Key Points
- Bankruptcy lasts for three years but the consequences can last much longer.
- Bankruptcy won’t release you from all your debts.
- Always seek the advice of a financial counsellor.
Bankruptcy is a legal process that helps you regain financial control by releasing you from most of your debts. It allows you to start fresh.
You can volunteer for bankruptcy or be declared bankrupt by the court at the request of your creditors – those to whom you owe money.
It can be a positive step. Even so, bankruptcy comes with serious consequences and stigma.
Registered Trustee in Bankruptcy Clare Corrigan recommends looking beyond that stigma and to the financial relief it gives those facing significant hardship.
“More often than not, people that are looking to file for bankruptcy are doing so through no fault of their own because financial hardship is often caused by external forces,” she says.
It should be viewed as a brave step towards a new financial future, especially through the support of professionals who understand that it's not just a legal action, but also an emotional journey.Clare Corrigan, Registered Trustee in Bankruptcy
Before filing for bankruptcy
Look at the other legal options that fall under the Bankruptcy Act.
Debt Agreement
A debt agreement allows you to pay off your debts, usually over three to five years and avoid bankruptcy.
An administrator will negotiate with you and your creditors, who might agree to reduce your debt and work out a payment plan.
For many, bankruptcy brings feelings of financial shame and stigma, but it’s sometimes the only course of action to relieve financial distress. Credit: gahsoon/Getty Images
A PIA is a legally binding agreement between you and your creditors. You're negotiating a flexible repayment plan to settle your debts, generally over three to five years.
This usually involves the appointment of a trustee. You'll pay a fee to structure the repayment plan.
Seek financial counselling
Sarah Megginson, senior money expert with Finder, suggests that filing for bankruptcy comes with serious consequences, so speak with a financial counsellor before making any decision.
The is available Monday through Friday at 1800 007 007. It provides experienced financial counsellors who will discuss your options with you.
“They’re a completely independent not-for-profit service, always free, always confidential and I highly recommend them,” Ms Megginson says.
The process
Applications are filed online via the AFSA website. They then assess the application.
“If it's accepted, the individual is declared bankrupt and from that moment, they're afforded certain protection from creditors which allows them to start rebuilding financially,” Ms Corrigan says.
The bankruptee is then assigned a trustee who ensures that the interests of all parties, including the creditors, are represented fairly.
Trustees also assess the bankruptee’s finances and investigate their conduct, and can sell off assets to pay their debts.
“We also provide information to the bankrupt individual to help guide them through the associated rights and responsibilities during the bankruptcy term,” Ms Corrigan says.
Bankruptcy lasts for three years and one day, but the consequences can last for much longer. Credit: Vladimir Vladimirov/Getty Images
How does bankruptcy impact your life?
Bankruptcy lasts for three years and one day, but the consequences can last for much longer.
You’re added to the National Personal Insolvency Index, which impacts your credit rating and your ability to get finance and loans even after your bankruptcy has ended.
Some of your freedoms are also impacted.
Small business owner Matthew found that bankruptcy impeded his ability to travel overseas.
“My main concern when I was first declared bankrupt was the ability to visit my daughter. She lives in the Philippines,” he says.
When you’re declared bankrupt you’re no longer able to freely travel abroad whenever you want. You first need to seek the permission of the bankruptcy trustee.Matthew, small business owner
Bankruptcy doesn’t generally impact your ability to work, and your employer doesn’t need to know.
Still, trades and some industries, such as accountancy or law, require you to contact the relevant government agency or professional association to discuss licences and memberships.
A bankruptee cannot manage a company without court permission or hold certain public positions.
And as Matthew discovered, you might face some restrictions if you’re running a business.
“I was unable to obtain public liability insurance or to set up accounts and lines of credit with suppliers. I had to pay for everything upfront and in cash,” he says.
Credit reporting agencies keep a record of your bankruptcy for five years from the date of bankruptcy or two years from when it ends. This impacts your ability to get credit or loans, and your interest rate will be higher.
Bankruptcy lasts for three years and one day, but the consequences can last for much longer. Credit: courtneyk/Getty Images
Does bankruptcy clear all your debts?
The simple answer is no.
You’ll be released from unsecured debts like credit cards, medical bills and loans.
Your trustee may then sell your assets to pay your creditors. Usually, you can keep household goods, business tools, or a vehicle worth a set amount.
“But your trustee can sell other assets including the house you live in,” Ms Megginson says.
“Also, don't rush to dispose of any property. You must declare it because there are serious consequences if you try to defraud your trustee.”
