Your Complete Guide To Bankruptcy | Get Out of Debt Today
What is bankruptcy and should I declare it?
Bankruptcy can provide debt relief but not without drawbacks. Are there better options?
Bankruptcy can provide immediate, almost total debt relief. Your debts will be wiped virtually completely. This is in an obvious way an attractive debt solution, and at Get Out of Debt Today we often see people who are considering bankruptcy to solve their debt problems.
But bankruptcy does have its significant drawbacks. It can negatively impact your ability to obtain credit, it can result in the repossession of your assets including your home and it can even affect your ability to get a job. These must be considered when deciding whether to declare bankruptcy.
Get Out of Debt Today is an expert in alternatives to bankruptcy, so we will be comparing bankruptcy in this article, objectively, with its alternatives including debt consolidation and mortgage refinancing.
What Is Bankruptcy?
What does declaring bankruptcy mean and involve?
Bankruptcy is a state that you can declare to the Australian government when you have debts totalling $5000 or more. It results in almost all of your debts being legally wiped, leaving you almost debt free. The Australian Financial Security Authority will appoint someone to manage your finances.
Selling Off Your Main Assets
Bankruptcy is a term inextricably tied to insolvency for a serious reason. This is that declaring bankruptcy means liquidating your major assets, aka selling off your main assets. Your house, your car and various other significantly valuable items are sold off in order to come up with as much money as possible for your debtors. A trustee is appointed to manage this process of paying back your debtors as much as possible.
In bankruptcy, you will only have to pay back as much as possible. Hence you will in most cases not have to pay back all of your debts. However, in this case your trustee will most surely siphon a share of your income for repayments.
What Assets Can And Can’t Be Liquidated
Liquidation (when your assets are sold off) will only affect certain items. Here are some examples of items that can and can’t be sold (as of August 2014):
CAN be liquidated:
House, land (real estate)
Tools of trade (worth over $3650)
CAN’T be liquidated:
Other ordinary household goods
Personal injury compensation payments
All except $1000 in bank accounts (for living expenses)
The pattern that the laws follow in general is, it can be liquidated if it is of substantial value or if it is not a basic part of life. It's important to consider what you stand to loose when you declare bankruptcy in Australia. Things could be claimed that you weren't aware of or that you thought were safe from bankruptcy.
Voluntary Versus Involuntary Bankruptcy
Bankruptcy can be voluntary or involuntary. Voluntary bankruptcies are the most common. They are when a debtor declares bankruptcy on their own volition for immediate and comprehensive debt relief.
Involuntary bankruptcy happens when a creditor or group of creditors submits a petition to the government against another party that owes them money. The rule of the Federal Court will determine whether the bankruptcy is declared involuntarily. The debtor is allowed to contest the petition in court. Creditors sometimes petition for the bankruptcy of one of their debtors because it is a more surefire way for them to be repaid at least some of their money. However, the statistics say that on average, debtors under involuntary bankruptcy repay less money than the debtor average so this is an option usually reserved for the most doubtful cases.
How Long Does Bankruptcy Last?
Bankruptcy lasts for 3 years, and during this period, you will be required to pay parts of your income to your creditors.
Benefits Of Going Bankrupt
Positive effects of declaring bankruptcy for debt
‘Bankruptcy’ is a word with a negative loading in today’s society. It does indicate debt and has some serious negative effects, but at the same time it has a few key positive effects that those in extenuating financial circumstances turn to for relief.
Virtually Cleared Debts And A Fresh Start
Bankruptcy can virtually clear your debts immediately. We use the quantifier ‘virtually’ to specify that not all of your debts will be cleared necessarily. We will explain this caveat in a second.
Creditors Are Required To Stop Asking You For Payments
If you have to deal with pushy debt collectors, then bankruptcy can be a release from this struggle. Because it legally requires creditors to halt all demands for payment. This includes through phone calls, personal confrontations, house visits and emails.
Even though you are still paying your creditors back in these three years, as a part of your income, they can still not contact you demanding payment.
Creditors Must Stop Legal Action Against You
Likewise, creditors are legally restricted from pursuing you through the courts any longer. All legal action by creditors against you is ceased.
Downsides Of Declaring Bankruptcy
The Many Negative Implications Of Declaring Bankruptcy Unfortunately
Though it would be wonderful if bankruptcy was a magical wand that wiped all your debts away without a trace, it is not so simple. And the reason why bankruptcy is a last resort, end-of-the-line option is that it can have large negative effects on your life that in almost all cases except as a last resort, outweigh the positives.
Losing Your Assets
Of course, this is the main downside of declaring bankruptcy. If you read the table above you will know that you can (and in all but the most peculiar cases will) lose your house, car, valuable prized possessions, even your engagement ring and tools of your trade (!) in the liquidation process. Your trustee will organise for people to come into your home, repossess your belongings and sell them off to the highest bidder.
It’s hard to imagine the toll on your life that such a move can make on you. You will be left without a home, without a car, it may affect your relationship and you may lose your ability to work (and earn income) because your car and tools of the trade were liquidated. This is not an adequate debt solution for most people which is why bankruptcy is most often seen as a last ditch solution.
Losing Control Over Your Finances
In general, losing control over your finances is a big loss that can have serious negative consequences even besides losing your belongings. Your trustee will have full access and control over all of your finances. They will determine what portion of your income to take depending on how much you can afford. Not only does this restrict your financial freedom and a lot of avenues of financial progress for a full three years, but it can impinge highly on privacy.
You Will Have A Black Mark On Your Credit Rating
Your credit rating will be affected to some degree forever, making it extremely hard to access credit and also extremely expensive. Your bankruptcy will appear on your credit report for five years and in the National Personal Insolvency Index forever. Unfortunately this is one of the contributors to the ‘debt trap’ effect, whereby debt begets more debt as it becomes more and more expensive to borrow money in the future and it becomes hard to get out of this debt spiral.
Not only will a bad credit rating affect your ability to borrow, but also to rent properties, access basic utilities and create a bank account. This can seriously affect your future. You may plan to get a mortgage, open a business or borrow to fund an investment opportunity. These opportunities are all inaccessible for the bankrupt.
You May Lose Your Job Or Not Be Able To Work In Some Positions
Some jobs require you to drive or to use speciality tools of the trade, and these jobs—of which there are numerous—are inaccessible to the bankrupt. If you work as a handyman, mechanic, plumber, builder, tradesman, private taxi driver, etc., you could be rendered unable to work by having your vehicle and the tools of your trade liquidated.
You are actually barred from being the director of a company if bankrupt and are not allowed to manage a company unless given expressed permission. You are also barred from public positions and if you own your own business, you are required to inform everyone that you trade with that you are bankrupt. Breaking these laws is a punishable criminal offence.
This is yet another way that bankruptcy can land you in the debt spiral, by taking away your ability to earn income. This is often a reason that disqualifies it from being an adequate solution.
You Will Be Restricted From Overseas Travel
Your trustee will clearly not only manage a large part of your finances, but of your life. You will have to request your trustee’s permission whenever you travel abroad and their decision will be determined on your finances. A lot of your life will be determined by your finances in fact . . .
Bankruptcy Doesn’t Cover All Debts
Bankruptcy is far from a magic wand. It is far from a perfect debt solution. In fact, contrary to popular perception, it doesn’t wipe all debts. There are some debts that bankruptcy doesn’t cover, these include:
So the uncomfortable reality of bankruptcy is that even in the three years depths of financial regulation and monitoring, you will still likely be paying off some of your debts.
Is Bankruptcy The Best Option For Debt Relief?
Are there alternatives to the last resort option that is bankruptcy?
Bankruptcy is a serious, bite-the-bullet, hard-line, last ditch option to clear your debts. Get Out of Debt Today are experts in debt and we know what unfortunately too few struggling debtors know and have the time and the resources to find out (hopefully you or your effected friends or family do):
There are better alternatives to consider before even thinking about bankruptcy
Get Out of Debt Today provides debt relief services that can steer your finances away from bankruptcy and back on the right track without ruining your credit rating.
There are two far better financial options that you should consider that don’t have the downsides of bankruptcy, yet match or surpass it in benefits. Firstly, Get Out of Debt Today can organise with you a smart, flexible budget plan that can get your finances back in the green. Secondly, Get Out of Debt Today provides debt consolidation services, which is a debt solution that restores financial security to debtors and their creditors like in bankruptcy, but without the liquidation and other unsavoury aspects.
Debt consolidation involves taking out a loan to pay off all your other debts. Hence you are essentially combining all your debts into a single debt. For one, this is highly convenient—you will only be paying one bill per month (!). Also, it reduces your payments as a whole. We negotiate with your creditors to give you deals for consolidating debt (which you will get because (A), debt consolidation gives you the leverage in the negotiation process, and (B), creditors want their debt to be paid as soon as possible which is what debt consolidation provides).
The combination of these two debt solutions is what we at Get Out of Debt Today recommend to our clients. It is the best debt solution that we know of and for those who are at the stage where they can still access it, it is usually a saving grace.
To find out about debt consolidation and budgeting versus bankruptcy, contact Get Out of Debt Today
Get Out of Debt Today is always willing to discuss people’s individual financial situations with them, to give them advice and to determine whether a debt solution is right for them. If you are considering declaring bankruptcy, debt consolidation or mortgage refinancing, give us a call on (02) 9011 7919, or fill out the form in the sidebar and we’ll contact you!