We have recently discussed the consequences of failing to respond promptly (or at all) to important legal documents. The same advice follows if a creditor is chasing you up for unpaid debts or loans. Ignoring or putting off responding to repeated demands from creditors can entitle them to obtain Federal Court orders declaring you bankrupt upon failure to pay off debts that exceed a total of $5000. Of course, if you have mounting debts and do not forsee that you will be able to repay them, you can also declare yourself bankrupt before this happens.
In any case, you should carefully consider your options if you are facing the threat of bankruptcy. The effects of either declaring bankruptcy or being declared bankrupt can be far reaching and long lasting, and extend far beyond the initial bankruptcy period (which is three years, one day).
More than 20,000 people are declared bankrupt each year, commonly citing reasons of excessive credit use and unemployment. Declaring bankruptcy can seem like an easy way to clear your financial debts and enjoy a fresh start, but in reality, it can be a knee-jerk reaction to make the problem go away, rather than an effective long term solution.
Consequences of Bankruptcy
When you become bankrupt, the following may occur:
- The trustee in bankruptcy may sell your assets. You will be able to keep tools (up to a certain value), ordinary household goods up to $1000 in your bank account deemed living expenses, and superannuation. Aside from that, you can sell other assets including your home, car, and luxury electronic items.
- You cannot travel overseas unless you have the written permission from the trustee. In some instances, the trustee may ask you to surrender your passport.
- You cannot be a director of a company.
- You will be prohibited from managing a company unless you have permission from the Court.
- Depending on your trade or profession, you may have restrictions continuing in that field of employment.
- Your bankruptcy will be recorded by some credit organisations (National Personal Insolvency Index (NPII)) for five years or more, even after your bankruptcy has been discharged.
- Once you have been discharged from your bankruptcy, you may find it difficult to borrow money or buy things on credit.
- Things like setting up utilities may prove difficult without paying a bond.
There are also onerous obligations on you once you are made bankrupt. You need to provide all books, bank statements and other documents to the Trustee and keep them aware of all changes in your financial position and asset wealth.
What Are the Long-Term Disadvantages?
Assume you are a young person aged in your early 20’s and have gotten rather excited with your credit card. It does seem like free money for a while until the creditors come knocking! You could have a fairly small debt, say $6,000, but be unable to see a way of paying it off. So you declare yourself bankrupt and your financial problems go away. Right? Wrong! The problem is that once the bankruptcy period is over, your bankruptcy will continue to haunt you. Perhaps you’ll want to buy a house with your partner? You may not be able to get a loan or obtain a mortgage. Your partner may need to get the loan in their name alone. What about if you want to apply for your dream job or profession? Your application may be rejected because of your poor financial record. What if you and your partner separate? You will not have a recent credit history.
It is best to try and work out a practical solution to your debt problems without resorting to bankruptcy where possible. It’s important to seek financial or legal advice as soon as you are pursued for debts if you do not wish to resort to bankruptcy. It is important to consider the advantages and disadvantages of declaring bankruptcy, especially the long term disadvantages that you might overlook in the interests of a ‘quick-fix’.
At LegalVision, we recommend exhausting all avenues to reach an agreement with your creditors before you are made bankrupt. This may include settlement negotiations, entering a debt agreement or seeing a financial counsellor. Of course, you may have no alternative but to declare bankruptcy or the Court may make this decision for you at the request of creditors. Where possible, try to remain on the ‘front foot’ as this will give you wider scope to explore your options.
If you have any questions, get in touch with our insolvency lawyers who can provide you with practical advice on your available options in the face of bankruptcy.