This is a question for the ages… Should I file for bankruptcy?
Well I don’t know you yet, so I’m sorry but I can’t answer that for you, however what I can do is give you a complete process breakdown on why people file for bankruptcy and this will help you with making your own decision.
Firstly I want to go through the disclaimer – This is all generic advice and your financial situation should be reviewed by a professional before taking any type of action. We have bankruptcy specialists that can help so when you are ready you can complete our FREE ONLINE BANKRUPTCY EVALUATION and we can advise you of your bankruptcy score.
Now, before we go through the big question of should I file for bankruptcy we need to consider the question of what is bankruptcy? There are a few different processes that confuse ppl.
- Temporary Debt Protection
- Personal Insolvency Agreement
- Part IX Agreement
- Debt Agreement
Now, a lot of these benefit the creditor (the person you owe money to). But it is important to know how each of these might affect your situation so that you can make an informed decision.
When you talk about bankruptcy eligibility, basically if you meet 2 requirements you are eligible. However just because you’re eligible doesn’t mean that bankruptcy will be your best solution.
You can apply for bankruptcy if you meet the following 2 requirements:
- You’re unable to pay your debts when they are due (insolvent)
- You’re present of have a residential or business connection to Australia
There is no longer a minimum or maximum amount of debt or income you need to be eligible
It’s all based on what’s the best for you.
The way you can determine if bankruptcy “may” and I emphasise “may” be suitable is if you collate all your debts and ask yourself this 1 question:
Can I pay off all my debts without it causing me financial stress in less than 3 years?
If your answer is no you can’t, then bankruptcy could be the option for you.
If you answered yes then I suggest you read our Personal Insolvency Agreement, Part IX Debt Agreement & Debt Agreement articles which can provide you with 3 similar but different options outside of bankruptcy.
However, if you want to be released from your debts – read on:
A lot of people I speak to still think Bankruptcy lasts for 7 – 10 years… this is incorrect, the first thing about making any decision is to ensure you have accurate and correct information. This misinformation that’s out there is not only
- Wrong, it’s,
- Getting people to make decisions based on this wrong information that can affect them adversely.
So what we’re going to do here is provide a bit of a road map to determining if bankruptcy is suitable for you. Again, we can’t stress enough you should seek professional advice. Even if it’s just to reconfirm it’s appropriate for you as we can’t go through all options and processes here – having guidance and assistance throughout the process is the best way to ensure you get the fresh debt-free start you’re after.
If you’re after general information the first thing you need to do is collate your debts:
Once you have done this you can really see just how much debt you have. Also, you should put down how much it costs you each week / fortnight / month. Now, many ppl are on financial hardship / payment holidays / or just not paying the debts…
You can’t use these reduced figures. You MUST use the repayments you have to make after the financial hardship ends / the payment holiday ceases or if you were to start paying the debts again. Why…? Well, because you still have to pay the debt off, it’s not going to magically dissapear and using the lower figures isn’t going to give you an accurate figure.
Now add up the entire debt amounts and also the repayments you would have to pay. Draw a big line through it and consider for a moment that you had no debt. How much could you save each week / fortnight / month now?
Now do the following:
If you put your repayments into weekly, multiply by 52 then multiply by 3 again
If you put your repayments into fortnightly, multiply by 26 then multiply by 3 again
If you put your repayments into monthly, multiply by 12 then multiply by 3 again
This will give you an estimated amount you will save just over the course of the next 3 years (this is important for later). Now all of your debts will take more than 3 years to pay off, so you can go through the next step of multiplying the repayments by how long you have left on the debt to give you a full savings figure, but we’re keeping it simple for this explaination.
My average clients repayments on just consumer debt: (credit cards, personal loans, payday loans, etc etc) is about $300 a week (most is interest). You could be higher or lower, it doesn’t matter. You might not think yours is that high – most people are surprised when they put the actual debt repayment figures they should be paying down.
Now this works out to be approx $15,000 a year or $45,000 over 3 years – this is basically a deposit for a house…! I know crazy, right!
If you were released from your debts and were able to save 25% of repayment amount you would be in a far greater financial position than before. Not to mention, the many debt collection calls you would normally be getting.
However, aren’t there obligations that come with bankrutpcy..? Yes there is, however depending on your situation they may not really affect you.
We’re going to go through these now.
- Bankruptcy lasts for 3 years + 1 day
Yes, you heard correctly only 3 years… what happened to the 7 – 10 years, well as we mentioned this is wrong. Bankrutpcy in Australian in the year 2020 last for 3 years only. Now, for this 3 year period there are some things you need to be aware of.
- Bankruptcy will be lodged on your credit file for a total period of 5 years – this is broken down into 2 parts
- Undischarged bankruptcy – this is the period your obligations are applicable for. And as per above lasts for 3 years.
- Discharged bankrutpcy – this is for a period of 2 years, you are completely discharged of your bankrutpcy obligations but it will still affect your credit for 2 years. However you can still get a loan, you just might be paying a slightly higher interest rate.
- In the 3 year bankruptcy period you cannot act as a director of an Australian company or be the trustee of a trust. However, you can still trade as a soletrader, so rather than running your business through a company you can switch over to trading as a soletrader to continue. After the 3 years many of our clients restructure back into a company or trust trading structure.
- There are a few different debts that aren’t covered under bankruptcy, they include debts that were fraudulently taken out, child support arrears, HECS / FEE Help debts and parking infrindgement debts, outside of this all debts are covered including centrelink overpayment, tax debts, consumer debts etc etc – if you’re unsure contact us and we can answer your questions.
- There is an income indexation for the 3 years of bankrutpcy – Bascially if you earn over a certain amount each financial year, you have to pay back a portion of your income to the bankruptcy trustee who is manaing your bankruptcy. This amount changes depending on the number of dependents you have. The amount you have to pay is 50% of the income above this amount. So, if you were $100 a week above the index you would be required to pay $50 to the trustee each week.
- See below the index based on how many dependents you have – also pls note it is “after tax” income.
# of dependants to income
0 – $59,031
1 – $69.657
2 – $74,970
3 – $77,921
4 – $79,102
Now, if you are over the income index that doesn’t mean you cannot declare bankruptcy. I have many clients that are over the index. 99% of the time the amount you have to pay through the index will be far lower than your current debts. So if you have to pay back $10,000 over 3 years to release yourself from $100k + I think that’s a good option, don’t you?
- Lastly, there is a National Personal Insolvency Index. Every single Australian who declares bankruptcy is listed on the index. This isn’t a bad thing, it’s not readily available and costs money to do a search. If you’re concerned about if it will affect you then we can advise you.
Now that you have worked out how much debt you have, how much you’re saving in repayments and if you fit within the income index it’s now time to determine what else might be affected when you declare bankruptcy:
Early we talked about what we could save by not having to pay all these debts, a question I get asked is:
Can I save money during bankruptcy?
You absolutely can, however you must be VERY VERY careful as if you do anything with this money that changes it from after tax earnings to an investment then the trustee can claim it.
So, to keep money from being taken from you all money saved should be from after tax income (if your after tax income is above the threshold you should be paying contributions). You should also leave your savings in an ordinary savings account.
Things you should not do with your savings
- Never put your savings into a term deposit as it will now be classified as an investment and the nature has changed. Therefore, your trustee can claim it
- Never invest in shares – again the nature has changed and the trustee can claim it
- Purchase assets above the asset threshold of $8,000 for a vehicle or $3500 for tools of trade, the trustee will claim it if you purchase things above the threshold
- Invest in property – the asset will be claimed and sold
So by all means save your money but just have an ordinary savings account and make sure you can evidence that this is after tax funds in case you get asked to prove where it came from
How will my Government Assistance be affected?
Your current government assistance won’t be affected so you can still apply for government student loans – however remember if you apply for credit above $5882 you need to disclose that you’re bankrupt.
Your current family tax benefit will not be affected, and you are still welcome to apply for centre link – the normal eligibility criteria will take effect.
Can I keep my job?
Bankruptcy won’t stop you from working and earning a living. Also the trustee won’t tell your employer (unless your employer is a creditor).
However there are some restrictions:
- Some professional / licencing bodies impose restrictions in some trades
- You may not be able to hold certain public positions
Now that we have spoken about the various parts of bankruptcy and how they apply, you should have more of an understanding on how your situation is personally affected.
We offer Free Advice so feel free to enquiry below and we can assist you with any further questions and provide specific advice for your situation.