When to declare bankruptcy
Declaring bankruptcy is an option to consider if you are unable to pay your debts or are owed money by someone who is. A debtor may become bankrupt in one of two ways:
- by the debtor declaring themselves bankrupt. This involves the debtor filing a debtor’s petition and statement of affairs with the Official Receiver; or
- having a creditor/s declare a debtor bankrupt. Where a creditor or creditors are owed collectively more than $5,000.00 by the debtor, a creditor may apply to the Official Receiver for the issue of a bankruptcy notice. If the debt remains outstanding for a period of 21 days following the issue of a bankruptcy notice, the creditor can commence bankruptcy proceedings in the Federal Circuit Court or the Federal Court of Australia.
Assets that can be sold
Once declared bankrupt, a trustee is appointed to administer the bankruptcy. In order to pay the outstanding creditors of a debtor, the trustee is entitled to sell property owned by the debtor, recover any income earned by the debtor and investigate the debtor’s financial affairs.
The property that a trustee is entitled to sell can include real estate, motor vehicles, shares or investments owned by the debtor and also any property that was sold by the debtor in the preceding six months prior to the date of bankruptcy. There are, however, exceptions to the general rule, whereby a trustee cannot sell the following:
- motor vehicles up to a prescribed amount (the current limit at 22 April 2015 is $7,500.00);
- tools used to earn an income up to a prescribed amount (the current limit at 22 April 2015 is 3,650.00);
- most ordinary household items;
- most balances in superannuation accounts, life insurance policies (including any proceeds payable under these policies) and compensation from any personal injuries claim; or
- certain items of sentimental value.
Period of bankruptcy
Bankruptcy lasts for a period of three years and one day from the date the debtor filed a debtor’s petition and statement of affairs or from the date of acceptance of a debtor’s statement of affairs following a declaration of bankruptcy by the Court. This period can be extended if the trustee lodges an objection to discharge.
Consequences of bankruptcy
Besides the selling of a debtor’s assets, bankruptcy can have other serious personal consequences. Once declared bankrupt, the debtor’s name is recorded in the National Personal Insolvency Index, which is a permanent public record. A debtor’s name cannot be removed from this record even following discharge of the bankruptcy. The debtor’s name will also appear on credit reporting agencies’ records for the latter of two years following discharge or five years from the date of bankruptcy.
During the period of bankruptcy, the debtor is also restricted in a number of ways and is subject to a number of onerous obligations. Examples include the debtor being required to obtain the trustee’s permission to leave the country, being required to advise any new credit provider of the debtor’s bankruptcy status, being disqualified from managing corporations or acting as a director or secretary of a company, being restricted from administering a trust account and being required to notify the trustee of any changes in his or her financial position.
Further, not all debts are extinguished following discharge, where certain debts such as HECS or HELP loans, child support payments, court and non-court fines will remain payable.
Ways of ending bankruptcy
Bankruptcy can come to an end by either the expiration of the bankruptcy period or annulment. Annulment can occur by the debtor paying all of his or her outstanding debts in full including interest and required fees and charges, the debtor’s creditors accepting an arrangement to receive an amount less than the full amount outstanding, or on successful application to the Court.
Bankruptcy can be a successful means of obtaining debts owing to you by a debtor. However if you are in a situation whereby you owe creditors money, given the serious and permanent consequences, it is important to consider your personal circumstances and the implications that bankruptcy may have on these before declaring bankruptcy. If you require advice in respect of bankruptcy or are seeking recovery of an outstanding debt call us on 1800 683 928.
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