How much do you know about bankruptcy?
Bankruptcies are at a 24-year low in Australia, but if you run a business you still need to know what to expect if financial difficulties occur.
It is absolutely vital that you understand bankruptcy laws in Australia if you are in business. If you are being pursued by a creditor who wishes to declare your business bankrupt, or you are thinking about declaring bankruptcy, you must comprehend how this will affect your financial future.
Understanding bankruptcy laws in Australia will also ensure you make informed and considered decisions.
According to the financial experts at Pronto Finance, “this will allow you to think clearly about the consequences of bankruptcy and assess if there is an alternative solution for your debt problems.”
Basics of Bankruptcy Law
Bankruptcy is designed to offer a degree of protection to individuals who are unable to fulfil their debt obligations to creditors. Bankruptcy also provides a timeframe for creditors and debtors to reach a mutual agreement to clear the debt, either partially or completely.
There are a number of alternatives to bankruptcy, including informal and formal agreements, as well as debt consolidation. However, not all of these might be viable, especially if bankruptcy proceedings have already commenced.
There are two ways in which bankruptcy can occur in the event that the creditor and borrower fail to reach an agreement:
#1 – Voluntary Bankruptcy
The borrower feels that declaring bankruptcy is the only option available to them and they voluntarily file for bankruptcy. In this case, necessary documentation is offered by the borrower to the court in order to invoke the bankruptcy law and proceed with the bankruptcy process.
#2 – Involuntary Bankruptcy
One or multiple creditors – who have been unable to reach an agreement with the borrower – initiate proceedings to have the borrower declared bankrupt through the due court process.
Limits in the Australian Bankruptcy Law
Any individual is free to file for bankruptcy on their own, regardless of the amount or severity of debt they hold.
You do not need to have a certain debt level before you’re allowed to file for bankruptcy. It’s also important to understand that there is no limit to the number of properties you own or the amount of income you earn when choosing to file for bankruptcy.
The only requirements when applying for bankruptcy in Australia is that you are an Australian citizen living in Australia at the time of declaring bankruptcy, or you own a business or residential property in Australia.
Legalities of Bankruptcy and Future Steps
If you have considered all the alternatives to bankruptcy, and you have decided to file for voluntary bankruptcy, you will need to engage a registered trustee to guide you through the bankruptcy process. You will need to complete a number of forms, and file these with the Australian Financial Security Authority (AFSA), which are:
- Statement of Affairs
- Debtor’s Petition
- A Signed Acknowledgement, stating that you have received, read, and understand the required information.
After filing of these documents, you can begin the process of bankruptcy.
Fees Required
Once you have filed for bankruptcy, you may have to contribute an amount of money from your personal income.
This figure will depend on your financial circumstances – such as whether you have any available income – as well as your current income level.
Assets may be sold to cover the outstanding debts to creditors. This might include your car or house, and can also include any other assets of significant value.
It is recommended that you discuss your personal situation with your registered trustee or the AFSA and assess which of your owned assets can be sold to repay creditors and service your bankruptcy.
Length of Time You Remain Bankrupt
Bankruptcy laws in Australia state that an individual will remain bankrupt for a period of at least three years.
You will be discharged from bankruptcy if you demonstrate cooperation with the registered trustee for that period. If you do not cooperate with the trustee throughout that time, your bankruptcy may be extended for up to eight years.
Alister Clare from finance company Credit Capital explains “Though it is not always known, it’s important to understand how bankruptcy affects financing. You can only get funding once you have been discharged from bankruptcy for more than 12 months.”
Debts That Qualify for Bankruptcy
Not all debts are able to be included when filing for bankruptcy. While most creditors won’t chase you for payments after filing for bankruptcy, here is a list of debts that cannot be written off through bankruptcy:
- Personal maintenance orders – i.e spousal payments and child support payments
- Any penalties or fines levied by court
- CentreLink overpayments
- Higher Education Contribution Scheme Linked Loan debts
Bankruptcy Offers a Fresh Start
The main benefit of bankruptcy is that it allows for a fresh start financially. However, there are long-lasting financial consequences of filing for voluntary bankruptcy, and applying for bankruptcy should only be used as a last resort to unserviceable debt.
The consequences of bankruptcy may include:
- Difficulty in obtaining credit for a significant period of time
- Limiting any future employment options
- Losing various significant assets including your home
If creditors are pursuing you for unpaid debts and you are concerned you may be forced into bankruptcy, it’s important you address the situation as quickly and transparently as possible.
You should get independent advice for various options on debt management by contacting a financial advisor, and speak to your creditors to see if there are any other options available outside of filing for bankruptcy – you also have the option of calling MoneyHelp.
It’s important for you to fully assess the positives and negatives of filing for bankruptcy if you are considering it as a solution to dealing with your unpayable debts.
It can be act as a fresh financial start, or a lingering stain on your reputation – however, handled correctly and responsibly, you can ensure you limit the damage bankruptcy may have on your future.
