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Pros and Cons of Bankruptcy – Your Guide

To assist you to consider bankruptcy as the solution for the financial pressure you are experiencing, in this blog we provide a summary of the benefits bankruptcy will provide you and the restrictions that go with bankruptcy.

If you have any questions from reading this blog, give our helpdesk call Nicholls & Co on 1300 060 122 or email helpdesk@nichollsco.com.au.

 

The Pros – The Benefits of Bankruptcy

To get your best result from bankruptcy, it is important that you understand bankruptcy, the opportunity it provides, and how your life will work whilst you are bankrupt.

  1. a) The Opportunity to Turn Your Life Around
  • Bankruptcy gives you a clean slate.

We encourage you to identify what you would like to achieve from your bankruptcy. Everyone is different. You may just want the debt to go away. Others may also want to change their direction in life. The choice is yours. Unresolved debt can be constricting, your wages increasingly go to payments to keep your creditors away. When bankruptcy extinguishes your debt, it frees up your wages. This gives you a fresh start and the opportunity to reset your direction and goals. Let us give you some examples of what other people have done.

Example 1

One couple we helped through bankruptcy wanted to get rid of the pressure from having the debt and have financial security by saving one month of their combined wages in the bank. They did this and then started saving for new household appliances and were discharged from bankruptcy with well over $6,000 in the bank and new household furniture and appliances which they had purchased one at a time, paying cash, during their bankruptcy.

Example 2

Another couple wanted to bring their financial problems to an end and stop the constant worry. The financial pressure was starting to undermine their relationship. They saw their dream of one day owning a townhouse getting further and further away. They wanted to rid themselves of their unresolvable debt and one day have a deposit to buy a townhouse. They filed for bankruptcy, became debt-free, and found they were able to live off one wage and save most of the other wages. They were discharged from bankruptcy three years later with savings of over $60,000 in their ordinary bank account.

  1. b) The Benefit, When You Become Bankrupt
  • You can choose the Trustee to administer your bankruptcy.
  •  All debts caught by your bankruptcy are gone.
  •  Debt collectors calls and messages stop.
  •  Stress levels reduce.

You can select the Trustee that will administer your bankruptcy – a Trustee that you feel comfortable with.

All debts caught by your bankruptcy are permanently extinguished. For most people, this is all their debt including loans, credit cards, and tax debt. The debt collector calls stop as does the debt collecting text messages, emails, and mail. With these debts gone, the stress and pressure you have been enduring abate.

Extreme financial pressure can adversely impact all aspects of your life, ultimately causing serious problems for your health and wellbeing. From our years of experience, if you ignore the problem, it has the potential to bite you.

Bankruptcy allows you to recover from the stress and to start working on improving your quality of life.

  1. c) How Your Life Works During Bankruptcy
  • Household furniture, appliances & effects are protected.
  •  Cars & Bikes protected up to dollar value.
  •  May be possible to continue using a financed car and /or equipment.
  •  Tools & equipment for work protected up to dollar value.
  •  Your income is protected for you to have money to live.
  •  Super that has accumulated over the years is protected for your retirement.
  •  Stat super your employer pays during bankruptcy is protected for your retirement.
  •  Compensation payments you have received for personal injury are protected, as are assets you’re purchased with those funds.
  •  You can save to your super fund during bankruptcy.
  •  During bankruptcy, funds legally accessed from your super fund are protected, as are assets you purchase with those funds.
  •  You operate your bank account without the involvement of your Trustee.
  •  You can save from your wages during bankruptcy without limit.
  •  You can travel overseas for work or holiday whilst bankrupt.

The good news is that you do not lose everything when you become bankrupt. The purpose of the bankruptcy legislation is to remove your insurmountable debt and help you get on with your life.

You keep your Harvey Norman type household furniture, appliances, and effects. You keep your cars and motorbikes up to a threshold value $8,150, you keep your tools and equipment you need to earn your income up to a threshold value $3,800 and the superannuation you have accumulated over time for your retirement is protected.

If you have a vehicle or motorbike on a lease or hire purchase you can continue to use the vehicle provided you continue to pay the monthly payments and the loan has negative equity or if it does have equity, the equity does not exceed the threshold value of $8,150.

Your income is protected during bankruptcy to make sure you have money to pay your bills and live normally. Further, the stat super your employer pays during your bankruptcy goes to your super fund for your retirement. You can pay additional monies from your wages to your Super Fund during your bankruptcy and those monies are also protected for your retirement. You can save from your wages during bankruptcy and those savings are protected for you provided they remain in your ordinary bank account. Once you are discharged from bankruptcy, your accumulated savings in your ordinary bank account are yours, for you to spend as you like.

You can travel overseas for work or a holiday whilst you are bankrupt. You just must obtain the Trustees written permission first. Overseas travel is a human right, and you would have to be doing something very wrong for the Trustee to be precluded from approving your travel.

  1. d) Saving Assets That Would Otherwise Be Lost with Bankruptcy.
  • It may be possible to continue using assets you have an emotional connection to.
  •  It may be possible to continue using assets your family members do not want to lose.

Over the years, from talking to tens of thousands of people, it sometimes comes up that a particular asset has personal significance. With the support of family and friends, it is possible for assets to be saved for your continued use. In these situations, we sell the asset at valuation to a nominated family member and your continued use is between you and the purchaser. We can do this for boats, cars worth more than the threshold value, tools of trade worth more than the threshold value and it is common for us to help the non-bankrupt co-owner save the family home. Yes, you may be able to remain living in your home.

  1. e) Operating a Business While Bankrupt
  • It is possible to operate a business while bankrupt, you just need to know the rules.

As a sole trader, you can operate a business while bankrupt. You use your ABN and trade in your own name. If you trade in your own name, you are not required to disclose your bankruptcy to the people you are dealing with, provided each transaction is less than $6,017 in value. If you have a business name that is relevant to your business, you will need to include your name in the business name. For example, Downtown Mowing would become Downtown Mowing by ‘your name’.

  1. f) Recovering Financially While Bankrupt
  • It is possible to commence your financial recovery while bankrupt.

We recommend that you start working to improve your credit record from when you become bankrupt. It is important to remember that your bankruptcy will not permanently be on your credit record. To start improving your credit record, make sure you have utility bills in your name, and they are paid on time. Further, do not make any loan applications while you are bankrupt.

If you wish to one day buy a house, car, boat, or caravan, start saving from your wages in your ordinary bank account, while bankrupt. These savings are protected for you and once you are out of bankruptcy, all your savings are yours.

If you are that bit older and your strategy for your financial recovery is to save from your wages to your super fund – well, you can do that throughout your bankruptcy. If this is your situation, we recommend you discuss your plan with your licensed Superannuation advisor.

  1. g) Recovering and improving your Health and Well-Being.
  • We recommend you use the stress release bankruptcy provides for the enhancement of your good health and wellbeing.

Our financial wellness is only a small component of what makes us happy and well. However, if we are placed under prolonged financial pressure not only do we become financially unwell, but all other aspects of our life can become negatively impacted. Removal of financial pressure allows you to think about the other things in your life that contribute to your happiness and wellbeing. Maybe improve your fitness, direction of your career, improving your surroundings, start playing sport again, renewing old friendships, and taking control of the direction of your life.

  1. h) Discreetness of Bankruptcy
  • Your bankruptcy is not advertised to the media.

Your bankruptcy is not advertised in the paper. Your trustee communicates with your creditors, bank, solicitor, accountant. The trustee only talks to people that are relevant to your financial affairs. People who are not involved in your financial affairs will not have contact with your trustee. This may include, friends, family, and your boss.

  1. i) Becoming Bankrupt
  • If you live in Australia and cannot pay your bills, bankruptcy is an option for you.

We can help you to become bankrupt without you leaving the privacy of your own home.

If you are unable to repay your debts and live in Australia, you can choose bankruptcy as your solution for the debts you are able to pay.

If you cannot pay your bills but do not live in Australia, bankruptcy will only be available for you if you operate a business in Australia or own property in Australia.

There is no minimum amount you must owe and no lodgement fee.

  1. j) Commencing or Continuing University Studies
  • You can commence or continue university studies while bankrupt.
  •  You can apply for and receive HECS while bankrupt.

Bankruptcy does not stop you from continuing or commencing tertiary studies.

  1. k) Gifting Money from Your Wages and Supporting Your Family
  • During bankruptcy, you can pay-off debt to family members
  •  During bankruptcy, you can gift money from your wages to charity or church
  •  During bankruptcy, you can use your wages to support other members of your family

After paying your day-to-day bills and financial obligations, if you are able to save from your wages there is nothing to stop you from gifting your savings to family or charity.

  1. l) Bankruptcy provides flexibility, should your circumstances change.

It is possible for your bankruptcy to be finished early if your circumstances should change. Your bankruptcy can be finalised early by proposing an offer to your creditors. This is done as a Composition under Part 4 of the Bankruptcy Act. If your Trustee supports your offer and creditors accept your offer, then your bankruptcy is annulled. When your bankruptcy is annulled, you can again be a director of a company and a Trustee of an SMSF.

The Cons – The Restrictions That Go with Bankruptcy

Bankruptcy has some restrictions that you need to be aware of and comply with, to get your best result from bankruptcy.

  1. a) Assets You Cannot Own Whilst Bankrupt

Unprotected assets like boats, caravans, and houses will be lost to your bankrupt estate. I note that if you have any of these items and wish to save them, you should talk to us. It may be possible for a friend or family member to buy them from your bankrupt estate at valuation – enabling your continued use.

Bankruptcy lasts for 3 years and although you can save from your wages to your ordinary bank account during bankruptcy, you cannot use your savings to buy assets like boats, caravans, shares or IBDs during bankruptcy. You need to wait till you are discharged from bankruptcy before spending your savings.

  1. b) Windfall Gains Whilst Bankrupt Go to Your Bankrupt Estate.

If you receive any windfall gains whilst bankrupt, they are required to be paid to your bankrupt estate. For example, a lottery win, inheritance, or gambling win.

  1. c) Your Credit Record and Public Searches

Bankruptcy is shown on your credit record during your bankruptcy and for a further two years. It is permanently on the National Personal Insolvency Index (NPII) which is maintained by the Federal Government. This index is not readily available to the public but can be searched by a member of the public at the Australian Financial Security Authority if the prescribed fee is paid.

Prebankruptcy defaults on your credit record are not removed when you become bankrupt. They remain for five years from when each default appeared on your credit record.

We do not recommend that you apply to borrow money while bankrupt. Only last resort lenders would lend you money at exorbitant interest rates. Further, applications and declines will be shown on your credit report, causing further damage, with each application/default remaining on your credit record for five years from when recorded.

If you borrow or undertake a transaction for more than $6,017 while bankrupt, you must disclose your bankruptcy.

  1. d) SMSF and Company Director Restrictions

You cannot be a trustee of a Self-Managed Super Fund or director of a company while bankrupt. If this is your situation and the assets of your SMSF are not readily realisable or you need to be a director of a company, you should let us know. It may be possible to have your bankruptcy annulled for you to remain the trustee of your SMSF or become a director of a company and continue to have the protection from your creditors that bankruptcy provides.

  1. e) Bankruptcy and Your Employment

If you are required to hold a registration or license for your employment, you should check whether your registration or license is impacted by bankruptcy.

  1. f) Trustee’s written approval for overseas travel

For overseas travel, whilst bankrupt, you are required to have your Trustee’s written approval for the travel.

  1. g) You may not be released from all debts.

Bankruptcy will not release you from court-imposed fines, Child Support Agency (CSA) debt, tertiary studies – HECS debt, debt that has not been quantified to an amount owing or debts derived from fraud.

  1. h) May lose the right to commence or continue legal action.

If you are involved or may become involved in legal action for recovery of commercial debt, that litigation will pass to your bankrupt estate, with you losing control of the litigation.

  1. i) Requirement to disclose your bankruptcy for some transactions.

You are required to disclose your bankruptcy if you:

  • Apply for a loan.
  • Pay for goods with a cheque.
  • Promise to pay for goods.
  • Undertake to supply goods or services.

and the value of the transaction exceeds $6,017.

  1. j) Doing the Wrong Thing and Failing to Comply with the legislation can have Significant Consequences.

The bankruptcy legislation releases you from monies owing to your creditors, causing those creditors a significant loss. This is a big win for you, giving you a fresh start.  It is important that you comply with the requirements of the legislation regarding what you are required to do, as there can be harsh penalties if you do not play ball and do the wrong thing.

 

Thank you for reading our blog.

If you would like more information on bankruptcy, we recommend you read our article ‘What happens when you declare bankruptcy?’ which can be accessed here.

We trust that our blog has helped you. If you would like to have a chat about bankruptcy or have any questions, Nicholls & Co have a complementary ‘help desk’ to answer your questions on bankruptcy. Call Nicholls & Co on 1300 060 122 or email helpdesk@nichollsco.com.au.

Alan Nicholls - Registered Trustee

Alan Nicholls’ no obligation help desk

Nicholls & Co provide a free, no obligation ‘help desk’ for people considering bankruptcy – we discuss and explain bankruptcy and answer questions for anyone who is considering bankruptcy. The Nicholls & Co help desk can be accessed by phone  
1300 060 122  or helpdesk@nichollsco.com.au . Alan Nicholls, Registered Trustee in Bankruptcy is also available to answer your questions to enable you to decide if bankruptcy is right for you.