The process of bankruptcy begins when either a debtor files for a petition or the creditor wants a debtor for claiming bankruptcy. The court then assesses the financial position of the person in question in order to pass a judgment. If declared bankrupt the individual is given a chance for a fresh financial start. There are numerous reasons that can lead to bankruptcy for example divorce, Fluctuations in economic cycles or a sudden increase in Medical expense.
When it comes to Australia, the legal process for filing for bankruptcy involves filing forms with AFSA. These forms can be found on their official site too by clicking on the ‘Apply for bankruptcy’ tab. In case AFSA accepts the forms that you have filled, they will also notify your creditors by including your AFSA administration number. In case they have rejected your application, they will definitely notify you in writing stating all the reasons for rejection.
The person needs to declare any assets they have or receive when they apply for bankruptcy. A trustee is then appointed by the Australian Financial Security Authority (AFSA) who manages the financial affairs of the bankrupt individual and may charge fees for this service. The individual has an obligation to provide information to trustee, including changes to circumstances. This may involve supplying financial statements, bank statements and all other documents that the trustee asks for.
The effects of bankruptcy can either be positive providing a fresh financial start or depending on the situation it may make life more difficult ahead. Usually a help from financial counselor can be of great benefit when it comes to these cases.
The fact of bankruptcy will appear on the individual’s credit report for five years and on National Personal Insolvency Index for life which means it will be difficult to obtain credit for five years. Your credit score will be affected as in most cases it will decrease due to bankruptcy however you can rebuild it which can lead to a positive outcome in the end.
Bankruptcy may lead to loss of some of the assets, which may include a house and a car which is worth more than a specific stated amount.
There is usually no limit to the amount of income that one can earn or save while being bankrupt. Earnings within a certain income bracket (which varies according to the number of dependants a person has) are allowed. However if the after-tax income exceeds the amount applicable to a person, they will need to pay trustee for the creditors.
When it comes to assets ordinary household goods such as furniture, television and computer are not taken by the bank. However again if the value of asset exceeds a standard value then there are chances of losing them. Personal luxury items for example jewelry, tax refund winnings or inheritance might be lost. A person is allowed to keep a limited amount needed for living in their bank account.
Moreover, Bankruptcy may lead to complications when it comes to employment. A bankrupt person cannot be a director of a company or involved in its management without the permission of the Court during the term of their bankruptcy. Trade associations also have certain conditions of membership for the duration of a bankruptcy.
It is important to note that bankruptcy does not mean that the person gets rid of all the debts, as there are some exceptions. Most unsecured debts (the ones that are not tied to specific property) are covered in bankruptcy for instance credit cards, electricity bills and unpaid rent. Bankruptcy does not cover some debts like court fines and penalties or debts that are incurred after the declaration of bankruptcy.
There can be cases where some other person than the one being bankrupt is held liable for the debt. For instance, in the case of a joint debt. If both people are bankrupt, then they should include the debt in each bankruptcy. Another case is when there is a guarantor for a loan then he/she becomes liable for the debt. Furthermore, in case any person own assets that the bankrupt person has helped purchase like a car, can be taken by the bank.
Travelling overseas also becomes difficult, as the bankrupt person needs to seek permission from the trustee who may ask further details to consider this request.
The biggest price of bankruptcy to most people is that they lose their privacy. All financial information now has to be shared with the trustee that has been appointed who also takes decision for a period. Thus this takes away the decision making power as well.
Bankruptcy may emotionally affect the person reducing their confidence level. They can become more risk averse thus not fully taking up the business opportunities that come to them. This reduces their ability to earn for a better living.
Steven Rooyen is a husband, father, senior debt advisor and a financial consultant at Sort My Debt. With over a decade of experience in different financial fields, Steven has helped many people resolve their debt problems and provide debt relief Australia. While not doing that, you can find him reading books and roaming with friends.