What are the Main Consequences of Bankruptcy?

main consequences of bankruptcy

If you become bankrupt, either by a creditor petitioning for your bankruptcy or by the filing of your own bankruptcy petition, a trustee will be appointed to administer your Estate and oversee and control the bankruptcy process.  It is your trustee’s job to achieve the best outcome that is possible for your creditors.

Presently, bankruptcy normally lasts 3 years from the date you file your statement of affairs (which sets out your financial position) with your trustee, however your trustee may lodge an objection to your discharge from bankruptcy, and extend your bankruptcy for up to 8 years, if you fail to (for example) provide information when requested, pay income contributions if required, or disclose all your income/ assets.

It is likely that the current 3 year bankruptcy discharge period will be reduced to 1 year sometime during 2018 after the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 is passed into legislation by the Federal Parliament.

The main consequences of bankruptcy are:

  1. Your trustee is in charge of your bankrupt estate until you are discharged. His or her job is to obtain the best return for your creditors. You must correctly declare your financial position (including all assets) at the start of your bankruptcy, as well as any property you may receive during bankruptcy (e.g. an inheritance under a Will)
  2. All assets you hold will automatically vest in your trustee, and be realised by your trustee to pay your creditors, for example:
  • Real estate, including houses and/or land;
  • Vehicles, where the bankrupt holds equity of more than $7,800 being the value of the vehicle less the sum owing under finance;
  • Tools of trade worth more than $3,700;
  • Money in your bank account/s in excess of $1,000;
  • Any inheritance or winnings; and
  • Tax refunds.
  1. On your discharge from bankruptcy, most of your debts are cleared so you can start fresh financially. Be aware that some debts are not covered in bankruptcy, such as a HECS or HELP student loans, Court imposed penalties or fines, child support, unliquidated debts, or debts that you may incur after your bankruptcy has commenced.
  2. You will still be able to work, but if you earn more than the relevant income limit, you will be required to make income contributions towards your bankruptcy of 50% of the amount you earn above the relevant threshold. The income limit threshold, so what you can earn before have to make contributions, will depend on the number of dependants you have, as follows:

    Number of Dependants

    Income Limit (after tax)

    0

    $56,674.80

    1

    $66,876.26

    2

    $71.977.00

    3

    $74.810.74

    4

    $75,944.23

    More than 4

    $77,077.73

  3. The following employment restrictions will apply:
    1. You cannot be a Director of a company, or be involved in managing it (including a self managed superannuation fund); and
    2. Some professional bodies and trade associations impose conditions of membership during and/or after bankruptcy. You should contact the relevant organisation in your industry to determine if any restrictions apply to you.
  4. If you become bankrupt while you are being sued in legal proceedings, generally no further action can be taken without Court approval (also, no legal proceedings can be commenced against you without Court approval). Any action that you commenced prior to bankruptcy will also be automatically stayed and your trustee must elect to prosecute or discontinue the action in writing.  There are some exceptions to this, such as:
    1. If you commenced an action prior to becoming a bankrupt in respect of:
      1. personal injury or wrongdoing to you, your spouse or de factor partner, or family member; or
      2. death of your spouse or de facto partner, or family member,
        then you may continue that action in your own name; or
    2. If you are involved in a family law proceeding when you go bankrupt, the Family Court can still deal with your case as it has exclusive jurisdiction over matters where both family law and bankruptcy issues are involved. There is a complex overlap in respect of family law and bankruptcy, so if you are in this situation, you should seek legal advice immediately.
  5. Overseas travel requires the written permission of your trustee, and you must usually surrender your passport to your trustee.
  6. Your name will permanently appear on a public record called the National Personal Insolvency Index advising that you are, or have been, a bankrupt.
  7. Your bankruptcy will appear on your credit report for either:
    1. 5 years from the date you became bankrupt; or
    2. 2 years from when your bankruptcy ends, whichever is later.
      This means you may find it harder to obtain credit during that time.

If you would like to know more about bankruptcy, or need legal advice regarding bankruptcy or any of the above issues, then please call us on (07) 4616 9898.

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