Bankruptcy Overview - From A Trustee’s Perspective
Hello, I’m Alan Nicholls and I’m a Registered Bankruptcy Trustee, Company Liquidator, and a Chartered Accountant. So that you can have the chance to read some right information, I’d like to tell you about bankruptcy from my perspective.
People tell me every day that they want to pay their debts, but just can’t.
They tell me that they’ve tried to keep up with the minimum repayments required, they’ve talked to their creditors to see what other relief was available, they’ve accepted whatever period of grace was offered to enable them to get themselves into better shape, and they’ve tried and tried and tried and tried and are getting nowhere.
In a lot of cases their circumstances have just changed, and that’s why they are now in debt.
So, I very often recommend to them that they consider declaring themselves bankrupt. I tell them that bankruptcy will give them the chance to start a new life, in most cases completely debt free, and that if they wish, they can start this new life…..now.
What Happens Once You Become Bankrupt?
By becoming bankrupt, and it can generally happen within about 10-14 days, you’ll first get a Bankruptcy Trustee. Perhaps you’ll choose me. We’ll go into that if you ask.
Almost all of your debts, and most times it is all of your debts and liabilities (in the language of a Bankruptcy Trustee they are known as provable debts), simply then become owing by your bankrupt estate, not by you anymore, so you become debt free or almost debt free.
The exceptions are monies owing to Centrelink, Child Support, HECS Debt, and what are known as Court Imposed Fines, and finally, debt incurred by Fraud.
And if you want to keep an asset that is allowed, like a car, and later on we’ll talk about your house too, then of course you must continue to pay for it. This sort of debt is called Secured Debt.
I’ll explain what happens to them shortly, right now I want to tell you what happens to the majority of debt that I come across like credit card debt, tax debt, store card debt, phone debt, personal loan debt, and the like. It’s called unsecured debt, and it’s the easy to get dead end sort of debt that burdens people the most.View More About Bankruptcy
What Happens If The Person Who Files For Bankruptcy Is The Director Of A Company
The Corporations Act precludes persons from being a director of a company whilst they are subject to bankruptcy. Once a person obtains a bankruptcy number they should lodge a completed Form 296 with ASIC. There are no fees payable to ASIC for lodgement of this Form. It is necessary to put the date of bankruptcy and the bankruptcy number on the Form 296. It is lodged with ASIC by mailing it to the ASIC address on the bottom of the Form.
The Form 296 can be downloaded from this web page. Once a person lodges a Form 296, if the company is left with no directors, you can expect ASIC to deregister the company as a director less company. It may well be that one of the creditors will initiate a Court winding up of the company before ASIC gets to the point of deregistering the company. Either way, once you have removed yourself from being a director of the company, you will no longer have capacity to act on behalf of the company and should leave issues regarding the company to a Liquidator if appointed, or ASIC. We do however recommend that a letter be issued to all the creditors of the company to tell them what you are doing so they can decide what actions they wish to take, if anything.
How Does Life Work During Bankruptcy
Once you obtain the protection of bankruptcy, life goes on as normal. The biggest difference people tell us is that they can use their wages to live rather than having no money because all their wages were being used for loan repayments. The Trustee is not involved in your daily life. The role of the Trustee is to administer the bankrupt estate although it is worth mentioning that you are required to help the Trustee should that be required. That might mean sending a document or having a chat on the telephone.
Household furniture & effects are protected unless you have items of value that will appreciate like works of art or antique furniture. You are able to save and replace items of furniture & effects during the three years of the bankruptcy. You can retain tools of trade to an auction value of $3,700. This amount enables a lot of tools of trade to be retained as these days tools tend to sell for very little at auction.
Transport is very important; you can retain cars to an auction value of $7,800. These days a lot of people have cars on finance and normally the lender will allow people to retain the car during the three years you are bankrupt (and then once bankruptcy has been completed) provided the payments are kept up to date. They do this as cars depreciate rapidly and if the financier repossess the car they will most likely sell it for less than the amount owing and bring a loss to account. This loss would be a provable debt in the bankruptcy. To avoid this lenders allow people to retain the car and to continue making the payments. If in any doubt, we recommend that you discuss the car with the lender prior to proceeding to lodge the papers for bankruptcy. It is important that you can function in your day to day life post bankruptcy. Where a car is subject to finance, the value of the car that can be retained is the loan payout plus $7,800. For example, if the loan payout is $20,000 then for the car to be retained its auction value should not be more than $27,700. If you have a car that exceeds the $7,800 threshold equity amount and you need to retain the vehicle, give us a call and we will try to help and will look to see if anything can be done to help you retain the car.
We recommend to people that they obtain a Debit Card so they still have the convenience of a credit card if travelling, buying goods on line etc. A Debit Card works the same as a credit card except you are using your own money and do not have the costs and interest that will be incurred on a credit card if the monies are not repaid on time. During the 3 years of bankruptcy you must disclose your bankruptcy when applying for, or obtaining goods and services on credit or by cheque for more than $5,613. Normally, once subject to bankruptcy you will not be able to obtain a credit card and we recommend that you do not obtain credit as you will most likely be charged a high rate of interest which will detract from your funds that are available for day to day living. Use bankruptcy to create the habit of saving, no matter how small the amount being saved is.
Bankruptcy is not only about assisting you to resolve debt that you are unable to repay, it is also about reconfiguring the way you live your life going forward. We recommend that you create some quiet time and plan how you want to live your life once you have the protection of bankruptcy, it is a new start so do not waste the opportunity.
As you ‘go through the door’ of obtaining the protection of bankruptcy, as Trustee I would allow you to have $2,000 in your bank account. (not all Trustees will allow this). However these monies must remain in your bank account and cannot be invested into property, managed fund, shares etc. The funds from your protected wages can be banked and used for living expenses, replace a fridge, lounge, TV or even to go on holiday etc.
Any monies able to be claimed as a tax refund for the year or part year prior to bankruptcy, go to the bankrupt estate. For example, if a person becomes bankrupt on 30 September, 2012 and lodges a tax return for the Financial Year ended 30 June 2013 and obtains a tax refund of $1,200, then $300 will go to the bankrupt estate and the person will get to keep $900 of the refund. All subsequent refunds during bankruptcy can be retained by the bankrupt person, but will be looked at as these are really some of your net income, and so may take your earnings over what is called the Threshhold amount. Another point to note is, if monies are owed to the Tax Office, refunds during bankruptcy will be retained by the Tax Office against taxes owing at the date of bankruptcy. This only happens during the three years of the bankruptcy.
We have been advised by some people that once subject to bankruptcy they have been declined rental on property. We have had other people who have advised that they have had no problems. It most likely comes down to each individual agent.
It is possible, depending on your circumstances, to save a house when you become bankrupt. Good commentary on this is contained on the web site Bankruptcy and Houses each case needs to be considered on its own merits. It is in everyone’s best interest if the social consequences from the trauma of extreme financial problems can be minimised. The effects and consequences for other (non bankrupt) members of the family can be significant. Kids can be distressed from losing the security of their bedroom, the non bankrupt spouse can be devastated to lose the house when they do not have financial problems, etc and we will work to help the non bankrupt spouse to save the house if we consider this to be a viable option.
During bankruptcy we do not take your passport. Those persons wishing to travel will however need to obtain permission from us to travel overseas. There is a form to be filled out and we then process this form to be able to authorise the travel. It is very rare that overseas travel is declined.
How Does Bankruptcy End
Bankruptcy lasts three years (3) and your discharge from bankruptcy is automatic. At the end of the 3 years we provide a Certificate of Discharge to confirm that the person is no longer bankrupt. The Trustee can object to your discharge and extend the period of your bankruptcy if you do the wrong thing. This is not common and will never occur if you are doing the right thing. We ask all people who we are administering bankrupt estates for to work with us and do the right thing. We work to help people. If during the 3 years of bankruptcy your debts are paid in full, then your bankruptcy is ‘annulled’. For the bankruptcy to be annulled, interest must also be paid to the creditors who are legally able to claim interest, for the period from commencement of bankruptcy to the date the dividend is paid. It is also possible to propose a Composition with creditors at any time during the 3 years of bankruptcy. When you propose a Composition with your creditors the Trustee will convene a meeting of your creditors and if creditors approve your proposal, your bankruptcy is annulled and you are then subject to the composition. There are some traps that you need to be aware of. A Composition (unlike bankruptcy) will only protect you from creditors who are circularised for the proposed Composition. If a Composition is entered into creditors who were not circularised can commence their own debt collection action, including the commencement of bankruptcy proceedings. Also, if for some reason you do not comply with the Composition and it is terminated, you are then back to square one and may have to commence the bankruptcy process from the beginning again and have wasted the time spent dealing with the first bankruptcy and the Composition. A Composition to be proposed must be given appropriate consideration and be approached with care.