In Australia, bankruptcy is managed by the Australian Financial Security Authority (AFSA) where a trustee (a person or body), is appointed to manage individual cases. According to the Federal Court of Australia, bankruptcy is a legal process where an individual who cannot pay their debts gives up their assets and control of their finances, either by agreement or court order, in exchange for protection from legal action by their creditors. Importantly, it means that the individual does not have to repay part, or all of the debt owed to creditors.
Bankruptcy is generally considered a last resort for those in severe debt and have minimal chances of recovery. Although bankruptcy may provide some immediate debt relief, it comes with serious consequences. Declaring bankruptcy will leave a listing on an individual’s credit report for 7-10 years. Further, an individual’s name will appear permanently on the National Personal Insolvency Index (NPII), an online record that parties such as banks, landlords, and employers can gain access to undertake a credit assessment. As a result, this will negatively impact a person’s ability to access funds, making it increasingly difficult obtaining loans, mortgages and personal finance matters, well after their bankruptcy period has ended.
The Bankruptcy Act 1966 along with the Bankruptcy Regulations 2021 govern Australia’s personal insolvency system and provides a framework to allow individuals that are in severe financial stress to discharge unmanageable debts.
Bankruptcy conditions are legally binding and must be adhered to by all parties involved. This means that individuals under bankruptcy agreements must follow specific regulations, including asset distribution, debt repayment terms, and any restrictions imposed by the Court or relevant authorities. Violating these conditions can result in legal consequences.
There are several obligations one must follow when declared bankrupt, including:
- Providing details of your debts, income and assets to your trustee
- The trustee notifies creditors of the bankruptcy – this prevents most creditors from making contact about the debt
- The trustee can sell certain assets to assist in repaying debt
- If income exceeds a certain amount, then compulsory payments must be made
Before filing for bankruptcy, it is crucial that an individual considers alternatives. These can be less costly and likely to do less damage to a person’s credit record. Some options include:
- Speaking to a Financial Counsellor: They are available in all states and countries. Most of these services are free, independent, and confidential. Financial counsellors will provide advice on one’s financial situation and will recommend the best options.
- Debt Agreements: Negotiating to pay a percentage of combined debt over a period will assist in clearing debt in a suitable manner. These payments will be made to a debt agreement administrator (fees may be associated). However, debt agreements are not agreements to borrow money and cannot release an individual from all types of debt.
- Personal Solvency Agreements (PIA): These are legally binding agreements between an individual and creditor/s. They involve a trustee to take control of one’s property and make an offer to creditors to pay part or all the debt by instalments, or through a lump sum payment. The length of a PIA will be determined based on the negotiation between the individual and creditor/s. Assets such as a house or car may be retained if the agreement allows. Fees will apply to process, propose, and manage a PIA agreement.
- Temporary Debt Protection (TDP): This option gives individuals a 21-day period where unsecured creditors cannot take enforcement action, such as sheriffs seizing goods (for example: a warrant to seize property and assets to pay off outstanding debt amounts), or garnishing wages (an official notice directing an employer to collect funds from an employee to fulfill their debt). Once a TDP is approved, individuals can use the time to negotiate a payment plan with creditors or gather formal insolvency options and necessary information. It is important to note that a TDP can only be applied for every 12 months and does not stop creditors from contacting and seeking repayment. Importantly, the details of a TDP will not appear on the National Personal Insolvency Index.
In addition to the above, there are other options that may be more expensive, and these include: speaking with an accountant and/or a lawyer.
Financial Freedom – At What Cost?
The long-term, silent effects of bankruptcy that are not talked about need to be fully understood and carefully considered. The emotional toll of bankruptcy can have a detrimental impact on an individuals’ mental health. The stigma associated with bankruptcy often leads to feelings of shame and embarrassment and while this is presently being challenged it may still feel like a financial defeat for customers. Furthermore, the uncertainty and instability that comes with filing for bankruptcy can trigger higher levels of stress, anxiety, and depression. This can strain relationships with family members, friends, and colleagues causing one to withdraw from social interactions.
Some other restrictions imposed on an individual during bankruptcy include:
- Conditions imposed on an individual’s passport during the bankruptcy period, may mean that consent needs to be obtained from the bankrupt trustee to travel.
- Impediments to employment in some industries
- Restrictions on business owners who declare bankruptcy. Individuals who file for bankruptcy are not permitted to be the director of any company or require written permission from court to allow the continuance of management and will have to disclose to employees of the bankruptcy status.
- Bank trustees will also need to be notified of any job changes, adjustment to income, or if employment has ceased.
- At any time during the bankruptcy period a trustee can take any money or items the bankrupt receives – this can include income, gifts, inheritance, or lottery winnings.
While bankruptcy can offer a path to financial relief, the answer is not always straightforward, and the decision can come with more financial challenges, some of which continue once the bankruptcy period has ended.
The Francom Effect
At Francom we offer a solutions-based approach. We consider every customer’s circumstance through listening, imagining, engagement, believing and navigating to provide solutions that are respectful of unique situations.
As a general rule, we do not charge interest or fees unless the matter is before the court where we permit the Judge to make a ruling. We also do not actively list a credit default on an individual’s credit file and work with customers to understand whether they received the default notice or had some extenuating circumstances at the time the default notice was sent to the customer. We also consent to remove judgment once a matter has been finalised.
We also work with many financial counsellors and strive for a better future for all our mutual customers by meeting short-term needs and considering long-term aspirations.
We want to help our customers and are willing to engage with the customer directly or any representatives of the customer to find reasonable solutions. We have a myriad of options that can be explored, once we work together in a collaborative manner. Moreover, Francom helps customer’s make informed decisions to benefit their financial longevity present and future.
References
https://www.fedcourt.gov.au/law-and-practice/guides/guides-bankruptcy/bankruptcy
https://www.afsa.gov.au/i-cant-pay-my-debts/bankruptcy/what-bankruptcy
https://www.investopedia.com/articles/pf/07/bankruptcy.asp
https://www.kleinattorneys.com/the-psychological-impacts-of-bankruptcy/