Although bankruptcy is a formal and legal process to relieve someone of their unmanageable debts, it is vital to understand that there are consequences for filing for bankruptcy. Once bankruptcy is filed and a Trustee is appointed, they become the sole controller and manager of the Bankrupt’s finances. This is so that creditors and debts are fairly managed and paid in order to achieve the best possible result under the circumstances.
Consequences relating to bankruptcy include:
- Selling off assets to pay off debts
- A bankrupt must be willing and is obligated to provide all information to the Trustee relating to changes of circumstances, such as employment, income, business statements
- May need to make compulsory income contributions if the bankrupt exceeds income limits
- All debts may not be ‘cleared’ under your bankruptcy
- Impacts to your credit file that may impact future financial decisions such as loan applications
- Permanent listing on the National Personal Insolvency Index (NPII)
The Trustee may need to sell off assets in order to recover funds to pay off creditors. With the Trustee being appointed, the Bankrupt has legal obligations that include the disclosure of any change in circumstances that relate or may impact the situation or bankruptcy. This includes providing information such as bank statements, files and other records that the Trustee may request of you.
In addition, entering bankruptcy may also have an effect on your income, employment and business. Earning over a certain amount of income may mean that you will need to make compulsory payments to your Trustee. If you lose or job, have a change of employment or there is a change of income, these circumstances must be communicated back to the Trustee.
Unfortunately, entering bankruptcy does not necessarily mean that all debts are cleared or you are exempt from all debts. There are exclusions to the debt relief that someone may seek under bankruptcy, this includes; court penalties or fines, child support, Government student loans, debts that are incurred after the bankruptcy begins and debts that are undecided between the bankrupt and the creditor (also known as unliquidated debts).
There are also secured debts (or debts that are tied to assets) that need to be managed. This includes instances such as a mortgage over a house, the secured creditor (commonly a bank that has issued the mortgage loan) has the security over the house. If a bankrupt is not making the repayments, the secured creditor has the right to take possession of that property they have the security over. As a consequence, being a bankrupt, you do need to comply and be of assistance to the secured creditor during this asset recovery.
There are also different types of debt including joint debts, company debts and overseas debts, all of which are treated individually. It is important and your obligation to disclose all debts and all creditors as part of your bankruptcy to your Trustee.
For more information on the consequences of bankruptcy in Australia, contact one of our professionals.