Bankruptcy: What does it mean?

Bills piling up and running out of cash to pay them? One option may be bankruptcy but don’t leap in too quickly as it could have long term impacts on your ability to borrow. Bankruptcy should only be considered as a last resort. Let’s dig deeper. If you get to the point where you just cannot repay your creditors then you may be able to voluntarily apply for bankruptcy, unless people you owe money to file a creditor’s petition first.

There are 2 requirements to be met to apply for bankruptcy: 1. You are unable to pay your debts as they fall due (that is you’re insolvent) 2. You are present in Australia or have a residential or business connection to Australia If your bankruptcy application is accepted, then you will be appointed a trustee to manage your financial affairs.

The trustee will take possession of your assets that can be sold to repay your creditors. This can include any property, vehicles over a certain value, and personal effects of a higher value. It generally doesn’t include regular household items, your primary vehicle up to a certain value, and any tools of trade up to a certain value

The trustee will negotiate with your creditors to repay as much as possible from the sale of your assets. The trustee will also require you to make personal contributions towards repayment of creditors if you receive income above a specific amount during the time you are bankrupt.

The period of bankruptcy is usually 3 years and 1 day, and on completion of this time whatever debts remain you are no longer required to repay. There are however certain types of debt that are not covered by bankruptcy. Things such as court-imposed penalties and fines, child support & maintenance, HECS & HELP debts (government student loans), and debts you incur after your bankruptcy begins. Sometimes tax debt may not be covered either.

While the period of bankruptcy is 3 years, a record of your bankruptcy is kept by credit reporting agencies for 5 to 7 years and there is a permanent record on the National Personal Insolvency Index (NPII) which can be accessed by potential employers and landlords, as well as financiers. Both of these records could inhibit your ability to obtain credit in the future, as can unpaid debts.

Even though the creditor is not able to pursue you for payment after bankruptcy the record of non-payment can still be detrimental to future credit applications. While bankruptcy may be the option to give yourself a fresh start always explore other avenues first as your fresh start may not be the financial future you’d hoped for.

Curious to know more about finances? Have a look at the range of other Davidson Institute financial education resources on their website.