Near Bankrupt? – Don’t be alarmed!
Below is a series of questions about being bankrupt.
Q. Most people know of bankruptcy – but what is like being bankrupt exactly?
Being bankrupt might be described as the likely result of having too much debt. In legal terms, it is a process where a trustee is appointed to administer the affairs of a person who is insolvent. Insolvency arises if a person is unable to pay their debts when they fall due.
Don’t be alarmed! Credit and debt is the basis of the entire financial system. It is not unusual that someone may be late making a loan repayment or paying a bill, but it does not mean they are insolvent. There is a difference between temporary cash flow difficulties and insolvency. Insolvency is where there is no realistic prospect of meeting debts. It is also possible to have valuable assets and be insolvent (e.g. unable to sell the property).
Q. How does bankruptcy happen?
- 1- Self-initiated
- Make yourself bankrupt by a process called a “debtors petition.”
- Most common situation – accumulated debt – no realistic prospect of repaying
- Unexpected long period of unemployment – significant obligations
- 2- Creditor-initiated
- A creditor may serve a bankruptcy notice for a liability of $5000 or more – requires a response within 21 days
- After 21 days may then make an application for a “creditors petition” in Federal Court
- The court makes a sequestration order – bankrupts the debtor
- Law provides for other bankruptcy events as well, but failure to comply with bankruptcy notice is the most common
Q. How ordinary is bankruptcy?
- “Total personal insolvency activity” (also includes other situations such as insolvency agreements and debt agreements) of around 30,000 per year in Australia
- About 16,000 actual bankruptcies 2016-17
- Around Australia about a third of bankruptcies occurred in NSW for the 2016-17 year
- Most insolvency (4/5) arises from personal debts
- The remainder (1/5) is business related
Q. What happens to a person who is bankrupt?
Usually is three years of control (from filing SoA) over your affairs which during that time a Trustee manages your affairs and has a range of powers including investigate matters, sell assets and distribute to creditors. You must also surrender your passport and ask permission to travel overseas.
Some assets are exempt like tools of the trade ($3700) and a motor vehicle ($7800), but more importantly, a bankrupt’s home is not exempt.
You can continue to work and receive income but there are restrictions on directorships, some employment and you must disclose your bankruptcy.
Q. What’s the best approach?
Bankruptcy does not happen overnight – debts accumulate over time so getting the advice of to best resolve your case before making a decision is essential.
We can help with Bankruptcy
Contact any of our offices to talk to someone about your concerns.
More info on the Australian Bankruptcy Act 1966
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