BANKRUPTCY MYTHS

Bankruptcy advice is not expensive, and usually free.

Bankruptcy advice from Shaw Gidley is FREE You can call us on 02 4908 4444 or email at newcastle@shawgidley.com.au for a free confidential consultation with a bankruptcy specialist.

A bankrupt does not have to lose their house,

The bankrupt’s share in the property may be sold by the trustee if the value of the property is greater than the amount owed to the mortgage. If the house has to be soldthe bankrupt may be able to arrange for the co-owner, their spouse, family or a friend to purchase it from the trustee.

There is no limit on the amount of income a bankrupt can earn.

There is no limit on the amount of money a bankrupt can earn. However, if they earn above a certain limit of after-tax income currently $56,674.80, they are required to make contributions to the trustee. The level of income can increase depending on the number of dependents the bankrupt has. If the bankrupt earns over the set level of after-tax income, they must pay 50% of the amount earned over the threshold to the trustee.

Declaring bankruptcy is not published in the newspapers, only on extremely rare occasions.

While it is true that a record of bankruptcy will be recorded on the NPII forever, bankruptcy will only temporarily appear on a person’s credit file, either 2 years after discharge or 5 years after declaration of bankruptcy, whichever is later . A trustee can advertise a bankruptcy if they feel it is necessary, but this is in very rare cases. People can pay a fee and search the NPII, but we find that not a lot of people search this record.

Unsecured creditors can not harass bankrupts

Creditors are prevented from taking any action to recover money from a bankrupt relating to debts incurred prior to bankruptcy. An exception to this is a secured creditor such as a mortgagee over property.

A person can choose a Bankruptcy Trustee

Even when a person has a creditor’s petition pending against them, they are still able to lodge a Debtor’s Petition and appoint their own bankruptcy Trustee. They will need to obtain a Consent to Act from their chosen Trustee.

Bankruptcy does not covers all debts.

While bankruptcy covers most unsecured debts, it does not cover: -

• Court imposed penalties and fines
• Child support & maintenance
• HECS & HELP Debts
• Debts incurred after bankruptcy
• Unliquidated debts

If someone goes bankrupt, their spouse does not have to go into bankruptcy.

A person is not required to file for bankruptcy just because their spouse needs to. In some cases though, where there are joint debts, it may be beneficial for the spouse to enter into bankruptcy at the same time.

This is one which we still hear quite often, despite the Australian Taxation Office’s (ATO) priority ceasing in 1993! Since then all debts due to the ATO rank equally with other unsecured creditors. The only claim for which the ATO has a priority is in respect of unpaid superannuation guarantee charge. 

Contrary to what some believe, insolvency practitioners don’t always get paid first, and often we don’t get paid at all!

In court liquidations and bankruptcies, petitioning creditor’s costs rank ahead of most other claims including an insolvency practitioner’s remuneration. The extent of secured creditors in an administration will also have a bearing on the funds available to meet remuneration.

Often there are no assets available to be realised and no other recovery actions capable of being pursued. In those cases we still have many statutory obligations which we must attend to notwithstanding that there are no funds available to meet our remuneration and disbursements.

Although an insolvency practitioner may be appointed by the directors of a company (as may occur in a voluntary administration), or the company’s shareholders (such as a voluntary liquidation), the appointed practitioner is bound to act in accordance with the Corporations Act and must act in the interests of all creditors. 

This is to be contrasted with a receivership where the appointed receiver is generally working for their appointee such as a bank or other financier.

Generally a person can be a director of as many companies as they wish subject to restrictions within the Corporations Act which specifically disqualify persons from managing a corporation.

The Corporations Act provides for the automatic disqualification of persons from managing corporations where a person has been convicted of certain offences relating to contraventions of the Act or dishonesty, they are an undischarged bankrupt or they are subject to a Personal Insolvency Agreement under Part X of the Bankruptcy Act. These automatic disqualifications apply unless the person has obtained the leave of the Court to manage a corporation.

Once a person is discharged from bankruptcy they can be a director again. Similarly, once a person subject to a Personal Insolvency Agreement has fully complied with the terms of the agreement they can be a director again.

In addition to being automatically disqualified in the circumstances mentioned above, the Australian Securities & Investments Commission has the power to seek a banning order against a person from managing corporations where they have been involved in two or more failed companies.

Bankrupts do not lose everything.

If there are significant assets the trustee may be required to sell them for the benefit of creditors. However most people are entitled to keep the following items:

• Normal household items such as furniture and appliances
• Motor vehicles to the value of $7,900
• Tools of trade to the value of $3,750
• Superannuation, unless irregular contributions were made before bankruptcy

A person can operate a business while bankrupt.

A bankrupt cannot be a company director for the period of bankruptcy. However, bankrupts can run a business as a sole trader. There are certain restrictions placed on running a business: for instance they must trade in their own name and cannot incur debts to suppliers or other creditors over a certain indexed statutory limit, currently $5,726

Everyday people become bankrupt, not just people with poor money handling skills.

Anyone can find themselves in a situation where they feel bankruptcy is the best option for them. Nobody plans for debt to get out of control, and bankruptcy is there to help people stop feeling overwhelmed and help them rebuild their lives

Tax debts are included in bankruptcy.

Bankruptcy freezes debts incurred at the date of bankruptcy and will clear most debts upon discharge. In most cases bankruptcy discharges common debts like credit card and tax debts. Debts that are not cleared under a bankruptcy are HECS/HELP debt, debts from fraud, child support or maintenance debt.

Discharged bankrupts are able to buy property.

Bankruptcy does not prevent people from buying a house ever again. While bankrupts cannot purchase property whilst they are bankrupt, they may purchase assets after their discharge. In fact by not going bankrupt it is possible that they will never be able to afford to buy a house because they can’t save a deposit or afford mortgage repayments because of their unsecured debt burden.

Child Support can be included in Bankruptcy, but not discharged.

While bankruptcy covers many debts, child support isn’t one of them. The debt will be provable, meaning it will be included as a debt in the bankruptcy. However, the debt is not released when the debtor’s bankruptcy is over. If there is a large amount owing to child support it would be best to talk to DHS.

Superannuation is normally protected and not affected by bankruptcy.

Bankruptcy will not impact on superannuation retirement savings provided:

1. The funds are held in a regulated superannuation fund; and
2. There are no transactions which have the effect of attempting to put funds beyond the reach of creditors.

Restitution Orders will typically be wiped by bankruptcy in certain circumstances.

Restitution orders will be wiped by bankruptcy provided: -

1. The amount was fixed prior to the date of bankruptcy;
2. The order was not made under proceeds of crime; and/or
3. The order was not made in relation to a crime involving fraud

It is possible for a bankrupt to operate a business while they are bankrupt. The main restrictions in relation to operating a business include that the bankrupt must trade under their own name, or if they trade under an alternative name they must inform everyone that they deal with that they are bankrupt.

In addition, while there is no restriction on a bankrupt incurring credit when they are bankrupt, they are obliged to disclose their bankruptcy status to any prospective credit provider if the amount involved exceeds a prescribed limit.

Some company directors are under the impression that the liquidation of their company means that they are also made bankrupt. 

The personal financial affairs of the director are separate and distinct from those of the company of which they have been a director and whilst bankruptcy may be inevitable in some cases, is it not automatic and will depend upon the director’s own financial position and the extent to which they may have guaranteed any liabilities of their company.

Despite what some may think when they first seek advice from us regarding bankruptcy, they will not lose everything they own as there is certain property which a bankrupt is entitled to retain. This is known as non-divisible property.

In addition to being able to retain normal household furniture, clothing etc, a bankrupt is entitled to retain tools of trade and motor vehicles up to certain prescribed values. 

The Bankruptcy Act also restricts other property from being divisible, subject to certain criteria being met, including superannuation and the proceeds from personal injury claims.  

It is possible for a bankrupt to operate a business whilst they are bankrupt. The main restrictions in relation to operating a business include that the bankrupt must trade under their own name or if they trade under an alternative name, they must inform everyone that they deal with that they are bankrupt. 

In addition, whilst there is no restriction on a bankrupt incurring credit when they are bankrupt, they are obliged to disclose their bankruptcy status to any prospective credit provider if the amount involved exceeds a prescribed limit

Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.