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Isolating from a Bankruptcy Trustee?

Isolating from a Bankruptcy Trustee?

There is an old bankruptcy expression called “keeping house” – an act of bankruptcy in fact before a person is made bankrupt. Picture the blinds that are drawn all day, the doorbell and knocks that go unanswered even though the lights are on and the debtor is at home, but unwilling to discuss his/her circumstances or accept service of legal documents. On a small number of files, this behaviour continues after our appointment as bankruptcy trustee, in some instances for many years.

Does it help? In short, no. In some cases, there will be an ulterior motive to hide assets/income with a cheeky flight to Majorca at the far end of the scale, but more commonly, it appears to be a simple denial of the circumstances, hoping it will pass over and maybe some mental health challenges to deal with the paper/issues and any conversation around it.

While most bankrupts are discharged after 3 years, that only holds true when all of their paperwork has been done. In fact, where a person has been made bankrupt by court order and the bankrupt fails to complete the statement of affairs (now Bankruptcy Form), they remain bankrupt indefinitely – yep, 20, 30, 40+ years as the case may be even if that means the trustee has retired, the estate continues with a new trustee or the government office (AFSA in its capacity as the Official Trustee). Three interesting long running cases we have seen recently include:

  1. A fellow who worked and saved hard over 10 years, buying property and building up equity. These assets are available to creditors in the bankruptcy as “after-acquired assets” (pursuant to section 58(1)(b) of the Bankruptcy Act – BA), so creditors are expected to be paid in full in that case. Had he attended to the paperwork earlier, he would have saved thousands, but a win for creditors as it turned out;
  2. An inheritance in favour of the bankrupt which vested in the trustee because the grantor died before the bankrupt’s discharge – also covered by the after-acquired assets provision mentioned above. While clearly this was not the intention of the deceased, creditors received an unexpected windfall that would not have been triggered if the bankrupt’s paperwork was in order and his bankruptcy therefore discharged at the 3 year mark;
  3. A bankrupt gentleman who had died in the intervening period. Nothing turned on it from a financial perspective because he had earned only modest income and accrued no assets, but it did result in wounds being re-opened for family members (executors) in relation to the background to their loved one’s financial circumstances.
    The lesson to learn we say is for bankrupts to meet their obligations, then the time window for after-acquired property scenarios like those listed above is limited to 3 years.

Compliance with the statutory obligations helps avoid other tricky scenarios for the bankrupt such as:

  • Deeming of income – when information about income is not provided or the trustee has reason to consider the information is incomplete or skewed, such as by a related party employer situation, the trustee may deem reasonable income (139Y BA).
  • Garnishee notices – issued to the employer or major customer of the bankrupt pursuant to s139ZL of the Bankruptcy Act. We prefer to be discrete and otherwise would not contact an employer, so this really is a last resort.
  • Offence referrals – s19(1)(h) and (i) of the Bankruptcy Act requires trustees to consider whether offences have been committed and to report these. While many offence referrals receive a light treatment by the justice system, there is a risk that Judge Judy will have had a bad night’s sleep, empathise with the plight of creditors and the trustee and take a stricter line.
  • Overseas travel bans – overseas travel during bankruptcy is approved in most circumstances, however conditions may be included by the trustee to encourage compliance. Travel without said approval may trigger the Australian Federal Police at the airport to stop the bankrupt’s unapproved travel.
  • Extended bankruptcies (3 years instead becomes 5 or 8 years) bring with them longer periods of time that the bankrupt cannot be a company director, trustee of a SMSF and if they are trading a business, ongoing disclosure requirements.

Every year we receive calls from people who are bankrupt through other trustees and we steer them toward meeting their bankruptcy obligations in order to take the upside of bankruptcy (moving on from their debts) and to minimise the downsides referred to above.

If you think your client may be avoiding their obligations, please give us a call to discuss better ways forward or ask them to call us directly.

Article written by Malcolm Field
Director – SV Partners Perth

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