The Pros and Cons of Bankruptcy

Bankruptcy can feel like a terrifying prospect. It’s had a black cloud over its reputation for as long as it has existed, and we often see clients who are anxious about the possibility of filing bankruptcy. It definitely has its downsides, and it’s certainly never a first-point-of-action for people in financial troubles. It should always be a priority to see if debts can be paid, first and foremost. However, it’s not all bad if all other avenues have been exhausted. In fact, it can be your most positive way out of debt and a chance to start over. If you’re in or facing financial hardship and considering bankruptcy; it’s worth balancing the pros and cons to help decide if it’s a viable option for you.

Pros or Positives of Bankruptcy;

•    It is not a life sentence. The bankruptcy term does end, and you can move on after bankruptcy.

•    Bankruptcy will cancel most of your debts permanently. These debts are credit cards, payday loans, shortfalls on secured debts, and even personal guarantees given on company loans, and there are still more. There are some debts which the bankruptcy does not cancel, which are explored below.

•    Creditors and debt collectors stop hassling you. Once your bankruptcy has commenced, the unsecured creditors are not permitted to contact you and must contact your Bankruptcy Trustee.

•    There is no minimum amount to owe and no lodgement fees to file for bankruptcy. You can approach a qualified personal insolvency profession to help with filling out the paperwork and filing for you, and this is usually free. 

•    You can save money during bankruptcy. There is no limit on the amount you can save during bankruptcy. Your savings are protected provided that they remain in your bank account until you have been discharged from bankruptcy. 

•    You may be able to keep your house. In most cases, you can stay in your house, and a third party can work out an arrangement with your Trustee to keep the house. 

•    Essential assets, such as furniture and effects, are protected.

•    Vehicles can be protected. If you have cars and bikes that are valued less than $8,150, then these will be yours to keep and protected in bankruptcy. 

•    Tools to earn an income are protected. Tools that are used to earn an income, and valued less than the threshold amount (currently $3,800) are yours to keep. 

•    Your superannuation paid by your employer is protected. Superannuation paid to you at the correct rate will be protected from the creditors and available for your retirement, or appropriate early withdrawal.

•    Superannuation withdrawn during bankruptcy is protected. If you need to withdraw your superannuation and met the eligibility criteria, then the amount paid will be protected. If the superannuation money is used to buy an asset, then the asset is also protected.

•    You can operate a business in your own name. If you chose to operate in your own name, then you don’t have to disclose that you are bankrupt. 

•    You can travel overseas while you are bankrupt. You need to get your Trustee’s written permission, which is usually not a hassle. 

•    Your bankruptcy is not advertised. Your bankruptcy will remain on your credit file until 2 years after you have been released from bankruptcy, but then it disappears. 

The consequences, or cons of bankruptcy;

•    Bankruptcy usually lasts 3 years and 1 day. 

•    You are not able to buy assets while you are in bankruptcy. 

•    Bankruptcy may impact licences you hold which you need to earn your income. You should make enquiries with the appropriate office, or your employment contract to find out what happens if you become bankrupt. 

•    Your bankruptcy remains on the National Personal Insolvency Index (NPII) forever. This record is maintained by the Australian Financial Security Authority and costs $15 to access. 

•    You cannot be the Trustee of a Self-Managed Superannuation Fund. 

•    You cannot be a director of a company. 

•    Bankruptcy does not clear all debts. Debts such as fines imposed by the courts, HECS debts, debts resulting from fraud, child support liabilities, and debts that a court is yet to order how much you owe.

•    Unexpected money is to be paid to the Bankruptcy Trustee. Should you receive a lottery win, or gambling win or inheritance, it needs to be paid to your bankrupt estate. 

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.