For a lot of our clients, bankruptcy brings about a huge relief from the financial pressures of juggling bills that have gotten out of hand and imminent litigation they are in no real position to defend. For others, there is bankruptcy appointment remorse or regret that a court made orders against them and for which they were inadequately prepared.
A university graduate, initially unemployed after uni calls us, mentions a few credit cards and a desire to declare bankruptcy given the absence of income. Sounds like a good idea until the repercussions of a bleak credit file resonate (difficult to get finance for a car let alone a home loan for many years to come) and given the potential to pay those debts within a year or two of the imminent career starting gig. So more a case of bankruptcy not at all for them.
Bankruptcy now vs Bankruptcy later
Bankruptcy timing plays an important role in decision-making. Property owners may prefer to defer bankruptcy in the hope that their property appreciates sufficiently in value such that a future sale or refinance will facilitate full payment of creditors. The opposite of course may prevail.
When an individual’s financial circumstances are absolutely irretrievable, bankruptcy at the earliest possible time means a discharge (and true fresh start) at the earliest time – normally 3 years from the start of bankruptcy.
For more financially established individuals, bankruptcy can call for adjustments to lifestyle as a result of a number of factors which may include:
- Lower income earning capacity – be that from a move from self-employment to working for others, lost ability to act as a director of companies during the 3 year bankruptcy period, loss of licence to operate in the same capacity (real estate agents, chartered accountants, CPAs etc), damage to personal profile or otherwise;
- Income splitting available through trusts being more complicated in a bankruptcy scenario given the trustee’s obligation to seek to capture and assess all of the income “off the bankrupt’s brow”; and/or
- Income contributions payable by high income earners – eg, $15k to $20k payable per annum from gross wages of $150k (exact calculation subject to a statutory formula having regard to the individual’s circumstances).
So if the above are relevant to your client, there may be an appetite to avoid bankruptcy for as long as possible in order to maintain licence/income with the upside to creditors being potentially repaid from it.
The right of a bankrupt to proceeds under a will are in fact payable to the bankruptcy trustee. This scenario assumes the grantor has already died or passes during the bankruptcy term.
During a bankruptcy, parents and others are free to change their will to avoid payment to a trustee and should consider independent legal advice to facilitate it. That said, having alternate beneficiaries to receive the inheritance is not so simple for some grantors, so a sooner rather than later approach to bankruptcy may be preferred while the grantor is in good health. And what if the will is essentially “fixed” because there has been a loss of capacity by a living grantor to change their will? One of the most critical things for the bankrupt to do is to maintain good compliance with their obligations to their trustee. That helps ensure the “at risk window” stays at 3 years or less and is not extended out to 8 years for non-compliance.
SMSFs become non-compliant while a member of the fund is bankrupt. The ATO website references a 6 month period of grace for a bankrupt to move their assets into an industry super fund or appoint an RSE to wind up the fund absent which the fund is no longer eligible for tax concessions and risks heavy penalties. Unfortunately, the ATO tell us that while legal personal representatives (enduring power of attorney etc) can act on behalf of the Trustee/Director under a legal disability, they cannot act on behalf of a disqualified person such as an undischarged bankrupt. If the value of the fund warrants it, bankrupts can consider an application to the court for an exemption to the disqualification – Macalister FCA 1455.
Debts bankruptcy won’t solve
Child Support Agency, student start up (university) loans, parking fines and environmental fines are among the short list of debts that bankruptcy does not wipe. Another “interesting” one is the insolvent trading claim of a liquidator in certain circumstances. To mitigate against this and assuming there is some funding available to meet their basic costs, it is good practice to appoint a liquidator to companies which had trading liabilities before entering into personal bankruptcy. On that basis, the director can disclose a potential such claim in their Bankruptcy Form and the liquidator will typically lodge his/her claim in the bankruptcy, receiving a dividend if one is paid and that otherwise being the end of the matter. Absent funding to appoint a liquidator, the company will likely be deregistered by ASIC within 2 years of non-payment of ASIC annual fees. If the company had only minor operations/debts, that may be the end of the matter, however this approach is more risky with larger trading corporates which the courts may later reinstate and appoint a liquidator to enlivening claims such as insolvent trading and breaches of director duties potentially put new assets at risk post-bankruptcy.
Insolvency and the best advice typically turns on the exacting circumstances of the company/individual. Our offices are always happy to discuss those circumstances and to set out alternative solutions and to help triage your client toward their chosen path. For more information, read our article on what happens when you declare bankruptcy.