Bankruptcy can seem like an easy fix to solve your financial problems. However there are legal and practical consequences that you should be aware of before you consider declaring bankruptcy.
How does a person become bankrupt?
You may voluntarily declare yourself bankrupt by filing a Debtor’s Petition with the court. Alternatively, you may be ‘made’ bankrupt by the court, on application by another person, in circumstances where they you failed to pay a debt.
A court has the discretion to decline to declare you bankrupt if it deems that you are solvent (capable of paying off your own debts).
Whether you become bankrupt voluntarily or involuntarily, your rights and obligations as a bankrupt are the same.
Does bankruptcy cancel my debts?
Bankruptcy does not release you from responsibility for your debts. It merely restrains your creditors (the people or businesses you owe money to) from bringing legal proceedings to recover their debts.
A trustee is appointed to manage your funds and assets in order to pay off your debts during the course of the bankruptcy. Normally, your creditors will be paid a proportion of the money that they are owed and are thereafter unable to pursue you for the full amount.
However, certain debts are not covered by bankruptcy, and remain the responsibility of the bankrupt to pay back in full, such as a court fine, HECS debt or liabilities arising from maintenance agreements under the Family Law Act.
What powers does a bankruptcy trustee have?
Trustees have the power to seize cash, funds held in bank accounts, debts owed to you, real estate, stocks and shares, jewellery and valuable household fixtures and fittings. Trustees also have the power to garnish your wages if you earn over a specified threshold and this may continue even after you have been discharged from bankruptcy.
How else will bankruptcy affect me and my freedom?
Bankrupts are subject to significant financial control by their trustee. For example, a bankrupt is required to keep their trustee up to date with any change to their circumstances and personal life, and declare any additional funds they have acquired either through gifts, inheritances or other means. Special permission by the court is required for a bankrupt to receive a money transfer from a financial institution.
Bankrupts are required to surrender their passport to their trustee and are prevented from travelling overseas except in very limited circumstances. Bankrupts are also unable to hold certain positions within a company and face restrictions on how they are allowed to conduct a business.
How long does bankruptcy last?
The period of bankruptcy is usually 3 years, but this may be extended by the trustee in certain circumstances.