What to expect from the bankruptcy process

Company Insolvency     |     April 12, 2016

There’s little argument that bankruptcy is something of a dirty word. There’s a stigma attached to declaring yourself bankrupt, and for some people the very idea of it can be incredibly stressful.

However, much of the impression that exists in people’s heads about the process may come from misinformation. For instance, some people remain unclear on precisely what the term means and whether it’s something which applies to individuals, organisations or both. Obviously, if your financial situation reaches a point where bankruptcy is legitimately an option, you need to learn precisely what it means, or at least speak to someone who can guide you through the process.

First things first – the process actually only applies to individuals. As far as a company is concerned, reaching a state equivalent to bankruptcy, where debts have become unmanageable, would most likely mean liquidation, voluntary administration or receivership. As an individual, however, when you are deemed unable to meet your debt obligations your best option may be bankruptcy. To demystify that process, let’s take a closer look at what you can expect should you find yourself taking this path.

How does it happen?

There are two ways in which bankruptcy can be declared – either voluntarily by the person facing the financial trouble, or by a court after application by a creditor. While the outcome of each process is essentially the same, there are a few reasons why you might be better served by voluntary declaration rather than having the process imposed upon you.

Most importantly, being a voluntary bankrupt means you will be able to appoint the trustee to manage your affairs. On the other hand, if a creditor is successful in having a court declare you, they choose the trustee to perform the same role.

If it feels at all like you may be heading towards bankruptcy it’s worth speaking to an expert agency about whether or not declaring is the most appropriate action in your circumstances. As with most financial issues management, getting ahead of the process can make things a great deal easier.

Understand the consequences

While it isn’t necessarily the frightening situation that some might think, there is a reason that bankruptcy carries a troubling reputation. The consequences for declaring include having your name added to the National Personal Insolvency Index (NPII) for life, a public record that can be accessed by anyone with basic information about you.

Not quite as permanent, but still lasting long enough to make certain aspects of your life difficult, your bankruptcy will appear on your personal credit report for five years, meaning your ability to obtain a credit could be impaired.

In terms of more tangible consequences for your life, you may find that some of your personal assets will be sold off during the bankruptcy process to pay back as much of your debt as possible. Not everything you own will be at risk, however, with safe assets including things such as:

  • household goods, including appliances, computers and furniture;
  • vehicles purchased with lender finance, in which you have accumulated equity of less than $7,600;
  • superannuation and life insurance policies;
  • tools of trade worth up to $3,700; and
  • credit limits of $5,496.

Bankrupts must disclose their bank or debtor status when seeking to obtain goods or services on credit, hire purchase or cheque; when leasing, hiring or promising to pay for goods and services; or when seeking to obtain an amount by promising to supply good or render services.

All of these items are considered as necessary living assets, and cannot be taken from you. The bankruptcy process is intended to not only pay back creditors, but hopefully leave you in a position to rebuild your own fortunes.

Assets that you can reasonably expect to lose as part of the process include real estate, cars that you own outright or hold more than $7,500 equity, valuable antiques, artworks or jewellery and savings in excess of $1,000 in bank accounts.

While declaring yourself bankrupt means that creditors are no longer able to chase you for repayment, that doesn’t mean you will be freed from all debts. If your income post-bankruptcy exceeds a certain limit, your salary may be garnished to make further contributions to the appointed trustee.

Similarly, you will remain liable for any fines or penalties you may have accrued, while regular expenses such as child support payments continue to be your responsibility.

Remaining optimistic in the face of bankruptcy

As you can imagine, bankruptcy is not a situation that people set out to find themselves in, but it’s important to think of it as a remedy to your issues, rather than closing the book on your financial affairs. The system is designed to offer you a fresh start, and while the consequences are understandably tough, there is light at the end of the tunnel for many Australian bankrupts.

That said, you have a much better chance of coming out of the process positively when you seek the advice of experienced advisors. For assistance with your bankruptcy, or for more information about navigating financial difficulty, speak to Corporate Lifeline today.