Dealing with financial problems and how bankruptcy fits in - Nicholls Co

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Dealing with financial problems and how bankruptcy fits in

Dealing with financial problems and how bankruptcy fits in

When considering options for the resolution of financial problems we recommend that the goal must be to ensure that the financial problems are resolved in the most efficient manner and not left to fester.

At Nicholls & Co we have had more than 30 plus years of helping people dealing with their financial problems. We have observed that there can be a very high social cost if the financial problems are not dealt with in a timely manner. As people struggle with unresolvable financial debt they inevitably become stressed, suffer health problems, emotional problems, relationship problems, problems at home with children. As the downward spiral accelerates quite often people’s lives fall apart, the creditors become increasingly stressed and everyone is unhappy.

Therefore action must be taken to stop the downward spiral, restore balance to normal life and allow creditors to know where they stand. Care must be taken when considering how to solve the financial problems because if a solution involves continuing the financial stress, the downward spiral will not be stopped. To stop the downward spiral, the solution must provide a release from the liabilities to allow relief and for the person experiencing the financial problems to ‘call time’ regroup and get back to living life as a human being. It is in no one’s interest for people to be ground into the dirt, unable to work, suffering from depression, having relationship break down and children who are innocent victims having their lives changed forever and possibly having a greater propensity to lose direction in their lives.

It is for this reason that we very often recommend bankruptcy as a solution for extreme financial problems. There are other options and these are outlined further on on the website, but in most cases, a bankruptcy claim provides the neatest and most effective solution as bankruptcy provides an immediate release from the liabilities, recognises that we are all human beings. It provides a minimum level of income and property that is protected to ensure that the person can live fully. Once a person gains the protection of bankruptcy they can change their focus towards regrouping, living their life, and recovering from the trauma of extreme financial distress.

The greater the collateral damage caused by financial problems can be limited, the better it is for society. Society pays for people who are out of work, sick in the hospital, and unable to contribute to society. It is critical that the financial problem is dealt with quickly and efficiently, thereby limiting this collateral damage, and the person who has claimed bankruptcy is allowed the dignity and respect to enjoy a happy and productive life as again.

An excellent hands on’ web page on bankruptcy, which has been written by Slade McInerney who has been through the bankruptcy process himself can be located at www.understandingbankruptcy.com.au I recommend that you read the Understanding Bankruptcy web site, it has a lot of good practical information that is easy to understand and digest”

The Bankruptcy option explained

The purpose of the Bankruptcy Act is to provide a humane solution for persons who are unable to pay their debts, without regard as to whether the debts are business or personal.

If you have what to you consider to be (and it is you who decides this) is overwhelming debt then bankruptcy is a legitimate way for you to get out of debt so that you can start again to get back on your feet and on with your life.

Thousands of what could be generally termed as “ordinary people” choose to utilise bankruptcy each year. You don’t have to be in business to declare yourself bankrupt. Unresolvable debt does not discriminate and can impact anyone without regard for whether they are or are not in business, the type of work they do, or where they live. Some examples of the types of debt that may cause people to seek the protection of bankruptcy include unmanageable credit card debt, personal loan debt, tax debt, or debt from an adverse Court Judgement. Some of the causes for people to experience unresolvable debt can include; relationship breakdown, unemployment or underemployment, sickness, adverse Court judgment, business failure, an act of nature (eg Floods), personal guarantee being called up, structural change within an industry, or excessive personal expenditure. There are other reasons as well but these are the mains reasons and you should know that a bankruptcy claim works the same way, regardless of the reason.

Sometimes there is confusion about businesses going “bankrupt”. Only individuals can claim bankruptcy. If a Pty Ltd company or a Limited company is unable to pay their debts then there is a different set of laws and procedures for them, they mostly go into what is called Liquidation. In many ways, the processes are quite similar. Often because company directors have signed personal guarantees with suppliers and landlords when a Pty Limited or Limited company goes into liquidation, it follows that directors who signed the personal guarantees cannot honour them. In this instance, the directors individually also may seek to go bankrupt so that the debt, as far as they are concerned is canceled and life can go on.

For you to consider bankruptcy as a solution for the financial problems you might be experiencing, you need to understand how bankruptcy works and how it will enable you to have a better life. Bankruptcy needs to be a sensible solution for the person who has unmanageable debt and for the persons who are unable to collect their debts. My observation is that persons who owe unmanageable debt, over time experience increasing emotional problems, relationship problems, and health problems. As time progresses, the ability to repay the debt deteriorates until their life implodes. This is no good for anyone. Also, persons who are owed money deserve to know where they stand. It is wrong for them to be throwing good money after bad, chasing debts that are uncollectible, and cruel for them to be budgeting for the money to be collectible when in truth the debt is not collectible or is perhaps only partly collectible. Bankruptcy enables everyone to put direction into their lives and plan forward.

How Does A Person Become Bankrupt?

To obtain the protection of bankruptcy you need to first complete a Bankruptcy Application. Completing the Statement of Affairs is probably the most complicated part of the process of obtaining the protection of bankruptcy. The feedback that I get is that completing the Bankruptcy Application can be very stressful. Oftentimes people begin putting together their Statement of Affairs and give up after five or ten pages, the end result of which is the financial stress, endless phone calls, toxic letters appearing in the post box not to mention sleepless nights go on. For persons who need help completing their Statement of Affairs, I recommend our [paper_costs] service for more information click here. I also recommend www.understandingbankruptcy.com.au. This site has excellent information on bankruptcy that is easy to understand and digest.

If you are completing the Bankruptcy Application yourself and you want me to be Trustee you should mail your paperwork to me at P.O. Box 271. Tamworth NSW 2340. Email: helpdesk@nichollsco.com.au  and I will organise for it to be lodged for you to obtain the protection of bankruptcy. When your paperwork is lodged together with consent by me to be Trustee, I will be appointed as the Trustee of your bankrupt estate”

What Happens Once A Person Becomes Bankrupt?

Once a person obtains the protection of bankruptcy, all liabilities (provable debts) become owing by the bankrupt estate and the person is debt-free. This is an extremely important point to note and digest as the alternatives to bankruptcy, notably Debt Agreements and Personal Insolvency Agreements you are not released from your debts until the final payment is made. Often times with Debt Agreements that are five years down the track. That is too long to stay in debt and to be broke and miserable for most people and their families.

Once the Bankruptcy is in place then the bankruptcy number and date of bankruptcy are recorded on the National Personal Insolvency Index. The Trustee will write to all creditors to let them know to contact his office regarding their liabilities and the person who has obtained the protection of bankruptcy is advised to direct all creditors to the Trustee’s office. This relieves the person from all the phone calls and allows the creditors to talk to the Trustee’s staff who will try to help the creditor to work out where they stand regarding the collectability of their debt. The bankruptcy is not advertised in a newspaper. The Trustee will move to secure assets that become part of the bankrupt estate and commence administering the bankrupt estate. The person who has obtained the protection of bankruptcy can start putting the stresses of being unable to repay their debts behind them and get on with life.

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 Form 296. It is lodged with ASIC by mailing it to the ASIC address on the bottom of the Form.

Once a person lodges Form 296, if the company is left with no directors, you can expect ASIC to deregister the company as a directorless 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 the 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 $3,800. 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 $8,550. 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 repossesses 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 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 $8,550. For example, if the loan payout is $20,000 then for the car to be retained its auction value should not be more than  ($20,000 plus $8,550). If you have a car that exceeds the  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 traveling, buying goods online, 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 $6,273. 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. Once you are ‘through the door’ and have the protection of bankruptcy, any money you save in your bank account is protected without limit. However, these monies must remain in your bank account and can not be invested into property, managed funds, shares, etc. The funds can however be used for living expenses, replace a fridge, lounge, TV, or even to go on a holiday, etc. Once discharged from bankruptcy the funds in the bank account are available for the person to do what they want.

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. 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. 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.

During bankruptcy, the bankrupt person will maintain their own bank account and insurances. The Trustee has no involvement. The Trustee will open a Trust Account for the bankrupt estate. The Trustee will bank into the Trust Account monies from realisation of assets of the bankrupt estate and income contributions if they are required to be paid by the bankrupt person.

“Bankruptcy provides protection from creditors owing as at the date of bankruptcy. It provides no protection for liabilities incurred after the commencement of bankruptcy.”

Where income contributions are required to be paid, we do not contact the employer. We liaise with the person subject to bankruptcy for the payment of the income contributions. There would have to be a serious problem before we would go near the employer and it is very rare for such a situation to occur. The Bankruptcy Act is very humane. One of the great attributes of bankruptcy is that it ensures that your income is protected so as to ensure your wages are available for the provision of the necessities of life such as rent, food, electricity, fuel, transport costs, saving for a holiday, that sort of thing.

How this works is with no dependents your after-tax wages up to $61,789  are protected and that money is yours for living expenses and what’s leftover you can save in a bank account for a rainy day. Where a husband and wife have no kids and both become bankrupt, they can each earn $61,789 after-tax, and that income is protected. The Bankruptcy Act is very generous. Where a couple has a child and the child does not earn more than $3,950 they can both claim the child as a dependant and are able to each receive after-tax income of $72,911.02 and these monies are protected for their personal use. This amount increases to $78,472.03 for 2 dependants, $81,561.48 for 3 dependants, $82,797.26 for 4 dependants and $84.033.04 for more than 4 dependants. If your after-tax income exceeds these threshold amounts (depending on the number of dependents you have) you will have to pay income contributions to the bankrupt estate of half of each after-tax dollar that you earn above your threshold amount. You get to keep the other half of the excess as protected income. Some people who are subject to bankruptcy save their half of the excess income to save for a holiday, to buy a car once discharged from bankruptcy, to save a deposit to buy a house once discharged from bankruptcy.

Monies held in a superannuation fund are protected provided they have been accumulated over time. If lump sums are deposited into the Super Fund prior to bankruptcy there can be problems. During bankruptcy, monies your employer pays into your super fund are protected and not are available to the bankrupt estate. You are not precluded from depositing money into your super fund during bankruptcy and if you are considering doing this we recommend that you first obtain advice from your superannuation advisor. If you have to pay income contributions, payment of extra funds to the Super Fund where you gain a tax deduction for same can impact the amount you have to pay in income contributions. If we are administering your bankruptcy, we recommend that you discuss with our Income Assessment Team the effect that this would have on your income contribution liability. Post the commencement of bankruptcy, the monies you receive from your super fund are protected. If you receive an income from your super fund and it exceeds the above-mentioned threshold amount that is relevant for you (eg $61,789 if you have no dependents) then you may have to pay income contributions.

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 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 the 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 waisted 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.

Life after Bankruptcy

Once you are discharged from bankruptcy your creditors cannot reappear, they remain with the bankrupt estate. The bankruptcy (and pre-bankruptcy Judgements, defaults, etc) remain on the records of Credit Reporting Agencies for 5 years. This can cause problems if you apply for loans, particularly if it is on the basis that you do not have a deposit for the goods you are wishing to purchase. You need to be aware and plan for the fact that there could be a problem. That said we also note that we have been advised by a major bank that where persons who we administer bankruptcy for, save a minimum of a 20% deposit for a house during the 3 years of bankruptcy, they will receive a housing loan application from those persons once they are discharged from bankruptcy, and process the application on the same basis as any other person applying for a housing loan.

For more information call Nicholls & Co on 1300 848 075 or email helpdesk@nichollsco.com.au