Bankruptcy - A Last Resort
Bankruptcy is a big step that can involve significant restrictions on your life. These restrictions continue until you are discharged from bankruptcy, which usually occurs automatically after three years. However negative effects continue beyond the bankruptcy period and include being:
- Default listed by a credit reporting agency for seven years.
- Placed on the public National Bankruptcy Registry indefinitely and having to declare, if required, that you have been bankrupt. This may be asked by landlords and creditors.
You will be released from the majority of your debts on discharge from bankruptcy, but not from all debts. A trustee will be appointed to your case when you are in bankruptcy and in order to pay your creditors, this trustee will:
- Sell your assets (although you will be able to keep certain types).
- Depending on your income, enforce payments from your earnings once you make over a certain amount during the period of your bankruptcy.
- Investigate your financial affairs and may recover property or money that you have transferred to someone else for inadequate consideration.
Most unsecured debts are cancelled by bankruptcy and include:
- Personal loans, credit cards and goods and services obtained on credit before bankruptcy.
- Trade-related creditors incurred before bankruptcy.
- Taxation debts incurred before bankruptcy.
Centrelink will not try to recover their debt while you are bankrupt, but can pursue the debt once you have been discharged.
Penalties imposed by the Australian Taxation Office for late payment or the late lodgement of returns are also cancelled by bankruptcy. However, the ATO is entitled to keep any tax refunds due to you during the period of bankruptcy and apply these to
your unpaid income tax. Tax refunds after discharge from bankruptcy may be retained by you.
Debts that are not cancelled by bankruptcy include:
- Secured debts. These arise from loans which are backed-up by the right for the business lending the money to sell property (such as a car or a house) to repay the loan. (When there is still money owing after the sale then that amount becomes an unsecured debt and can be cancelled by bankruptcy).
- Student loans and Higher Education Contribution Scheme (HECS) or Higher Education Loan Programme (HELP).
- Centrelink debts due to fraud.
- Court-imposed fines.
- Child support and maintenance payments.
- Council rates.
If you are thinking about bankruptcy, keep in mind that it is very difficult to obtain any credit during that period and you will definitely not be able to obtain a large loan such as a home mortgage while you are in bankruptcy.
Bankruptcy should be seen as a last resort and only considered after obtaining the advice of a financial counsellor.