In these financially tough times some people might ask, what does it mean to go bankrupt?
There are advantages and disadvantages to being declared bankrupt:
- Once someone goes bankrupt they will remain an undischarged bankrupt for at least three years.
- The bankruptcy will be registered on a public index, and creditors will be notified.
- A bankrupt forfeits all property to their trustee in bankruptcy, including any property acquired whilst they are an undischarged bankrupt.
- If the bankrupt holds any property as a joint tenant, then the bankrupt’s share vests in the trustee as a tenant-in- common. An example of this is a home jointly owned by a husband and wife.
- Any rights to commence legal proceedings vest in the trustee.
- Furthermore, during the period of bankruptcy, after a person earns over a certain amount (currently $41,250.30 per annum net of tax) they must pay the additional amount to the trustee. There is an increase in the threshold amount for any dependents residing with the bankrupt.
- The bankrupt will in most circumstances need to surrender their passport and have restrictions placed on their freedom to travel.
- The bankrupt must also hand over all books and accounting records in their possession, attend the trustee’s office or attend meetings that the trustee reasonably requires, execute necessary documents, and do their ‘utmost’ to aid the trustee and notify the trustee of any changes to their circumstances.
- A bankrupt is subjected to extensive powers of investigation and examination. In certain circumstances the bankrupt must by law disclose their bankruptcy status when obtaining credit, though in reality most institutions will conduct a bankruptcy search when considering a loan application.
- A bankrupt also cannot participate in certain professions. For example they cannot in most circumstances be a real estate agent, hold certain government seats or positions, or manage a corporation (and ‘manage’ is defined widely).
- Some of the abovementioned restrictions or requirements carry criminal penalties if the bankrupt does not comply.
- Also some transactions entered into prior to bankruptcy will be ‘clawed back’. The date of bankruptcy varies in each case, and for a period of two to five years prior to bankruptcy the trustee can seek to claw back certain moneys or property, and the trustee has wide powers to seek to recover the property including any money paid to a third party. There are protection mechanisms for arms length market value transactions made in good faith.
- Being declared bankrupt also provides a person with some relief from creditors. An unsecured creditor cannot commence proceedings to recover a debt. There are, however, some exceptions to this - maintenance orders relating to child support, for example.
- A bankrupt may also keep certain household items, including tools used to earn an income, vehicles used primarily as a means of transport and household property that is reasonably necessary for the household’s domestic use, up to certain limits.
- Also, the bankrupt will usually not be forced to forfeit most standard superannuation policies or life assurance policies
- Once a bankrupt is discharged from bankruptcy any debts provable in the bankruptcy are, with limited exceptions, discharged.
A person may attempt to avoid becoming bankrupt by submitting to the trustee a Debt Agreement in accordance with the Bankruptcy Act, or by entering into a less formal arrangement with the party seeking to make them bankrupt. If you receive a Bankruptcy Notice or a Creditor’s Petition the timelines for responding are very strict, and the simple act of not responding within 21 days to a Bankruptcy Notice (by paying the amount or commencing appropriate proceedings if they are available to you) could of itself be an act of bankruptcy that could form the basis for an application to bankrupt you. If you receive a Bankruptcy Notice or a Creditor’s Petition it is vital that you quickly obtain legal advice.
Janis Connelly-Coode has qualifications in these areas of law and has worked as an accountant. She is able to provide advice to anyone needing help in regard to these types of situations.