Bankruptcy is something people can apply for if they believe they are unable to repay their debts. However, it’s important that you consider all of your options first before diving headfirst. That’s why we’ve prepared this guide to help you understand how bankruptcy works and what it entails so you can make an informed decision down the road.
What is Bankruptcy?
Bankruptcy is a legal state in which a person is absolved in having to pay their debts. One can apply for bankruptcy in two ways.
The first is via a debtor’s petition, which includes applying for the bankruptcy status yourself. The second approach is when you are forced into bankruptcy through court. The latter is also known as a sequestration order.
After being declared bankrupt by the authorities, you’re immediately released from any debt. For those with secured debts like property mortgage, the asset may be sold in order to repay outstanding debts. On the other hand, unsecured debt such as personal loans or credit cards won’t require you to give up assets like your car or house.
Before deciding to enter bankruptcy, a Declaration of Intention might be something worth considering first.
What is a Declaration of Intention?
A DOI or Declaration of Intention provides a person with 21 days for them to decide whether they wish to declare themselves as bankrupt or obtain a debt agreement or Personal Insolvency Agreement (PIA). Lenders with unsecured debts aren’t able to take action throughout this DOI period. Creditors are also informed immediately once you’ve acquired a DOI with all information on your finances supplied as well.
One thing to note is that a DOI isn’t an act of bankruptcy and your name won’t be recorded on the National Personal Insolvency Index. By the end of your 21-day grace period and if you haven’t entered an official arrangement, your creditors can then take you to court to force you into bankruptcy.
How Long Will the Bankruptcy Label Remain in a Credit Report?
The latest details mention that bankruptcy will remain on your credit report for a minimum of two years from the date it was discharged. After that, the label will then be removed from your report.
Having a bankruptcy listed on your credit report will also reduce your overall credit score, making it much more difficult to apply for financial products such as mortgages, loans and credit cards.
Do note that the laws around bankruptcy and reporting change from time to time. It’s best to visit government websites like the AFSA (Australian Financial Security Authority) for the latest news.
Declaring for Bankruptcy
Before making the decision to declare bankruptcy, it’s crucial that you talk to a financial counsellor for advice on how you can deal with debt. It might be possible to set up alternative payment plans with your creditors or create a budget to help you through this stage. Once all options have been exhausted, you may then decide to enter bankruptcy or be made so by the courts.
Bankruptcy by Choice
Completing the debtor’s petition form found on the AFSA website will allow you to apply for bankruptcy. This document comes with signed acknowledgement of prescribed details along with your statement of affairs.
You will have to accomplish and lodge the debtor’s petition within 28 days upon signing the forms to the Official Receiver. After that, you will have to supply details of your debts, assets and income to a trustee. A trustee can be the Official Trustee of the AFSA or another registered trustee which can be nominated.
The trustee will then notify your creditors that you are now bankrupt and they can then sell your assets to compensate for your debts. If your income goes past a certain amount, you may have to make compulsory payments as well.
Bankruptcy by Court Order
For those who owe more than $5,000 to a creditor, you may be asked to attend a court hearing and be forced into bankruptcy. The creditor can issue a sequestration order if they already have a court judgement against you in the past six years.
You are normally provided a 21-day grace period to settle your debts prior to the court hearing. You also have a chance to plead your case before a judge before the actual court date.
If you are unable to accomplish repayments during this period, the court will then issue a sequestration order to declare you as bankrupt. A trustee will then be appointed to handle your case.
How Long Does Bankruptcy Last?
Bankruptcy normally lasts from three to eight years but will still depend on your situation.
- If you have become bankrupt by applying for it, you can be discharged three years and a day after you have filed your petition with the AFSA.
- If you have been forced into bankruptcy by the court, you are due for discharge three years and one day after your statement of affairs have been accepted by the AFSA.
- There are some cases where bankruptcy can last from five to eight years if a trustee files an objection to your discharge.
The Consequences of Bankruptcy
Although declaring bankruptcy can let you start fresh with any outstanding debt, it can also impact your employment, income and your ability to make use of credit products in the future.
Employment and income. For those earning more than a set amount, you will have to make compulsory payments to your trustee. Besides that, you also have to keep your trustee in the loop if you get a salary increase/decrease, changed jobs or stopped working.
Access to credit. As stated earlier, bankruptcy is going to stay on your credit report for some time. This means that your credit score will be lowered and will also reduce your chances of being approved for loans and other types of financial products.
Overseas travel. Before you can travel abroad, you will have to get permission from your trustee. The reason for this is because travelling overseas without your trustee’s written consent is an offence for those who are bankrupt.
Assets and properties. Your trustee can sell your assets such as your property or house, which should be declared upon applying for bankruptcy. Normal household goods, tools and vehicles to a set amount can be kept.
Being listed on the NPII. When you enter bankruptcy, you will be listed on the searchable public register of the National Personal Insolvency Index for life.
If you are heading towards financial ruin and want to avoid bankruptcy you can speak to our very knowledgeable team about finance management. We don’t just provide loans we actually want to help you have better managed finances and get you out of debt.