What happens when you declare bankruptcy?

If you are experiencing issues paying your debts, you may be considering going bankrupt and should seek advice from a bankruptcy lawyer. We have outlined bankruptcy and what happens if you declare bankruptcy.The government has recently amended laws for bankruptcy and insolvency during the Coronavirus Pandemic. Whilst these laws protect people from bankruptcy it does not deal with the debt or repayment of the debt.

What is Bankruptcy?

At its simplest form bankruptcy is a legal process an individual is declared unable to pay their debts.

There are two ways in which someone can be declared a bankrupt, voluntarily and by a creditor that is owed money.

The process to be voluntarily declared a bankrupt is rather simple. An individual fills out a form providing details of their assets, income and debts. The form is submitted to the Australian Financial Security Authority (AFSA) and once the form has been processed you are declared a bankrupt.

Being declared a bankrupt by a creditor involves a court process. The creditor will need to establish that you owe them money (usually by obtaining default judgment in one of the various Courts or Tribunals). The creditor will then need to serve you with a Bankruptcy Notice which will allow you 21 days to either resolve the matter with them or apply to set aside the Bankruptcy Notice. If it is not addressed a Creditor’s Petition can be commenced in the Federal Court. If the Court is satisfied that the debt is valid and has not been paid you will be declared a bankrupt and a Trustee will be appointed to administer your estate.

Generally speaking, a bankruptcy will last for a period of 3 years and 1 day. However, it may be extended up to 8 years in certain circumstances.

Has Covid-19 impacted Bankruptcy?

In order to be declared a voluntary bankrupt your debts were required to be in excess of $5,000.00.

In order to be declared a bankrupt by the Court, the requirement was that:

• the debt exceeded $5,000.00;
• you were served with a Bankruptcy Notice; and
• you did not respond to the bankruptcy notice within 21 days.

For 6 months commencing from 25 March 2020 the government as part of its economic response to COVID-19 has increased the applicable thresholds as follows:

• the minimum amount of debt has been increased from $5,000 to $20,000; and
• the time frame to respond to a Bankruptcy Notice has been increased from 21 days to 6 months.

I am considering Bankruptcy – do I need a lawyer?

It is paramount that you obtain advice from a suitably qualified professional before taking any steps to enter voluntary bankruptcy or if you are served with a Bankruptcy Notice, Creditor’s Petition or any other form of legal documents. Bankruptcy lawyers will be able to meet with you and provide you with advice and options relevant to your particular circumstances. They are the only professional in the insolvency process that is acting solely for you aside from your accountant. The bankruptcy trustee is independent and does not act for you.

In a large number of cases bankruptcy is an option of last resort. We find that creditors are often prepared to be commercial and negotiate where it is evident that their prospects of recovery are limited or hindered. A lawyer that is experienced in insolvency will be able to assist, advise and negotiate with creditors or the bankruptcy trustee.

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has issued a warning to businesses and individuals to be careful in dealing with inexperienced “advisors” in relation to bankruptcy.

It is a complex area of law, proper advice and representation are critical. So it is important that you understand the what happens if you declare bankruptcy from credible advisors.

I can’t pay my debts – What are my other options?

Debt Consolidation

Debt consolidation is where you refinance your debt into a loan with a lower credit rating. There can be a variety of options and your lenders may become more negotiable and helpful if you are working proactively to work through and pay your debts.

Debt Negotiation

Debt negotiation can assist in lowering the amount of debt you have to repay and the extending the timeframe you have to pay it in. A bankruptcy lawyer will be able to negotiate these debts on your behalf and give you more time and more flexible payment arrangements than you can negotiate for yourself. Our lawyers have helped many people with ATO negotiations as well as other debtors.

Debt Agreements

This is a good step prior to bankruptcy where creditors may be happy to take a lesser amount rather than nothing. These agreements can be helpful and be negotiated between the parties privately.

What is Annulment?

Annulment is the cancellation of your bankruptcy there are a few ways you can seek to annul the bankruptcy through payment of debts in full; arranging a composition or proving in court you should not be bankrupt.

Composition is the most widely used method of annulling a bankruptcy and this is where the creditors collectively vote to accept 75% of the amount owing to them. This is done through your trustee and they may charge a fee for this.

What are the consequences of bankruptcy?

The appointment of a Trustee to manage your bankruptcy

A Trustee will be appointed to manage your bankruptcy. The role of the Trustee will be to undertake investigations into your personal and financial affairs. The Trustee will make requests that you supply them with bank statements, records and any other documents relevant to your estate.

Impact on your business

A bankrupt is disqualified from being a director of a company. If you own and operate a business as a sole director and secretary without the appropriate measures in place bankruptcy will inevitably be a problematic.

Impact on income and employment

Certain licencing and accreditation bodies require an individual to be solvent. In the worst case scenario bankruptcy may actually preclude you from earning an income in your profession of choice. In many professions this is a show cause event where you may be able to apply for special consideration.

In addition to the above, you may be required to pay your Trustee an income contribution if you are earning an amount which is higher than the Base Income Threshold Amount

Restrictions on international travel

As part of becoming a bankrupt you are required to surrender your passport to your Trustee. For any travel overseas (even for a short period) you must obtain the Trustee’s consent and provide the Trustee with any information which may reasonably be required by the Trustee to consider a travel request. It is an offence to travel overseas without your Trustee’s written consent.

Debts which may survive bankruptcy

One of the appealing reasons for bankruptcy is that it is fresh start. This isn’t necessarily correct. There are specific debts which will survive the bankruptcy such as fines and director’s penalties

Credit Rating Impairment

You will have your credit rating affected by going into bankruptcy and this generally will impact your ability to obtain finance for at least the duration of your bankruptcy. Limited finance opportunities may be available to you upon being discharged from bankruptcy.

Bankruptcy is a financial tool in our system that allows you to be released from your debts, but it does come with some downside. If you act earlier rather than later if you are burdened by your debts and can’t meet your obligations you have a better chance of making arrangements and avoiding bankruptcy. Negotiation is key in resolving debt disputes and our insolvency lawyers are professional and skilled in handling these negotiatons.

It is important if you are considering declaring bankruptcy to be informed and act early to get the best result.

If you need more advice relating to bankruptcy contact one of our insolvency lawyers on 1300 907 335 or complete an online enquiry form.

About PCL Lawyers

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We are focussed on providing commercially sound legal advice to our business and individual clients. We are a full-service legal firm practicing in business law, disputes and litigation, property and family law.