Disadvantages of bankruptcy

Contributed by Ian Macdonald and current to 1 September 2005

NOT ALL DEBTS ARE INCLUDED

There are some debts that are not part of the bankruptcy, for example:

• fines and penalties imposed by a Court for an offence; and

• debts for an unliquidated amount. This means that the amount of the debt is not fixed, or there is doubt whether the person owes anything. An example is where a person has a motor accident, the matter has not been to Court, and there is no agreement about how much is owed. A person in this situation who wants to become bankrupt should bring things to a head by entering an agreement in writing setting out that he or she is responsible for the accident, and agreeing the amount of the claim;

• a debt which is one of the three types of HELP debts arising under the Higher Education Support Act 2003 (Cth), or a debt relating to a student loan made under the Student Assistance Act 1973 (Cth);

• an amount payable under a proceeds of crime law; and

• interest accruing after the date of the bankruptcy on a provable debt.

NOT ALL DEBTS ARE DISCHARGED

There are some debts from which a bankrupt does not get a discharge at the end of the bankruptcy. These are:

• a debt incurred by fraud. An example would be a person who has got money fraudulently from Centrelink. Bankruptcy stops Centrelink from suing the bankrupt while he or she is bankrupt. It also prevents Centrelink deducting money from a Centrelink benefit while the person is bankrupt. However, Centrelink can start action when the person ceases to be a bankrupt. Of course, these limits on civil recovery of a debt by Centrelink do not affect Centrelink’s right to prosecute the person for any offence that has been committed;

• a debt that results from a person entering a bail bond or recognisance;

• child support and maintenance debts, unless a Court otherwise orders. The Bankruptcy Act 1966 (Cth) generally puts maintenance and child support debts into a special category, where they are not affected like other debts; and

• an amount owing to the trustee at the end of the bankruptcy as unpaid contributions from income.

GUARANTEES

If a person becomes bankrupt he or she is freed from liability under any unsecured debt, but a guarantor is not. Unless the guarantor goes bankrupt also, he or she will have to pay. This will not necessarily stop a person becoming bankrupt. If people are free of all their other debts, they may be able to afford to pay money to the guarantor so he or she does not lose.

LATER ACQUIRED DEBTS

Bankruptcy only affects debts in existence at the start of the bankruptcy. Debts incurred during bankruptcy are not part of that bankruptcy. A bankrupt with new debts can become bankrupt again while still bankrupt. This will mean the new debts are disposed of in the same way as the old debts in the earlier bankruptcy. However, the bankrupt’s conduct may be examined to see if the new debt was incurred in such a way as to constitute an offence.

REAL ESTATE

Real estate, including a bankrupt’s interest in a jointly owned house, and all luxury goods including boats and caravans, go into the bankrupt estate to be sold, and the proceeds divided amongst creditors.

PROPERTY ACQUIRED DURING BANKRUPTCY

Any property, other than the protected property listed above, that a bankrupt comes to own while he or she is bankrupt also goes to the estate. This includes money or property from deceased estates, or lottery winnings.

PAYMENTS TO BANKRUPT ESTATE

Bankrupts are required to make a contribution from their incomes if their incomes are over a specified figure. At the present time, for a single person the protected income threshold is $35,271.60 per year. (This is net income, after tax is paid, and any child support payable). Income over that is divided 50/50 with the bankruptcy trustee. The protected income threshold for a bankrupt with dependants is increased by the same percentages as child support – that is, 18% for one dependant, 27% for two dependants, 32% for three dependants, 34% for four dependants, and 36% for more than four dependants. So a bankrupt supporting a spouse and four children has a protected income threshold, before he or she makes any contribution from income, of $47,969.38. As this is a net income figure, a bankrupt with dependants can have quite a high gross income before they are required to pay contributions from income. Income in excess of that is divided 50/50 with the trustee in bankruptcy. These figures are indexed, and will change with the rate of a pension figure to which they are geared.

OTHER DISADVANTAGES

Other disadvantages of bankruptcy include:

• A bankrupt cannot get credit, or write cheques, with any one creditor for more than $4,067 without notifying the creditor of the bankruptcy. This figure is also indexed, and will rise with inflation;

• Bankrupts cannot trade or run a business under any name but their own name, without additions, unless they notify everyone with whom they deal of the fact they are bankrupt;

• Bankrupts cannot take any part in the management of a company;

• Bankrupts cannot leave Australia without the permission in writing of their trustee in bankruptcy. Bankrupts have to obey the lawful directions of their trustees, provide all financial information the trustee requests, and keep the trustee informed of any change in their name or address;

• Some occupations are adversely affected by bankruptcy. People who need a licence to work, such as lawyers, tax agents, real estate agents, used car dealers, inquiry and security agents, may not be able to practise if they become bankrupt. The armed services, police and the Commonwealth Public Service look unfavourably on bankruptcy. A person considering bankruptcy should check carefully whether his or her particular occupation is affected;

• Bankruptcy may cause a closer examination of a person’s conduct and financial affairs than would otherwise occur. Bankrupts whose gambling has contributed significantly to their becoming bankrupt, or have been reckless in getting credit when they had no hope of paying it back, should hesitate before deciding to go bankrupt. Their conduct may amount to an offence, which could lead to prosecution;

• Perhaps the most significant disadvantage of bankruptcy is that it has a permanent effect on a person’s credit and borrowing prospects. For seven years bankruptcy is recorded on credit reference agency records, and permanently on the National Personal Insolvency Index. For the rest of their lives the fact that they were bankrupt will deter some creditors from lending them money.