The Consequences of Bankruptcy: What You Can and Can’t Do
Bankruptcy is a serious matter. It's best that you understand what the consequences of declaring bankruptcy can have on you.
Sometimes debt can pile so high, that declaring bankruptcy seems like the best option. Long story short, it’s not. There are definitely benefits to being rid of all your debts. But they don’t just magically disappear. The money has to come from somewhere. Often, people aren’t aware of all of the consequences that come with being declared bankrupt. The consequences of bankruptcy might seem unfair, but everyone’s financial safety must be protected. The situation looks very different if you’re in the creditor’s position and you’ve lent resources to people that can no longer pay you back.
There’s a lot into consideration before you decide to go through the bankruptcy process. It should be a well-thought-out decision. Once you’re declared bankrupt, there are some things that you now can and cannot do.
Consequences of Bankruptcy: The Good
Bankruptcy isn’t all doom and gloom. It is mostly, but not completely. There are a few benefits to being declared bankrupt that may come as a relief to those that have been dealing with mountains of debt for a long time.
Relief from Creditor Harassment
Once you’re officially bankrupt, you generally can’t be harassed by creditors anymore. Instead, this now becomes the responsibility of the trustee. If creditors have commenced legal proceedings against you, these are also now the responsibility of the trustee.
The trustee is the person that is given the responsibility to manage your financial situation after you’ve been declared bankrupt. They will work with you and your creditors to find a fair way to pay off your past debts. You still have the obligation, however, to provide information to your trustee. This will include things like bank statements and changes in income. If you applied for a debtor’s petition, you are able to nominate a registered trustee of your choice.
This is the benefit everyone looks forward to. Once declared bankrupt, you will be released from certain kinds of debts. Bankruptcy covers unsecured debts. These will include:
- Credit card debts
- Unsecured personal loans
- Gas, electricity, phone, and internet bills
- Medical, legal and accounting fees
Bankruptcy releases these debts when it is complete.
Consequences of Bankruptcy: The Bad
Bankruptcy will release you from debts outlined above. However, there are still some debts that bankruptcy does not cover. These are debts you will still have to pay but in a different way. These are debts you will still have to pay but in a different way.
The Australian Financial Security Authority (AFSA) lists debts that bankruptcy doesn’t cover. These include debts in child support or government student loans (like HECS). More unsecured debt examples are found on the AFSA website.
Secured debts still need to be taken care of. While this is now the responsibility of the trustee, they will now need to start paying off those debts by taking that secured property to pay off the debt. For example, you have a mortgage over a house. That house was security for the loan and will be taken by the trustee to pay the debt. The same applies to car loans where the car was provided as security.
Your debts don’t magically disappear. The money that will pay for these debts comes from the sale of your property. The trustee has the right to confiscate your property (except for your essentials) in order to pay off your debts. It can even apply to the property you acquire after you declare bankruptcy. Section 116 of the Bankruptcy Act 1966 (Cth) outlines the property the trustee can take. It also describes what they can’t take, which includes:
- Property held on trust for another
- Life insurance and super funds
- Household necessities (s 116(2)(b))
- A car valued up to $8,000 indexed
- Tools valued up to $3,000 indexed and used by the bankrupt to generate income
- Workers compensation
- Property with major sentimental value
Once you’re officially bankrupt, you will be listed on the National Personal Insolvency Index. This is a permanent record of your status as a bankrupt. Anybody can access it for a small fee. Having a permanent record will have a future impact on your ability to get loans or other finances.
You can no longer purchase goods on credit that exceed a certain amount without disclosing your status as a bankrupt. Every quarter, this amount changes. As at the time of writing this article, this amount is $5,842. It can even become a criminal offence if you are bankrupt and attempt to obtain credit in certain circumstances. The AFSA website provides updates to changes in this amount.
Running a Business
Once bankrupt, you cannot carry a business alone, or jointly without disclosure of your bankruptcy. You also cannot direct a company. If your skills are in running businesses, then a bankruptcy status might affect your ability to use your skills to earn an income in the future.
Leaving the Country
Another one of the consequences of bankruptcy is that you can’t leave the country. At least not without the court’s permission. This might seem wild and unfair, but it’s to make sure that you don’t run away to avoid your debts.
The Consequences of Bankruptcy: It’s Ugly
Declaring bankruptcy comes with serious repercussions. It is absolutely essential that you consider all of your options before considering doing so. Sometimes, the best course of action is to speak to somebody about your options that might know something you don’t. Speak to a bankruptcy lawyer if you need professional advice on how to best manage your financial situation. A bankruptcy lawyer can help you at any stage of the process and can either help you avoid unnecessarily declaring the status, or can minimise your total debt. Even if you’re on the other side of the fence, a bankruptcy lawyer can help you best ensure that you recover as much debt as possible.
Michael is a legal intern at Lawpath working with the content team. With an interest in contracts, intellectual property, and constitutional law, Michael is currently completing a Bachelor of Laws with a Bachelor of Commerce at Macquarie University.