Remember that classic childhood game Snakes & Ladders? Well, like the game, sometimes you have to take a few steps back to go forward. There are plenty of examples out there of people, both ordinary and famous, that have filed for bankruptcy and come back strong – often ending up well beyond their previous levels of wealth. While Donald Trump never personally filed for bankruptcy, his companies have gone bankrupt six times. The last was in 2009. In 2016, he became the President of the United States. Elton John declared bankruptcy in 2002; by 2018, he was worth an estimated $450 million. For most, bankruptcy has been a little bump in the road in an otherwise financially and personally successful life.
The point of this is not to recommend bankruptcy but to reassure you that it doesn’t need to be the disaster that you probably have been told it is.
“Rock bottom became the solid foundation on which I rebuilt my life” – JK Rowling
So, what is bankruptcy?
Bankruptcy is a formal legal process where you’re declared unable to pay your debts. When you become bankrupt, you don’t have to pay most of the debts you owe. Bankruptcy provides relief from the stress of debt and the harassment from debt collectors, allowing you to make a fresh start.
What types of debts are covered by bankruptcy?
Bankruptcy usually only affects unsecured debts, this means debts that are not tied to an asset like a house or a car. Unsecured debts include:
- Credit card debt
- Utility, medical, legal, and accounting (including tax) bills
- Unsecured personal or payday loans
- Overdrawn bank accounts
- Unpaid rent
You will not be released from secured debts such as mortgages or car loans or government debts such as court fines, council rates, penalties and fines imposed by a court (like speeding fines), most HELP/HECS-type debts and student loans, Child Support debts, family law maintenance payments or debts incurred by fraud. You will still have to pay these debts.
How long does bankruptcy last?
Bankruptcy normally ends 3 years and 1 day from the date when you were declared bankrupt. This is referred as being discharged from bankruptcy.
If you have failed to provide information to your trustee at any point (such as tried to hide some of your income or did not declare all your assets), your bankruptcy could be extended up to 8 years.
You can apply to annul or cancel your bankruptcy under certain circumstances. For example, a family member may offer to pay all your debts back early on your behalf, or you may enter into an agreement with your creditors to pay back a percentage. You may also be able to prove in court that you should not become bankrupt. For example – if someone stole your identity and took debts out in your name.
13 common myths and misunderstandings about bankruptcy
There are a lot of “myths” (lies) out there about bankruptcy. However, most of these arise from misunderstandings, and sadly, all they do is scare people from getting help to get rid of their debt. Bankruptcy can solve your debt problems and, importantly, give you and your family a fresh start.
If you are considering bankruptcy but are confused or afraid about what you have read or heard others say, don’t worry; below is a list addressing the most common myths, lies, and misconceptions about bankruptcy.
If you can’t pay your debts, you have to go bankrupt
Bankruptcy may turn out to be the best option for your particular circumstances; however, there are other options for paying off your debts and getting your life back under control that may better suit you.
There are both informal and formal debt solution options available to you, dependent on your specific circumstances. If you’re having difficulty making your repayments, you may want to try to reach an informal agreement with your creditors. Whilst informal debt solutions are not legally binding, they are likely to have fewer serious consequences than formal debt arrangements. An informal debt arrangement involves entering into an informal payment plan with your creditor(s) to enable you to pay your debts off over time – potentially deferring payments until you get back on your feet or making your payments more manageable and affordable.
The negotiated new payment plan could include renegotiating your home loan, paying your debts in a single, lower lump sum, or continuing with a different repayment plan involving one, or a combination, of the following:
- A Debt Moratorium – also known as a payment holiday or payment deferral, to either stop or reduce your payments and interest over a short period of time (usually between 3 to 12 months) to enable you to get back on your feet or to put other arrangements in place.
- Debt Consolidation – by bringing your existing multiple debts together into one single new loan, subject to a single interest rate, with a single regular (usually monthly) repayment it makes managing your debts significantly easier.
- Debt Negotiation – this involves discussions with your creditors to informally renegotiate the terms of your loan, this might mean settling the debt for less than the full amount, lower interest rates, reduced fees, and/or extending the length of the loan to reduce the size of your minimum payments.
- Debt Settlement – If you have access to a lump sum, a debt settlement may help. A debt settlement is an informal arrangement with your creditors that offers less than the full amount you owe in order to wipe out the debt completely.
- A longer-term informal arrangement – a long-term informal arrangement can last several years and often involves reducing your minimum repayments, reducing or freezing the interest owed over the period if you need more time to get back on your feet, or to put other arrangements in place.
Bankruptcy often has a minimal financial impact for people with limited assets and earnings below the income contribution threshold. However, if you do have assets or a higher income or need to avoid the restrictions of bankruptcy (for example, being a company director), one of the alternative formal debt solutions to bankruptcy may be a better option:
- Debt Agreement – A formal, legally binding (Part IX or Part 9) Debt Agreement helps you deal with unmanageable unsecured debts such as credit cards or personal loans. Your debt will likely be reduced to an agreed amount, and the remainder you will be able to pay back through affordable regular periodic or lump sum payments.
- Personal Insolvency Agreement – A Personal Insolvency Agreement is a formal, legally binding arrangement that is between you and your creditors to satisfy your debts. The arrangement could consist of a contribution of your income over a period of time or an assignment of your assets. It is the last option considered before filing for bankruptcy.
The Fix Bad Credit team can help you with any of these debt solution options. It is important that you fully understand what you are agreeing to before signing up to any type of debt agreement, as whilst they have benefits, there can be serious consequences.
People who file for bankruptcy are bad and should go to jail
While there are a few individuals that use the bankruptcy laws to avoid their responsibilities, most are good people, just like you, who are in difficult financial situations.
During bad times good people need help. You might be surprised to learn just who has found themselves in debt and turned to bankruptcy as a tool to save them. What would the world have looked like without the following leaders and entertainers?
- Abraham Lincoln
- Walt Disney
- The greatest showman (PT Barnum)
- Mark Twain
- Elton John.
The majority of people that file for bankruptcy each year are in desperate need of relief and have been struggling for months or even years to pay the bills. Whether you lost your job and can’t pay back your loans or credit cards, or your small business is failing, you are not a bad person for choosing bankruptcy relief. Everyone wants to be able to pay their bills, and everyone wants to be able to take care of their family and provide them with the things they need, but what if you can’t do both?
The Australian Federal government created the bankruptcy laws to assist hard-working people to eliminate their debts and move on with their lives. This way, you and your family can escape the crushing burden of debt and have a second chance at a fresh start.
Bankruptcy doesn’t really get rid of debt. Sooner or later, you still have to pay it all back
Bankruptcy lets you get rid of certain unsecured debts without paying for them…EVER. Once you are declared bankrupt, these debts are gone, FOREVER.
You will not be released from secured debts such as mortgages or car loans or government debts such as court fines, council rates, penalties and fines imposed by a court, most HELP/HECS-type debts and student loans, Child Support debts, family law maintenance payments or debts incurred by fraud. You will still have to pay these debts.
Depending on your personal circumstances, you may be required to sell your share of your home or car to cover your debt. However, you may be able to arrange for the co-owner, your partner, family, or friends to purchase your share from the trustee at market value.
Even if you declare bankruptcy, creditors and debt collectors will continue to harass you
One of the major benefits of bankruptcy is that your creditors or debt collectors must STOP trying to contact you as soon as you declare bankruptcy. Some creditors sell their debts to debt collection agencies, and they may not be aware you are bankrupt, in which case you simply need to tell them and provide your bankruptcy details. However, if they continue to harass you about an unsecured debt that is covered by the bankruptcy, this will amount to unconscionable conduct, and they may go to court for harassing you.
An exemption is for those debts that aren’t covered by the bankruptcy (such as secured debts like your mortgage or car loan) or if you were to incur any further debts after the bankruptcy begins. You are still fair game for these debts and may be chased by your creditors to pay up if you do not maintain payment.
If you go bankrupt, you’ll lose everything
Declaring bankruptcy DOES NOT mean losing everything. You can rest assured that you and your family won’t be left out on the street with nothing to your name other than your underwear. In fact, for many people, there will be little change at all. Normal household effects such as furniture are exempt from bankruptcy and you can continue to own a vehicle to the current value of $8,100*, or if financed up to this level of value above the loan debt. Tools of trade up to the value of $3,800* can also be kept.
*as at November 2020, For more information on the indexed amount under bankruptcy law see the Australian Financial Security Authority (AFSA) website.
If you do own significant assets, your trustee may be required to sell them to help pay off your debts, such as:
- Your interest in property, such as your home, if the value of your share is greater than the mortgage and selling costs – i.e. selling the house will release cash to put towards paying your unsecured debts.
- Shares or other investments.
Going bankrupt does not wipe out or get rid of secured debt, so if you’re in a position where you can keep your house or your car, you will need to keep paying that debt.
Everyone will know you’re bankrupt
It is unfortunate that bankruptcy carries with it such a stigma of shame, as it is a valuable tool that the Federal government has established to allow you and your family to escape the crushing burden of debt and have a second chance at a fresh start.
However, unless you’re famous and a daily tabloid or gossip magazine gets its hands on the story, chances are the only people that will find out that you’ve declared bankruptcy are your creditors and whomever you tell.
Your bankruptcy will be permanently recorded on the National Personal Insolvency Index (NPII), although most people don’t even know that this exists, and you need to pay to access this information.
The Bankruptcy Act 1966 does not require you to disclose your bankruptcy to your employer.
Bankruptcy will permanently destroy your credit
While your credit score will be affected when you file for bankruptcy, it WILL NOT be destroyed forever. The bankruptcy will be recorded on your credit report for either two years from the day your bankruptcy ends or for five years from the date you become bankrupt. But five years after filing, it will be removed from your credit report, revealing a clean slate. In fact, if you’re considering bankruptcy you’ve likely been struggling to pay your bills on time and may even have a few defaults or unpaid bills. So, your credit will already be bad.
Bankruptcy actually helps rebuild credit and improve your credit score. This is because you will have gotten rid of the debt you can’t afford, putting you in a position to pay back the rest of your debts. And as you rebuild your financial situation, you will be able to demonstrate you can again handle another loan or more credit. Besides, having less debt to pay after a bankruptcy makes you look more attractive to banks, credit card companies, and other lenders. Many of our clients have purchased new homes, vehicles and even qualified for credit cards a few months after the bankruptcy is concluded. In fact, many creditors will start offering credit right after the discharge. With proper planning and advice, you can get new credit much sooner than expected.
Even while you are bankrupt, you may still be offered credit, but be aware that the interest rates may be higher.
You can’t travel overseas while bankrupt
Many people believe that bankruptcy automatically blacklists you from overseas travel and that if you try to travel overseas, you will be arrested. The fact is, while you must request permission from your trustee to leave Australia, they will generally let you travel, as long as you’re complying with your duties to provide information and make any required payments such as income contribution instalments. You’ll also be required to provide information such as who is paying for your trip, your destination, dates of travel, etc.
If you travel a lot with your job, for example, you can apply for an open travel permit so you don’t need to ask each time you want to travel.
You’ll never be able to own anything again
Just because you go bankrupt, it doesn’t mean you are barred from buying assets such as a house or car ever again. While you will not be able to purchase a house when you are bankrupt, you may purchase assets after discharge.
In fact, by not going bankrupt and instead continue to struggle under the burden of your debt, you will probably never be able to afford to buy a house. The on-going debt repayments will likely prevent you from being able to save a deposit or afford mortgage payments. Your credit score is impacted for 5 – 7 years after you go bankrupt, affecting your ability to borrow money. However, many people use this time to save for a deposit for a house.
You can’t earn over a certain level of income in bankruptcy
While bankrupt, there is no limit on the amount of money you can earn. While there is no limit to how much you can earn, AFSA sets out income threshold amounts that are reviewed twice yearly and over which you must pay half of your income to your trustee to distribute to your creditors.
This threshold level is set by AFSA and is currently (as at November 2020) approximately $59,032 (after tax) for a person with no dependants. This increases for every dependent to $80,283 for a person with more than 4 dependants.
You won’t be able to keep or run your own business while bankrupt
It is true that during the term of the bankruptcy, which is normally three years, you cannot be a company director. However, you can still run a business as a sole trader, employ staff, and make money.
If you’re married, you both will have to declare bankruptcy
In cases where a husband and wife both have joint debts, such as a mortgage, credit card, and/or loans, and only one spouse declares bankruptcy, then creditors can demand payment in full from the other spouse. So, it makes sense to both declare bankruptcy. But this is not a “requirement”. In many situations it’s likely that just one spouse has a significant amount of debt solely in their name. In which case only they would declare bankruptcy.
Bankruptcy will destroy your family and lead to divorce
Financial stress is the number one factor when it comes to relationship breakdowns. The stress and anxiety between a husband and wife from not being able to pay the bills and provide for their family build and builds, often leading to divorce. Declaring bankruptcy relieves this stress and provides a pathway for you both to build your financially secure future together.
Could Bankruptcy be for you?
Hopefully, this explanation of the truths associated with bankruptcy has cleared up your confusion and improved your understanding of bankruptcy.
If you’re thinking bankruptcy might be a solution to your debt woes, Fix Bad Credit can help. Our debt experts will assess your financial situation for free and identify debt solution options tailored for your specific personal financial circumstances, using their in-depth knowledge of credit law and debt processes.
If you decide that bankruptcy is your best option, Fix Bad Credit can advise you through the process of filing for bankruptcy.
Debt is one of the few stressors in life that doesn’t go away. The worry is always there, along with the feeling that there is nothing that can be done about it. Money and debt worries cause heavy emotional and mental burdens, affecting your health, your work, and your relationships. But know you’re not alone. If you’re feeling overwhelmed by money matters, we’re here to help you find relief from your debt stress. Talking about debt can be daunting. It’s hard to know where to start or what your options are. However, you can take a small step right now by picking up the phone. For more information on what might be the best option for you, call one of Fix Bad Credit’s debt experts on 1300 729 757.