What Effect does Bankruptcy Have?
As a Bankrupt, until you are discharged from bankruptcy, you are prohibited from performing certain roles/carrying out certain duties. In addition there are a number of important and compulsory conditions that you must satisfy, which include:
- Making all divisible assets and their relevant information available to the trustee.
- Surrendering your passport/s to the trustee.
- Making all books, records, financial statements available for personal and corporate entities.
- The bankrupt cannot act as a company officer.
- The bankrupt cannot trade under a registered business name without advising the relevant individuals and authorities of their bankruptcy.
You must also consider the following information:
Will anything change while you are bankrupt?
If you borrow money or purchase goods on credit for an amount exceeding $4,170.00 (this amount is indexed), it is an offence if you do not inform the person you are dealing with that you are an undischarged bankrupt.
Your employer is not normally notified of your bankruptcy, unless you owe her or him money. Your bankruptcy may, however, prevent you from undertaking employment in certain occupations (such as the security industry) or from holding various licences, e.g. as a licensed builder.
- Change of details
You are required to inform your trustee of any changes to your name or address.
Any person who is an undischarged bankrupt must obtain written permission from the Court or from his or her trustee before undertaking any overseas travel. Where consent is given to travel, the trustee may impose written conditions. Failure to return to Australia when requested by the trustee can result in the bankruptcy being extended, and also constitutes a criminal offence punishable by imprisonment.
Different types of debt are handled in different ways in bankruptcy
Some financial situations might include the following:
- A HECS debt;
- A Centrelink debt;
- Late mobile phone bill payments (unsecured debt);
- Credit card bills that can’t be paid off in full (unsecured debt);
- Overdue car loan payments (secured debt);
- Overdue personal loan payments.
An unsecured debt is a debt that is not secured by any assets, such as: credit card debt, mobile phone bills or personal loans. Unsecured creditors generally do not have the right to take back the item you purchased from the funds advanced by them. If you go bankrupt, the credit card or mobile phone provider can take no further action against you to recover the debts, but may lodge claims in the bankruptcy.
A secured debt is a debt secured by an asset, such as a bill of sale over a car. This entitles the secured creditor to recover the property and sell it if you fall behind in payments. The lender of the car loan, as a creditor, may claim and re-sell your car and if this does not cover the amount of the debt then the creditor is entitled to lodge a claim in the bankruptcy for any loss incurred.
The lender of the personal loan is entitled to recover payment from a guarantor to the loan (whoever vouched for you when you took on the debt). Once the lender has been paid, the guarantor then becomes a creditor and is able to lodge a claim in your bankruptcy for the amount of the debt.
Loan in joint names
Generally for a personal loan in joint names, if one party declares him or herself bankrupt then the other party will still have a liability for the total outstanding amount that is incurred in their joint names.
Mortgage in joint names
If you are declared bankrupt, your trustee may have to sell your house or property to find money to pay your creditors. A mortgage is a secured debt, so the financial institution that granted the mortgage is entitled to sell your property if you are unable to meet the mortgage repayments. Even if you were not in default with your mortgage repayments, but were declared bankrupt as a result of your inability to pay another debt, the fact that you have been declared bankrupt would be an event of default under the mortgage. If the sale does not realise enough money to repay the mortgage, the remaining amount will be a debt in your bankruptcy; if there is a profit, the extra money will be paid to your trustee.
Consider the following example:
Barry is one of the joint owners of a house. If he becomes bankrupt, then his trustee will become registered as a ‘tenant in common’ of the house with Jill, the non-bankrupt co-owner, or will lodge a caveat on the title to protect Barry’s interest in the house.
The trustee will first give Jill, as the non-bankrupt owner, an option to buy Barry’s share of the net equity in the home from the trustee. If Jill cannot afford to buy Barry’s share, she may agree with the trustee to sell the home. Both the trustee and the non-bankrupt owner will usually receive equal shares of any money left over after the mortgage and related expenses are paid. If Jill refuses to co-operate, the trustee can apply to the Court for an order that the property be sold and the proceeds be divided between Jill and the trustee.
Operating a business
Under certain circumstances, a person can still operate a business while bankrupt. However, if trading under an assumed name or business name other than your own name, either as a sole trader or in partnership, you must disclose your bankrupt status to every person with whom you are dealing. You cannot be a director of a company or be involved in its management without the permission of the Court.
Transfer of assets prior to bankruptcy
The trustee has considerable powers to claim back property or money that the bankrupt may have transferred to others in order to avoid it falling into the hands of creditors. This is an offence under the Bankruptcy Act and the trustee’s powers can include recovering assets that were transferred up to 5 years before the bankruptcy. Similar powers exist to claim back payments to creditors who may have had their debts paid in preference to other creditors shortly before the bankruptcy.