Credit and Debt

Credit and Debt

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What are the consequences of bankruptcy?

The key advantages of bankruptcy include:

  • once the client is declared bankrupt:
    • almost all unsecured creditors are unable to take further legal action against the client in relation to almost all debts (in rare cases the court might grant the creditor a right to continue with court action); and
    • unsecured creditors should stop making contact with and harassing the client (instead, they will be required to communicate with the trustee about the client's debts). These requirements are expressly referred to in the ASIC and ACCC Debt Collection Guideline (see Debt Collectors and Your Client's Rights);
  • if the client has an income of less than approximately $54,000 net per annum (check the current amount on the Australian Financial Security Authority’s website), none of that income can be taken to pay their debts (whereas, if not bankrupt, low income earners can be required to contribute parts of their income to their creditors if an attachment of earnings order is made); and
  • once bankruptcy ends (usually after three years), the client will be released from almost all debts (the exceptions are discussed below).

Although bankruptcy gives people a fresh start, it can have longer-term consequences that the client must be made aware of.   These include that:

  • they will be bankrupt for a minimum of 3 years, and in certain circumstances bankruptcy may be extended;
  • most of their assets will be sold to pay their creditors, with the exception of:
  • while bankrupt, they will be required to contribute income to the bankrupt estate if they earn over a specified amount (approximately $54,000 but subject to indexation - updated figures are available on the Australian Financial Security Authority’s website);
  • the creditor can investigate the client's financial affairs and recover property or money that has been transferred to someone else for inadequate consideration;
  • any assets acquired during bankruptcy (for example by inheritance) will become the assets of the trustee to pay to the creditors;
  • their ability to borrow money or purchase items on credit may be limited;
  • some banks may not let them operate an account or will restrict use of accounts;
  • some job opportunities, especially jobs handling money or where a licence is required may be limited (examples include, estate agents, members of the armed forces, some public servants, licensed builders and security workers);
  • they may not be able to start their own company (as its Director) in the future;
  • they will need to advise the trustee of any change of address and must obtain written permission to travel overseas;
  • they may be required to pay a bond or repay outstanding account balances to get water, electricity, telephone and other utilities connected;
  • they may find it hard to get or renew insurance;
  • while bankrupt, they may lose the right to take and/or to continue most legal actions;
  • their name will be on the public record (the National Personal Insolvency Index) forever;
  • documents lodged with AFSA allow the public to search some of your information; and
  • their name will be recorded by credit reporting businesses for seven years, which may limit their ability to borrow money or purchase things on credit.

It's also important to make it clear to your client that certain debts will not be covered by bankruptcy (i.e. the client will still have to pay these).  These include (but are not limited to):

  • fines;
  • debts the client incurs after their bankruptcy started;
  • unliquidated damages (such as those arising from a car accident);
  • debts arising from fraud;
  • child support debts under the Child Support (Assessment) Act 1989 and family maintenance debts under the Family Law Act 1975;
  • taxation debts; and
  • Centrelink debts.

 

If you think voluntary bankruptcy is an option for your client, you should make an appointment for them to see a financial counsellor before proceeding with the application.