Usually, I write about savings but sometimes, living frugally isn’t enough. Every now and then, life throws curveballs our way that can nearly knock us out and no amount of thrifty cooking or turning off heaters will help.
If it’s all gone horribly wrong, you might be thinking about declaring yourself a bankrupt, but look before you leap. Bankruptcy has serious implications for your present and future, worse than just losing Monopoly. For those who are totally new to the concept, being bankrupt is more than just being broke. It’s when you say to the world, “not only do I have no money right now, but there is no way I can ever pay off all of my debts”.
If you are considering bankruptcy, you are obviously already struggling financially but before you give trying to claw your way out, you need to know the facts.
What is Bankruptcy?
When a person declares bankrupt they are declaring that they are insolvent; that all their income and assets cannot outweigh what they owe. This can happen if a person owns a business which fails, becomes unable to work or loses money through poor investments. People can choose to declare bankruptcy, usually when creditors start legally pursuing them, or if they are sued for an unpaid debt, a court can order them bankrupt. Today I am looking at voluntary bankruptcy.
Bankruptcy is a bit like a fresh start. The Government wipes the slate clean, absolves your debts and you can start anew. I should note that not all debts can be waived through bankruptcy though. Any debts owing to the government such as tax, court fines or HECS/HELP debts will remain owing. Similarly, any child support or family maintenance debts will continue, as will any damages awarded against the applicant in court for matters other than a contract (say, a car accident in which they were at fault) will still be owed.
What’s Bad About Bankruptcy
In exchange for eliminating (most of) your debts, the Government gets a slice of control over the bankrupt’s financial affairs.
A trustee company is appointed to take stock of your assets and debts. They work out what everything is worth, sell off as much as possible and then pay off your debts as best they can. If you own a house, it will be sold and you will have to move out. Under the Bankruptcy Act 1966, there are only a few things the trustee cannot take:
- a motor vehicle valued at less than $6,500
- necessary household goods (washing machine, fridge, tv, etc)
- tools needed for work
- any payments made to you as a result of a personal injury claim.
For the next three years (longer if the trustee lodges an objection!) you will be labelled “a bankrupt”. During this time you may have to pay contributions to the trustee if your income is over a certain amount. If you come into any money during the bankruptcy, like an inheritance or a lotto win, the trustee can take that too. You do not leave the country, you may not be the director of a company and if you apply for any credit over $3,000 you have to declare that you are a bankrupt which tends to mean you are unlikely to get it.
The penalty for breaching the Bankruptcy Act is imprisonment; this is serious business.
So Why Would I Go Bankrupt?
There is really only one benefit to declaring bankruptcy…most if not all of your debts are wiped clean. You no longer have to deal with debt collectors or court appearances and it can be a huge relief for people who’ve been fighting an uphill battle to just let it all go.
I Don’t Like the Sound of That, But What Else Can I Do?
There are some alternatives that are definitely worth thinking about before leaping straight into bankruptcy.
You may be able to renegotiate the terms of your loan/s, so you can make lower payments for a while until you get back on your feet. You can absolutely do this yourself by simply speaking to the financial institution’s customer service department but if it’s at debt collector stage or you’re just feeling a bit too overwhelmed, you may need to get some help.
Personal budgeting companies can negotiate on your behalf and manage the repayments for you but they will charge a fee for their services. Alternately, some government organisations, community groups and charities such as the Salvation Army’s Moneycare provide a free financial counselling service and can help guide you through the process. Contact your local legal aid office for more information.
Your creditors may not be willing to just take your word for it that you’re going to stick to your new arrangement. If this is the case, you may be asked to enter into a debt agreement. A debt agreement is a legally binding contract between the debtor (you) and the creditor/s. You make an offer to the creditors, be it to repay at a certain rate, to sell your house and pay them a lump sum or whatever it may be and they can choose to accept or not. If the creditors sign the agreement, this overrides any previous loan contracts you have and they cannot decide to sue you for non-payment of the original sum… unless of course, you break the debt agreement, then it’s back to square one.
Debt agreements are a little complicated and only certain people can apply for them, so contact THE Australian Financial Security Authority (AFSA) for more information.
The decision to declare yourself bankrupt has profound implications and shouldn’t be taken lightly. If you can take an agreement and avoid bankruptcy, I say do it. Get yourself some advice and work out what’s right for you and if you do need to declare bankrupt remember, it’s not the end of the world. Rather, it’s a new beginning.