The Nitty Gritty of Bankruptcy

Ever consider bankruptcy as the answer to all of your financial woes? After reading this article, hopefully you will have a more balanced opinion on the advantages and disadvantages of declaring bankruptcy.

Bankruptcy happens involuntarily or voluntarily; either a creditor (owed $2,000 or more) takes a court order against you or you sign up and declare yourself bankrupt with the Insolvency Trustees Services Australia (ITSA) or a registered trustee. Bankruptcy is an option for protection from creditors for someone who cannot pay outstanding debts and cannot reach an agreement with creditors to repay through a flexible repayment plan or be discharged from all debt obligations. Usually those considering bankruptcy lack the resources to pay off creditors while meeting basic living expenses and have no sellable assets to repay creditors.

One can opt for bankruptcy voluntarily by lodging the following documentation: a debtor's petition, a Statement of Affairs, and an acknowledgment that basically says that one is aware of the circumstances, effects, and consequences of bankruptcy.

However, opting for bankruptcy is a major financial decision that should not be taken lightly. Other options may be more suitable than bankruptcy and it is crucial that one considers all of the alternatives to bankruptcy before binding oneself to its lifetime ramifications. There may be other ways to get protection from creditors.

Declaring bankruptcy does not protect the bankrupt from being hassled by secured creditors such as banks, although it does protect the bankrupt from unsecured creditors such as major credit cards. For example, the credit card lender cannot legally ask for repayment while a secured creditor can simply take away assets that were covered by their security. Case in point, a bank can repossess a bankrupt's home if the bankrupt misses a mortgage payment.

Alongside having to repay secured creditors, other creditors and payments which have to be paid despite declaring bankruptcy are: court fines and penalties , child support, fees relating to fraudulent proceedings, and HECS/HELP obligations.

Bankruptcy also negatively impacts one's employment opportunities, ownership, earnings, and credit file. Certain industries are off limits for a bankrupt. A bankrupt employed in a restricted industry will have to look for another job in another industry and perhaps acquire a new set of vocational skills and certifications. Also, a bankrupt cannot be a company director without court approval.

A bankrupt is forced to live on a smaller income because of mandatory payments to a Bankruptcy Trustee if earnings are over a certain amount, which is determined by the government.

A bankrupt cannot own whatever he or she wants. A bankrupt can only own "necessary" household property and clothes, money or property bought with compensation payments, tools that meet a predetermined value, and a vehicle that meets a predetermined value. Check the ITSA website for current thresholds, restrictions, and updates at www.itsa.gov.au.

While a bankrupt can apply for and obtain credit, the credit line available for borrowing is limited to a predetermined value. One also has to ask for permission in order to borrow more than that predetermined value.

For seven years, a bankrupt's name and personal information will be all over various credit reference agencies' databases. After seven years, that information will be removed. Conversely, a bankrupt's name and personal information will stay recorded on the National Personal Insolvency Index, a public record which is accessible by any person or organization that is willing to pay a fee. Having name and personal information in a permanent record makes it harder to obtain financing options.

For all of the aforementioned reasons, it is important to consider one's circumstances and investigate all the options, weighing them against the benefits and consequences of bankruptcy.

New changes in the law also give more power to the government or the Bankruptcy Trustees to repossess assets that have been transferred before bankruptcy, depending on the deemed intention of the bankrupt to avoid creditors.

Normally, assets can be protected by giving assets to others (gifting assets) and placing assets in superannuation. Yet as of May 31, 2006, the Bankruptcy Act was amended to the effect that a trustee can take back property previously owned by the bankrupt and presently owned by a spouse or a family trust. Assets that were transferred to a party where common sense would say that the bankrupt made the transfer in order to evade paying creditors, and in addition, consideration for a property that was transferred from a bankrupt to a third-party, will most likely be taken back into the possession of a trustee.

Superannuation contributions that were made by a bankrupt before he or she became bankrupt can be taken back by a trustee if the intentions of making superannuation contributions were to avoid repaying creditors. This became effective from July 27, 2007 in response to a case in 1990, Cook v Benson, where a bankrupt had made superannuation contributions to numerous funds and still managed to enjoy an outrageously comfortable amount of benefits despite being bankrupt. Now the government and the court can take back superannuation contributions where they believe that the intention of those contributions was to avoid creditors, and an investigation of the bankrupt's past history of superannuation contributions can be launched in order to determine if the intention of those contributions was to avoid creditors.

The main point is that bankruptcy is not a laughing matter, and it is harder for the wily to avoid being caught for trying to plan a comfortable bankruptcy situation.

Pamela Caronongan is a guest writer for Debt Fix who help people avoid bankruptcy. She has a MSA degree with a specialization in finance from Northeastern Illinois University and a BA degree in English Literature from the University of Illinois Champaign-Urbana.