We spend a lot of time talking about how to better your finances here at Savings Guide, though today I realised that we have never covered the topic of bankruptcy, what it means and what it is used for.
It’s such a negative word that many people try and avoid the concept at all costs. This guide will look at what it means to become bankrupt and what happens when you declare bankruptcy. There are also a few options you can take before getting to this final stage.
What is bankruptcy exactly?
Bankrupt is the term given to someone who has filed for bankruptcy because they are unable to repay their debts.
Declaring bankruptcy is normally done due to the consumer not being able to service their debts. Once you file for bankruptcy, your debts are removed. The catch, however, is you will then be legally declared bankrupt and have a record on your credit history stating so.
This means it will be hard if not impossible to receive a loan in the future.
Difference between bankruptcy and insolvency
An individual can declare bankruptcy, though a business must go into what is called liquidation or often refer to as administration.
People often misuse these words so figured it would be worthwhile correcting here.
What is the process of going bankrupt?
An individual can declare themselves bankrupt by lodging a petition with the Australia FInancial Security AUthority – known as AFSA. A minimum debt of $5,000 is required before filing for bankruptcy, though I am guessing most people who file for this are normally in a lot more debt than this.
You are made to list your assets and liabilities. A bankruptcy trustee is then appointed to help you close all debts – their job is to notify all lenders that you are now bankrupt and to do the admin of shutting down your debts.
Once you are bankrupt you are also made to adhere to some strict rules, such as; not travelling overseas without permission, detail all assets and more.
How long does it state bankruptcy on your credit report?
Depending on the company, your credit report will state ‘discharged bankrupt’ for at least seven years – after that time, it is said that the note will be removed and in turn you are able to more easily lend again (though hoping this time you have learnt from your mistakes).
Alternatives to going bankrupt
There are two other main options to consider before taking the final step of bankruptcy.
Firstly you have the ability to negotiate a debt agreement with your credit provider. This means asking them to set forward a plan to help you pay the debt off. Sometimes people are given leniency and have their interest removed or a less sum agreed on to pay off.
There are professional debt agreement agencies that can do this on your behalf but beware their fees. Often there are companies that prey on the vulnerable and in turn cost them more money in the long term for a short spell of calm.
Alternatively, you can have a personal insolvency agreement put in place.
It is wise to note that all three of these methods will impact your credit rating so it is very important you spend a lot of time considering your options before agreeing to anything.
For more information, feel free to vist the Government website here.