Bankruptcy: What is it, what are the consequences, how do I prevent it?
Managing a business can be hard. When the bills stack up and the money coming in slows down, steering a path through the hard times can be difficult. Not being able to pay your debts can have serious consequences. Taking your eye off tax and superannuation payments can also lead to further debt. What do you when the creditors - the people you owe money to - come knocking at your door? In situations like this, you may consider bankruptcy, but what are the consequences?
Declaring bankruptcy can have a serious and long-term effect on many areas of your life. If you are considering declaring bankruptcy it is essential that you are aware of and understand the resulting consequences and obligations.
What is bankruptcy?
Bankruptcy is a legal process which arises when someone is unable to pay their debts. During bankruptcy a bankruptcy trustee will take control of your finances, usually for a period of three years. After bankruptcy you will be released from most of your debts (with some exceptions such as your HECS debt, debts you have incurred after you declared bankruptcy and court-imposed penalties). As communications with creditors are re-directed to your bankruptcy trustee, declaring bankruptcy will generally stop creditors from harassing you.
How do you become bankrupt?
A person can become bankrupt either by lodging a debtor’s petition with the Australian Financial Security Authority (AFSA) or, if one or more creditors are owed over $5000, they can apply to the court to have the debtor declared bankrupt.
What are the consequences of bankruptcy?
Once appointed, a bankruptcy trustee has extensive powers over your financial affairs. These powers include:
selling your assets;
recovering income earnt over a certain threshold; and
thoroughly investigating your financial affairs.
Additionally, they have the power to recover assets you transferred to others prior to entering bankruptcy.
As a bankrupt, you cannot be a director of a company without the permission of the court nor hold certain public positions. Additionally, you may be barred from entering or remaining in certain professions, potentially affecting your livelihood. Furthermore, you will have your passport confiscated and require the permission of your bankruptcy trustee to travel overseas. You may lose the right to take or continue certain legal actions. Your name will be permanently listed on the National Personal Insolvency Index (NPII), a searchable public register. This consequence is further compounded by the public stigma associated with bankruptcy. As someone who was once bankrupt it may be difficult for you to obtain future loans.
When should you seek legal advice?
It is always better to be safe than sorry and therefore it is advisable that you consider seeking legal advice or financial counselling if you are having financial difficulties. Receiving legal advice becomes even more urgent if you are thinking about declaring bankruptcy, a creditor has started proceedings against you in court or a creditor is threatening to seize your property. Declaring bankruptcy is a drastic measure and should be an avenue of last resort. If you are having trouble meeting your debts seek help as soon as possible.
How can we help you?
A solution is to negotiate repayment plans with your creditors. Negotiating a repayment plan may allow you to repay the debt in instalments to better suit your current financial situation. A successful and well-negotiated payment plan will reduce the financial pressure on you. Terri Janke & Company Lawyers can assist you negotiate a repayment plan, using our knowledge of the relevant laws and our experience dealing with persistent creditors.
Where can I get free legal assistance?
There are free legal services available specifically for consumer credit in all states and territories:
ACT- Consumer Law Centre of the ACT (02 6257 1788)
NSW- Financial Rights Legal Centre (1800 007 007)
NSW- Redfern Legal Centre (02 9698 7277)
Qld- Caxton Legal Centre (07 3214 6333)
SA- Consumer Credit Law Centre (1300 886 220)
Vic- Consumer Action Law Centre (1800 466 477)
WA- Consumer Credit Legal Service WA (08 9221 7066)
There are also additional financial advice services available for Aboriginal and Torres Strait Islander people:
Indigenous Consumer Assistance Network (ICAN)
Financial Rights Legal Centre
MoneySmart’s Indigenous Outreach Team
Centrelink’s Indigenous Phone Service
A list of community legal services which offer free legal advice can be found online here: https://www.moneysmart.gov.au/managing-your-money/managing-debts/free-legal-advice