Bankruptcy is a legal status which means that you cannot repay your debts, with the Australian Financial Security Authority (AFSA) overseeing the process. While individuals can become bankrupt, the same legal designation does not apply to companies. If a company cannot repay its debts, it is insolvent. Despite this, that status of being bankrupt is still relevant to businesses that are run by sole traders. This is because the business’s finances and liabilities are tied to the personal finances of the owner. Generally speaking, bankruptcy provides relief and a fresh start. However, there are many consequences that come with filing for bankruptcy. This article will explain how bankruptcy works and explore what options are available if you cannot repay your debts.
1. Declaration of Intention (DOI)
A DOI gives you twenty one days to determine whether you want to declare bankruptcy, take out a debt agreement or a Personal Insolvency Agreement (PIA). As a DOI is not an act of bankruptcy, it gives an individual a wide range of options to rectify any financial problems before filing for insolvency. If one happens to choose this path, creditors will be notified and will be provided with information of personal finances.
2. Voluntary Bankruptcy: Debtor’s Petition
The second option is completing the Debtor’s petition form, which is available on the Australian Financial Security Authority (AFSA) website. This includes signed acknowledgement of prescribed information and a statement of your affairs. The form must require all the relevant details of your debts, income and assets to a trustee. Your trustee can be the Official Trustee (AFSA) or a registered trustee, which can be nominated by you. Once the trustee has control, they will notify the creditors about the bankruptcy so they can sell your assets to cover the debts. Ultimately, this is one of the two available options when filing for insolvency.
3. Involuntary Bankruptcy: Sequestration Order
When it is found that an individual or company owes a certain amount to a creditor, they may be asked to attend court. A sequestration order can be filed by a creditor if they have a court judgement against you that is within the past 6 years. If you have exceeded twenty two days of not paying your debts the courts will issue a sequestration order. This declares you bankrupt and a trustee will be appointed to manage the case. This is the least favourable option as it is a matter of forced orders by the court. In matters like this you or your business must comply with the court orders. Ultimately the process of being discharged will occur once a successful ‘statement of affairs’ application has been filed, taking three years and one day.
What Are the Consequences?
While filing for bankruptcy can provide a fresh start, it can impact your income, employment and access to credit. Amid the process and after, your name will permanently appear on the National Personal Insolvency Index (NPII). Additionally, earning over a set amount will mean that you will need to make compulsory payments to your trustee. It also means that personal assets such as houses or cars may be sold by your trustee, along with a lowered credit score and mark stating you have once been bankrupt. Lastly, travelling internationally will be difficult as you will need to request permission from your trustee.
Conclusion
While applying for bankruptcy may seem like the easier option, it must be a decision that is well thought and rational. Filing a DOI and seeking the most appropriate option will always be the first line of defence should you be thinking about bankruptcy. Next, a Debtor’s Petition should be considered assuming that the DOI method has failed. Ultimately, filing for bankruptcy is a last resort option that should be measured against the intrinsic long list of consequences. If you want further advice on bankruptcy, it is worth speaking to a bankruptcy lawyer.
