over $30,000, meaning that she got less than $10,000 from her inheritance. 

She also found that she continued to have problems with getting pay TV services connected and getting further loans.

Get legal advice if you’re concerned about the criminal consequences of bankruptcy

For most bankrupts, the process goes quite smoothly and they are discharged at the end of 3 years and 1 day.

But there are offences associated with bankruptcy for which debtors may be prosecuted.

Most offences relate to dishonesty or failure to tell the trustee about income or property.

There is also an offence related to gambling or hazardous speculation, and another for incurring credit which it was clear you could not pay. Both relate to events that happened in the two years immediately prior to bankruptcy.

If you are concerned about any of these issues, talk to your financial counsellor or get legal advice.

There are situations where declaring bankruptcy is your best option

Consider declaring bankruptcy if:

  • You will not have sufficient money to live on if you make all the monthly repayments you are required to make to your creditors;
  • You do not have assets that could be sold to repay the debts (eg you rent your home and your only other asset is a car worth under $8100, as at September 2020);
  • You have sought advice from a free and independent financial counsellor and explored other alternatives; and
  • You understand and can live with the restrictions that bankruptcy will bring now and in the future.

REMEMBER: If you earn over the prescribed amount you will need to pay income contributions during bankruptcy. The amount of income you can earn without having to pay contributions increases with each dependent you support.

How to declare bankruptcy

Declaring yourself bankrupt is not difficult but it is a big step with potentially serious consequences.

The Australian Financial Security Authority (AFSA) regulates bankruptcy, including processing the paper work and acting as the Trustee in Bankruptcy in some bankruptcies. You should also read the information AFSA provides at www.afsa.gov.au.

STEP 1

Before declaring bankruptcy, it is strongly recommended you get free advice from a financial counsellor (you can find a financial counselling service near you by ringing 1800 007 007).

If you are in NSW you can use our Find a Financial Counsellor Tool.

A financial counsellor can advise you about other alternatives to bankruptcy.

If you are sure this is the right course of action for you, proceed to step 2.

Step 2

Do it yourself online

Most bankruptcy applications now have to be made online. See the Australian Financial Security Authority for simple guidelines to apply for bankruptcy.

Before you can declare bankruptcy by filling in the Bankruptcy Form, be prepared to:

  • Create an account with AFSA before you can begin;
  • Verify your name and contact details;
  • Submit documents that prove your identity.

Do it yourself on paper

If you do not have access to the internet, you can request the Bankruptcy Form from AFSA by ringing 1300 364 785. AFSA will mail the documents to your postal address.

Get a financial counsellor to help you

Financial counsellors can also help you. Most financial counselling agencies have access to the paper version of the Bankruptcy Form.

Financial counsellors can assist you to complete the forms and advise you on any issues you may be encountering about the bankruptcy process.

Step 3

Complete the Bankruptcy Form

Follow the prompts on the Bankruptcy Form to answer the questions that relate to your situation.

You must complete every question on the Bankruptcy Form. If a question is not applicable to your situation you must answer NO in the appropriate box.

You will then be prompted to move to the next applicable question on the Bankruptcy Form.

List all your debts and assets

List all your debts even if you may not be released from some of those debts. Not all debts are extinguished by your bankruptcy.

List all your assets even if you may believe the property is protected in bankruptcy.

Include a note about why you think the property is protected. You will need to supply evidence. Get advice if you are unsure if an asset is protected, or if you have enough evidence.

Get advice if you need it

You should call the National Debt Hotline on 1800 007 007 if you need specific advice on any of your debts.

WARNING: Beware anyone charging a fee for debt advice. They may offer to negotiate with your creditors, help you with bankruptcy or with alternatives to bankruptcy such as a Debt Agreement.

Paying a fee will not help you when you are already in financial difficulty. Worse, these people are often not particularly skilled or qualified and can make your situation much worse.

You can get free, independent advice from an accredited financial counsellor by calling 1800 007 007 for a referral in any State or Territory.  You do not have to pay any money to go bankrupt.

Alternatives to bankruptcy

Temporary Debt Relief application

This is an option if you are facing urgent enforcement action by your creditors (such as a garnishee which is not leaving you with enough money to live on, or the seizure of your essential household goods), but you are not sure if bankruptcy is for you.

Filing an application for Temporary Debt Relief (also known as a Declaration of Intention to File a Debtor’s Petition) gives you 21 days freeze to get advice on bankruptcy and decide what to do next.

Note: If you filed an application for Temporary Debt Relief between 25 March 2020 and 31 December 2020, you would have obtained a 6 month freeze on all enforcement action to give you time to get advice on bankruptcy.  This was a temporary COVID-19 measure.

Unfortunately filing either an application Temporary Debt Relief or a Declaration of Intention to Present a Debtor’s Petition is considered an act of bankruptcy. There is a risk that the application or Declaration would be used by your creditors to make you bankrupt even if you choose not to go ahead. This is a big risk if you own a house or assets.

Important Note: If you are facing urgent enforcement action, you can also try to stop the seizure of goods, or reduce the amount payable under a garnishee by making an application to pay by instalments. See our Fact Sheet: Making an Application to Pay by Instalments.

If you’re being forced into bankruptcy

If you owe more than $10,000 and you are unable to pay your debts as they fall due (keep up with your repayments), your creditors may be able to force you into bankruptcy.

You should get legal advice if you receive any of the following:

  • A statement of claim
  • A bankruptcy notice
  • A creditor’s petition.

See also our Fact Sheet: Help I’m being made bankrupt!

This is only a brief guide. It is recommended that you speak to a financial counsellor to discuss the best option for you in your circumstances.

See Fact Sheet: Getting Help for a list of additional resources.

Last Updated: January 2020