What is Bankruptcy?
Individuals experiencing financial difficulties often seek relief by filing for bankruptcy when they reach a point at which they are no longer capable of repaying their outstanding debts. Bankruptcy should, however, only be considered as a last resort as it has a significant impact of your ability to access credit in the future, and it may also prevent you from working or continuing to work in certain employment categories. Some licensed employment categories require disqualification or permission to continue to work and your passport may be held by your trustee, and you will require permission of your trustee to travel overseas.
Whilst bankruptcy may lessen the burden of unmanageable debt, it is by no means a quick-fix, and individuals considering filing for bankruptcy are advised to seek financial counselling in order to fully understand what the consequences are. Reaching a formal or informal debt agreement with your creditors may result in a preferable outcome to bankruptcy, if it can be achieved.
BANKRUPTCY DOES NOT ALWAYS MEAN YOU HAVE NO FURTHER OBLIGATIONS TO YOUR CREDITORS.
Your non exempt assets will be sold by you trustee and if your income exceeds prescribed levels (see ASFA website) 50% of the income above the threshold levels will be taken by the trustee and distributed to creditors along with the surplus from the asset sales after trustee expenses.
BEFORE FILING FOR BANKRUPTCY PLEASE SEEK FINANCIAL COUNSELLING TO ENSURE YOU FULLY UNDERSTAND THE CONSEQUENCES OF GOING BANKRUPT.
Whilst there are no limits on income, assets or debt when filing for bankruptcy, there are certain requirements which have to be met prior to lodgment.
- Be present in Australia or be an Australian resident or have owned a house or business in Australia at the time of lodgment. S55(2A) Bankruptcy Act
- Be unable to pay their debts as and when they fall due. S55(3AA)(a) Bankruptcy Act
- Not have been bankrupt 3 or more times or more than once in the last 5 years. S55(3AA)(b) Bankruptcy Act
Eligible individuals are required to submit a Debtor’s Petition and Statement of Affairs to the Australian Financial Security Authority (AFSA).
Successful bankruptcy applicants will have a trustee appointed to investigate their financial affairs and to sell certain assets in order to meet repayment requirements.
Assets exempt from sale include:
- Most household and personal items. S116(2)(b) Bankruptcy Act
- Tools of trade (up to $3750 as at 26/4/2017). S116(2)(c) Bankruptcy Act
- Vehicles where the net value of the vehicle is less than a set limit (up to $7700 as at 26/4/2017). S116(2)(ca) Bankruptcy Act
- Superannuation and life assurance policies. S116(2)(d)(1) Bankruptcy Act
- Personal injury compensation. S116(2)(g) Bankruptcy Act
- Property protected under the Defence Service Homes Act of 1918.
- Property of a sentimental value to the debtor. S116(2)(ba) Bankruptcy Act
Assets which can be sold or distributed by the trustee (divisible property). S116(1) Bankruptcy Act includes:
- Houses, apartments, land ,farms
- Cars, trucks motor bikes
- Shares and other investments
- Cash deposits
- Tax refunds for monies earned prior to bankruptcy
- Antiques, jewelry
- Business assets
- Monies owed to you
- Leaseholds, licenses, patents
- Livestock or farm crops
- Beneficiary under a deceased estate (under certain circumstances)
- Lotto wins
The following debts are still required to be paid during bankruptcy:
- Penalties or fines imposed by a court
- Car accident damages claims
- Student assistance/supplement loans
- New debts incurred after bankruptcy commences
In addition to these debts you may be required to make income contributions based on your current level of income. This is determined by the income limits outlined on the AFSA website.
The following debt are still required to be paid after your bankruptcy:
- Child support debts
- Debts incurred by fraud
- Accumulated HECS and HELP debts
- Court fines
Annulment of Bankruptcy
Individuals are discharged from their bankruptcy after 3 years unless the trustee believes they have failed to fully co-operate, in which case the bankruptcy can be extended to a maximum of 8 years.
A bankruptcy can be annulled within the 3 year period if: