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What happens if I go bankrupt?

Douglas Cheveralls regularly provides advice about Bankruptcy. Some of the frequently asked questions are as follows:

  • What happens if I go bankrupt?
  • What happens if someone that owes me money goes bankrupt?
  • How are bankruptcy proceedings used in debt recovery?
  • Are there are alternatives to bankruptcy?

The purpose of bankruptcy is to provide a last resort for a person who has so much debt that he or she cannot possibly pay it. Also, bankruptcy ensures that when a person can’t pay all of their creditors, any available assets are shared equally between genuine creditors.

Bankruptcy starts either when a person applies to declare themselves bankrupt, or when a creditor applies to a Court and obtains an order against a person that he or she be declared bankrupt. A Trustee is then appointed by the Australian Financial Security Authority (“AFSA”) which is the government authority responsible for regulating bankruptcy. The Trustee’s job is to investigate and locate all of the bankrupt person’s assets, sell them, and distribute the proceeds to all of the creditors in proportion to how much each creditor is owed.

For the bankrupt person, there may a significant impact on his or her life, but for many people, it can be a great relief and life does go on for the 3-year period of bankruptcy.

Bankruptcy may affect how much income you can earn and may restrict the kind of employment you may have and offices you may hold. For instance, a bankrupt person cannot be a director of a company or a member of parliament.

If you earn over a set amount (which is reviewed twice a year), you may need to make compulsory payments to the Trustee. The current income contributions threshold is available on the AFSA website (here) under the section called “Income Contributions”.

Bankruptcy releases you from most of your debts, but some debts are still payable. For example, court-imposed penalties and fines, child support, HECS, and debts that you incur after your bankruptcy commences, still need to be paid by the bankrupt person.

Also, bankruptcy does not release you from secured debts, such as a mortgage or car loan. The bank can still take possession of your house and sell it to recover the amount of your mortgage.

If you wish to travel overseas during your bankruptcy, you need to request permission from your Trustee while you are bankrupt.

Becoming bankrupt will certainly affect your ability to obtain loans and credit in the future, and your name will appear on the National Personal Insolvency Index, which is a searchable public register listing anyone who has ever been bankrupt.

Finally, while you are bankrupt, you are restricted in the legal action that you may take in the courts. Please contact us if you have further questions about the effect of bankruptcy.

What happens if someone that owes me money goes bankrupt?

If someone owes you money, and that person becomes bankrupt, then in most cases you can no longer pursue that debt. Instead, you have the right to lodge a document called a “proof of debt” with the Trustee, identifying the amount of money owed to you.

The Trustee will, subject to verification, and subject to there being available money, pay you an amount in proportion to the size of your debt and the total number of creditors. For example, let’s say the bankrupt person has $1,000,000 worth of debt, and $100,000 worth of assets that are available for unsecured creditors (after the Trustee’s fees and other priority debts). If that person owes you $100,000, then you will be entitled to a distribution of about $10,000 (i.e., about 10c on the dollar).

If you have security for the debt, such as a registered security interest on the Personal Property Securities Register or a caveat or mortgage over real estate, then your debt does not “merge” with the bankruptcy, and you can exercise your rights under that security. However, if the security doesn’t cover the full amount owing to you, the balance will be unsecured and you may be unable to recover the debt in full.

How are bankruptcy proceedings used in debt recovery?

If you have a court judgment against a person, and the person does not immediately pay the amount owing, you have various options to enforce that judgment (see further, our article here).

One possibility is that the person does not have the available cash to pay you. Another possibility is that the person owes money to a number of other creditors and does not know who to pay first.

In these circumstances, your best option might be to issue a bankruptcy notice. A bankruptcy notice is a form prepared by you or your lawyer and registered with AFSA that is served on the person who owes money under a court judgement. It says that if the money is not paid in 21 days, then the creditor can apply to the Federal Court for an order that the person be declared bankrupt (called a “sequestration” order).

Sending a bankruptcy notice is relatively inexpensive and can be a good way to find out if the judgment debtor has the means to pay the judgment debt. Sometimes the receipt of the bankruptcy notice is all the incentive required…

Are there alternatives to bankruptcy?

Alternatives to bankruptcy include informal arrangements, where you negotiate with each of your creditors to part pay a debt or enter into a payment plan, and more formal arrangements such as Part IX Debt Agreements and Part X Personal Insolvency Agreements.

A Debt Agreement is a binding agreement between you and your creditors that falls under Part IX of the Bankruptcy Act. Under the Part IX Debt Agreement, your creditors agree to accept an amount of money that you can afford to pay over a set period of time to settle your debts. Once you have paid this money your creditors cannot recover the rest of the money that you owe. There are specific criteria, and formal requirements for entering into a Debt Agreement and you will need to get professional advice to take this step.

A Personal Insolvency Agreement is similar in some ways to a debt agreement but is an even more formal process and requires you to appoint a controlling trustee to investigate your affairs and report to your creditors. Again, you will need to get professional advice about this if you wish to explore this option.

Please contact Douglas Cheveralls if you would like advice about any aspect of bankruptcy law.