Debt Recovery

There are a number of paths you can take when you’re facing bankruptcy and it’s important to consider each option carefully so that you can work your way out of this unfortunate situation where you can’t pay your debts.

The Bankruptcy Act 1966 (‘the Act’) sets out these options which we’ll look at below. One of the key things to consider is whether you are better off declaring bankruptcy, which may clear your slate of debts but has other serious consequences for your lifestyle, or you instead negotiate a legally enforceable debt agreement, which allows you to repay your debts on a schedule you can manage.

If you need more guidance on these options after reading this article contact Felicio Law Firm for a consultation. We will help clarify the best way forward with empathy and understanding.

The process and consequences of bankruptcy

When debts are mounting and a person has no way of meeting them, declaring bankruptcy under the Act often seems the best way forward.

Bankruptcy can be entered into voluntarily, or be forced on you by a creditor through a court order (what’s known as a sequestration order).

Once you are declared bankrupt, a trustee is appointed to manage your period of bankruptcy, which is usually three years and one day. The trustee can be appointed by the Australian Financial Security Authority (AFSA) or you can nominate your own registered trustee.

Once you are bankrupt and a trustee appointed, you have a series of ongoing obligations you agree to, including:

• providing details of your debts, income and assets to your trustee;
• facilitating the trustee notifying your creditors of your bankruptcy, which will stop them contacting you about repaying your debts;
• facilitating the trustee selling certain of your assets to help pay debts;
• making compulsory payments if your income exceeds a set amount.

Bankruptcy means you won’t have to pay unsecured debts, such as credit and store cards; unsecured personal loans and pay day loans; gas, electricity, phone and internet bills; overdrawn bank accounts; unpaid rent; and medical, legal & accounting fees.

But you will have to check with the creditor to see whether you are freed from certain other debts, such as Centrelink or ATO debts, victims of crime debts or toll fines.

Bankruptcy does not free you from certain other debts, such as court imposed penalties and fines; child support & maintenance; HECS and HELP debts; any debts you incur after your bankruptcy begins; and unliquidated debts.

It’s also important to note that being declared bankrupt can affect the way you live your life. During the period of bankruptcy your ability to work in certain trades and professions and be a director of a company will be restricted, while you’re also not able to travel overseas unless given permission by your bankruptcy trustee.

The record of your bankruptcy will also stay on your credit report for five years and your name will permanently remain on the National Personal Insolvency Index.

How are Part IX debt agreements different to bankruptcy?

A debt agreement is a legally binding contract between you and your creditors under which you make repayments of your debts on a payment schedule you can manage.

Such agreements are administered under the provisions of Part IX of the Act and hence are known as Part IX debt agreements.

There are conditions you must meet before being able to make such an agreement when you’re unable to pay debts that are due. Specifically you must:

• not have been bankrupt, or had a debt agreement or personal insolvency agreement, within the last 10 years;
• have unsecured debts and assets less than the set amount;
• estimate your after-tax income for the next 12 months to be less than the set amount.

‘Set amount’ refers to indexed, threshold dollar amounts which are updated twice a year to reflect the Consumer Price Index or the base pension rate. As of September 2020, for instance, the unsecured debt amount was $118,063.

The process of creating a Part IX debt agreement involves:

• negotiating to pay a percentage of your combined debt that you’re able to afford over a set period of time, and;
• making repayments to a debt agreement administrator, instead of making individual payments to creditors.

Once you complete the payments under the debt agreement, creditors can’t recover the rest of the money you owe.

Is a Part IX debt agreement preferable to bankruptcy?

Like bankruptcy, there are a number of consequences as a result of entering a debt agreement and it will be up to your judgement – or that of your legal practitioner – as to which best suits your circumstances.

Firstly you should understand that by proposing a debt agreement  you are undertaking an ‘act of bankruptcy’, which  your creditors can potentially use to apply for a court order to declare you bankrupt.

Additionally, if you trade under a business name that isn’t your own, you must inform those with whom you conduct business that you are operating under a debt agreement.

Furthermore, while unsecured debt is dealt with in such an agreement, secured creditors may still seize and sell any of assets you’ve offered as security for credit, such as your house or car, if you are unable to meet your payments. Remember also that there are eligibility limits to the amount of debt you can have in order to propose an agreement.

Entering a debt agreement of this kind will also be marked on your credit file for up to five years or possibly longer, and your name will be listed on the National Personal Insolvency Index.

Your creditors are likely to be more positive about a proposed debt agreement, however, as they are a better chance to recover more money under the agreement than if you are declared bankrupt.

We’re here to help

As the details above show, there are options when you are unable to meet debt repayments either as an individual or a business.

Working out which option is best for you given your situation is often best identified by experts in insolvency matters such as Felicio Law Firm.

We bring a warm and understanding approach to our relationship with clients and can help you guide you through to a fresh start if you are facing the prospect of bankruptcy. Call us Erina Lawyers today for an initial consultation on (02) 4365 4249.

Bankruptcy is a highly charged word. For many people it represents financial and personal failure, with an attendant loss of confidence and self-esteem.

But in some situations declaring yourself bankrupt is the most logical and sensible course of action, allowing you to extract yourself from a financial and legal quagmire and start afresh.

Below we’ll take a brief look at the advantages, as well as some of the disadvantages, of declaring bankruptcy. If you think this is an option you will require, you should consult a legal professional with experience in this area of the law such as Felicio Law Firm.

Why choose bankruptcy?

There are few things more stressful than falling behind on your debts. Doing so usually unleashes a cascade of unpleasant consequences – creditors chasing you for payment, threats of legal action to recover debts, and an inability to get yourself out of the debt hole.

When you declare bankruptcy, many of these consequences are stopped so that you can get your affairs in order. A registered trustee, who you are able to nominate, is appointed to manage the bankruptcy. The Australian Financial Security Authority (AFSA) will appoint a trustee if you don’t nominate one. The trustee’s role is to work with you and your creditors in order to find solutions which are fair and reasonable to all parties in the circumstances.

During bankruptcy you must provide necessary information to your trustee, including bank details, statements, pay slips and other documents which help clarify your current financial position.

This process helps prevent constant harassment by creditors, halts any legal proceedings against you to recover debt, and prevents the Sheriff from seizing any of your personal assets (except for new debts incurred after bankruptcy) in order to satisfy debts. If your wages or bank account are being garnished, this will also stop under bankruptcy (except in certain instances by the Australian Tax Office). In most cases, you are still able to earn an income, too.

Personal property protected under bankruptcy is indexed to maintain pace with the Consumer Price Index or the base pension rate. Property that cannot be taken and sold for the benefit of creditors includes your ordinary clothing; necessary household property (e.g. furniture and appliances, but not antiques or items of exceptional value); tools of trade up to the value of $3,800 and a car worth no more than $8,000 (as of October 2020); your superannuation  and life insurance policies, including payments from either policy received on or after the date of the bankruptcy; and any compensation received directly by you for personal injury.

There are also indexed limits over which you are not able to propose a debt agreement with creditors. These include $118,063 in unsecured debts, $236,126.80 in divisible assets and $88,547.55 in after-tax annual income (all correct amounts as of October 2020).

What happens to my debts?

When you file for bankruptcy you are generally freed from unsecured debts such as credit cards, unsecured personal loans and pay day loans; gas, electricity, phone and internet bills; overdrawn bank accounts; unpaid rent, and; medical, legal and accounting fees for the period of bankruptcy.

Other debts such as those owed to Centrelink or the ATO, or fines for parking infringements, tolls, etc, may not be ended by declaring bankruptcy. Other debts such as child maintenance and support, court-ordered fines or penalties, HECs, unliquidated debts or debts incurred after you filed for bankruptcy, cannot be avoided through bankruptcy. Legal advice should be sought.

Drawbacks of declaring bankruptcy

You must declare all your assets to the trustee once you become bankrupt. While some of your property and assets are protected, as outlined above, most will be sold to pay your debts, including your home. Cash in bank accounts over an amount considered necessary to live can also be taken.

If your income is over the indexed amount, this can also be used to make contributions towards your debts.

Some professions and licensed trades will restrict or prohibit your ability to work while you are in bankruptcy, and you will not be permitted to travel overseas without the permission of your trustee. In some cases you will be asked to surrender your passport.

During bankruptcy, you may experience difficulties accessing credit, renting a property or taking advantage of others services (such as taking out insurance) that most people take for granted. This is because your status as a bankrupt is listed on your credit report for a number of years after your discharge and is also permanently listed on the National Personal Insolvency Index.

The effects of these listings can be severe and long-lasting, preventing you from finding a place to live or to borrow money in order to start afresh. Furthermore you will not be able to hold a position as a company director, any money or assets received during bankruptcy will be taken by the trustee to satisfy your debts, and you are limited in your ability to commence legal proceedings against anyone without the permission of the trustee.

How long does bankruptcy last?

A person is usually discharged from bankruptcy after three years and a day, however a trustee can apply to have the period of bankruptcy extended for up to eight years.

If you are unsure whether bankruptcy is the right course to take, on the balance of the factors we’ve presented in this article, contact Felicio Law Firm today. We have considerable experience advising clients facing financial difficulties related to debts. We will work with you to understand both the advantages and the disadvantages of filing for bankruptcy so that you can make a decision that is right for your situation both now and into the future. Call us Erina Conveyancing today on (02) 4365 4249.