What do you think when you hear the word bankruptcy?
For many, bankruptcy is a dirty word. It's something you want to avoid at all costs; a last resort for those who can't manage their money. However, this bad rap is largely due to the many bankruptcy myths flying around – myths that cause people to avoid taking this path, even when it makes good financial sense.
To shine a better light on the benefits of this helpful debt tool, we've debunked 10 of the most common bankruptcy myths out there.
Myth #1 – You can no longer trade your business
Bankruptcy captures most assets, but your business isn't typically one of them. While you can't be a company director after declaring bankruptcy, you can be a sole trader and continue to trade rather than closing down. Your business and assets will come under the control of the trustee; however, generally your trustee would only sell your business if it had significant value.
You're also entitled to keep all profits earned while going through bankruptcy, subject to making any income contributions in line with regulations. Your net income is then deemed an income for assessment purposes.
Importantly, you remain personally liable for debts and liabilities incurred after the date of bankruptcy. You must also keep accurate books and accounts.
Myth #2 – I will lose what I own, including my family home
This is one of the biggest bankruptcy myths. It's also one that drives significant fear and anxiety. But thankfully, in most cases, you can keep your home and other assets.
While possession of your family home does pass to the trustee during bankruptcy, they'll generally only look to sell the property where equity exists.
In most cases where there are joint owners, the trustee would look to sell the bankrupt's share of the property to the other non-bankrupt party. As long as the mortgage stays up to date, you can usually keep your house.
There's also the option for a Deed of Forbearance, which is an arrangement where the trustee forbears their rights to take action with respect to the property in consideration for a monetary sum equivalent to the market value of the equity in the property. This normally occurs where there is no joint owner and the bankrupt owns the property solely.
Other assets not available to sell during bankruptcy include:
- Normal household items
- Living expenses – generally up to $2,000 may be allowed to be retained to cover living expenses
- Motor vehicles up to a net worth of $8,150
- Tools of trade up to a net worth of $3,800
- Personal property with sentimental value
- Life insurances/superannuation
- Personal injury/wrongdoing claims
Myth #3 – You cannot travel during the bankruptcy period
Many people believe that you're unable to travel overseas when you're going through the bankruptcy process. However, this is another myth. You are allowed to travel overseas (COVID-19 rules permitting!), but you do need to put in a request to your appointed bankruptcy trustee.
Be aware that you will be asked your reason for travelling, and your trustee has the power to say no. Ordinarily, overseas travel will only be refused where there is non-compliance on behalf of the bankrupt, such as income contribution arrears or outstanding requests for information.
In addition, you may be refused overseas travel requests if:
- Examinations and/or litigation requires you (the debtor) to be present in Australia
- The trustee has requested records from you to further his investigations
- Court proceedings are in play.
Myth #4 – Bankruptcy will mean I can't earn an income
There's generally no legal barrier preventing you from still working when you enter into bankruptcy. In fact, continuing to work can help you maintain good cashflow.
However, there are certain positions that you can't continue working in if you enter bankruptcy. These include jobs where you have access to trust funds or where you hold specific licences, including:
- Builder licences
- Property management licences
- Liquor licences
- Financial brokerage licenses
Bankrupts with legal practising certificates or contracting licences may continue to work with some restrictions subject to the relevant state authorities regulations.
If you're still earning, you may need to pay income contributions to your trustee if your earnings are above the given threshold.
Myth #5 – Entering into bankruptcy is expensive
There's no fee charged when filing for bankruptcy with the Australian Financial Security Authority (AFSA); it's completely free.
If you choose to appoint a private registered trustee (including us) rather than a publicly appointed one through the AFSA, you may be asked for a small amount of funds upfront. But, this is only in circumstances where no funds will be realised through your bankrupt estate, such as funds recovered from selling assets or income contributions.
There are several advantages to appointing a private registered trustee. These include having the same case manager throughout the bankruptcy and the opportunity to discuss your situation prior to becoming bankrupt in order to make informed decisions.
Myth #6 – A person who cannot pay their debts must go bankrupt
You definitely have options when it comes to unmanageable debt – bankruptcy is not the only path you can take. If you can resolve your debts through other means and the outcome will be better, you should.
The other options available to you if you cannot pay your debts include:
- Negotiating settlements of debts with creditors - This is where your creditors agree to take a reduced amount as full payment
- Putting forward a Debt Agreement proposal - A Debt Agreement is a formal legal agreement where your creditor agrees to accept an amount of money you can afford that you'll pay over time to settle your debts.
- Putting forward a proposal for a Personal Insolvency Agreement - This is a legally binding agreement between you and your creditors where you come to an agreement about how you'll pay your debt. It's only considered when a Debt Agreement is not suitable as your debts are liabilities are too large. It's often agreed that some of your debt will be written off.
Myth #7 – A married couple must file for bankruptcy together
You only need to file for bankruptcy together if you both share the liability for the debt and you are both insolvent. It's not unusual for one spouse to have a significant amount of debt solely in their name. For example, they may have run up a debt on a credit card or personal loans in their sole name. Where this is the case, it's best to file for bankruptcy alone.
It is important to note that if you're both liable for the debt and only one of you files for bankruptcy, creditors can continue to demand payment from the non-bankrupt party.
Myth #8 – Bankruptcy permanently prevents you from getting credit
There are no circumstances where your access to credit will be blocked entirely due to bankruptcy. While you can expect more limited access to credit for either 2 or 5 years (the length of time bankruptcy stays on your credit report), this situation isn't permanent.
When your bankruptcy period ends, there's no restriction for applying for loans or credit. It's entirely up to the credit provider whether or not they agree to lend you money. But, bear in mind that it can take time to rebuild your credit rating.
Surprisingly, bankruptcy can actually improve your long-term credit rating. That's because bankruptcy improves your cash flow position, meaning you're at less risk of defaulting on payments.
You might even be able to save money, ensuring you don't have to go bankrupt again.
Myth #9 – Bankruptcy discharges all debt
Bankruptcy gets rid of most unmanageable unsecured debt, including:
- Personal loans
- Gas, electricity and phone bills
- Credit and store cards
- Overdrawn bank accounts
- Outstanding rent
However, it doesn't wipe the slate clean completely. Debts that bankruptcy doesn't include are:
- Court imposed penalties and fines
- Child support and maintenance
- HECS and HELP debts (government student loans)
- Debts you incur after your bankruptcy begins
- Unliquidated debts (debt where you and your creditor are yet to determine the amount).
You must continue to pay these debts, even while going through bankruptcy.
Myth #10 – You can only file for bankruptcy once
As much as you may do everything you can to never get yourself in a place of unmanageable debt again, it happens. Luckily, you're allowed to file for bankruptcy more than once if you need to.
You can even file for a second time even if you've not been discharged from your first bankruptcy. Or bankruptcy can be filed against you for not making your payments. In these cases, however, your remaining debts won't be discharged.
But while it's possible to file for bankruptcy twice or even three times, it's best not to unless absolutely necessary. Multiple bankruptcies don't look good and will seriously affect your credit rating
If things are feeling unmanageable again, it's better to seek financial advice and try and get things back on track using a different path.
Stick to the facts
While bankruptcy certainly isn't without its downsides, it isn't the big no-no all these bankruptcy myths have turned it into. In certain situations, it can be the best way to wave goodbye to those unmanageable debts, wipe the slate clean and enjoy instant relief and peace of mind.
Are you struggling with unmanageable debt or worried about the implications of bankruptcy? Complete our Instant Online Assessment to see what your options are. Alternatively, speak to one of the team today on 1800 861 247 for professional, non-judgemental support and advice.