The Consequences of Declaring Yourself Bankrupt

The Consequences of Declaring Yourself Bankrupt

Bankruptcy is a legal process which an individual can apply for if they are unable to pay their debts on time. Bankruptcy provides temporal relief to the bankrupt individual so they may address the majority of their debts and attempt to make a fresh start. Although the benefits of declaring bankruptcy seem appealing, this article will explore the numerous consequences that may arise when declaring bankruptcy.

NB: This blog will focus on exploring the consequences of declaring bankruptcy for an individual. If you have a company, we have discussed how to protect your business from insolvency in another article.

Bankruptcy Consequences are Not Short Term

Bankruptcy typically last three years and one day from the date which the Australian Financial Security Authority (AFSA) accepts a bankruptcy application. This alone is a substantial period of time in which all of the following consequences will continue to impact upon the bankrupt individual. This length of time can be extended to either five or eight years if an objection to discharge the bankruptcy is lodged by the trustee.

Bankruptcy does not release the bankrupt individual from all of their debts, generally just those which are unsecured. This means that even after declaring bankruptcy, the bankrupt party is still liable for payments including court imposed penalties, child support and maintenance, HECS/HELP debts or those debts incurred after bankruptcy commenced. Therefore, through the assistance of an appointed trustee, the bankrupt party will need to arrange payment options with creditors to resolve the persisting debts.

Bankruptcy will likely inhibit the bankrupt individual’s ability to obtain future credit. Credit reporting agencies keep records of a bankruptcy for either, five years from its commencement, or two years from when it ends, depending on whichever is latest. This will be considered by future credit providers when they are deciding whether to accept your credit applications. Bankrupt individuals must disclose to their credit providers of their bankrupt status if they are applying for more than $5,934.00 in credit pursuant to the Bankruptcy Act 1966 (Cth) s 269.

Consequences of Appointing a Trustee for Bankruptcy

When an individual declares bankruptcy, a trustee is appointed to manage their affairs by working with the individual and their creditors to create a reasonable outcome for all parties. When the bankrupt party applies, they can either nominate a registered trustee of their choice or request that one be appointed from the AFSA. The bankrupt party is required to disclose all of their assets and any other relevant information to this trustee when they apply for bankruptcy.

The appointed trustee holds the power to make numerous discretionary decisions that will affect the bankrupt individual’s life, including:

  • A trustee may sell the assets of the bankrupt individual to cover or contribute towards paying their debts. There are only a few limited assets that the bankrupt party is entitled to keep, contrary to the discretionary powers of the trustee. These assets include: ordinary household goods, tools up to a certain value that are used for earning an income, and vehicles of up to a certain value.
  • Bankrupt individuals must request permission from their trustee to travel overseas. The trustee may ask for further details pertaining to the nature and reasons for travel, and may decide to decline their request accordingly.
  • Bankrupt parties must inform the trustee if they are involved in ongoing legal proceedings, as the trustee may determine whether the bankrupt individual’s involvement should be allowed to continue. This may involve contacting the court to determine if attendance is mandatory.

Consequences for your Employment throughout Bankruptcy

Bankruptcy may affect the employment of the bankrupt individual. Potential employment restrictions include those imposed by licencing bodies in some professions and certain limitations on operating as a sole trader. Furthermore, a bankrupt party cannot legally operate a trust account or hold public office.

Additionally, once a party has been declared bankrupt, their name will permanently appear on the National Personal Insolvency Index (NPII). The NPII publicly displays a bankrupt individual’s name, date of birth, address, occupation, the name and contact details of the trustee, and the proceeding administration and status. These details are accessible to the public and will only be suppressed in exceptional circumstances.

A bankrupt party cannot be a director of a company, following the Corporations Act 2001 (Cth) s 206B, unless they have been granted leave by a court to do so, or until the bankruptcy status has been discharged. This restriction on a company director also applies if the director is a party to a Personal Insolvency Agreement (PIA). A PIA is an alternative to bankruptcy which contains an agreement between directors and their creditors. This restriction applies to those subject to PIAs until all of the terms of that agreement have been complied with by the bankrupt individual.

If the bankrupt part earns over earns a certain amount of income, they will be required to make compulsory payments to their trustee. This amount is $59,559.50 (after tax) annually for a bankrupt party without dependencies under the Bankruptcy Act 1996 (Cth) s 139K.

How Etheringtons Solicitors can help

A solicitor at Etheringtons Solicitors can provide you with clarification on the relevant law and its application to your individual circumstances. Etheringtons Solicitors will assist in determining whether declaring bankruptcy or insolvency is in your best interests and will guide you through the best avenues for legal action.

If you require further advice or assistance with insolvency matters, please contact one of our experienced solicitors on (02) 9963 9800 or via our contact page.

How can directors prevent insolvency?

How can directors prevent insolvency?

It is vital for a director to continually monitor and assess the solvency of their company. Failure to do so may lead to insolvency and potential bankruptcy. This article will offer guidance to directors who are uncertain of their duties in managing the solvency of their company.

What is insolvency?

A company is deemed to be insolvent if it cannot pay its debts as and when they are due.

When determining a company’s solvency, the Court will assess the commercial realty of the company’s financial status. This legal process involves various cash-flow and balance sheet tests, which measure the financial position of the company. If the tests show the company is at risk of insolvency, the director must prevent their company from incurring further debt.

What is Insolvent trading?

Under s588G Corporations Act 2001, directors must not trade if their company is insolvent or if by incurring debt the company will become insolvent. It is a director’s duty to prevent insolvent trading.

Consequences for breaching this duty include civil penalties, compensation proceedings and criminal charges. Civil penalties for insolvent trading include the disqualification from directing a company or a fiscal penalty of up to $200,000. In addition to this, ASIC may prosecute and commence compensation orders against directors wherein payments are potentially unlimited. Not only is the director personally liable and at risk of bankruptcy, criminal proceedings may be issued by ASIC for insolvent trading which may lead to fines of up to $220,000 or imprisonment for up to 5 years.

What are a director’s duties?

To prevent insolvent trading, a company director must comply with the following duties:

  1. Directors must stay informed of their company’s financial position by continually assessing the company’s solvency. By monitoring bank lending facilities, cash flow and current assets, a director may predict and prepare for eventualities of poor liquidity ratios, overdue taxes or trade creditors. This assessment and preparation of potential financial difficulties is a duty which is essential to the solvency of a director’s company.
  2. Directors should obtain professional advice on the solvency of their company. Legal and financial guidance will inform directors of the risk of insolvent trading and provide options available to address financial difficulties. Options, based on advice, may include the injection of funds from an asset sale or the implementation of a restructuring plan.
  3. Directors should act in a timely manner should they, on reasonable grounds, suspect that the company is incurring debts they will not be able to pay. In this event, appropriate action should be taken immediately on advice received from legal professionals as some solutions may take time. For example, restructures and turnarounds are very complex and may take several months to prepare and implement.

For more information regarding a director’s duty to monitor and assess the financial position of their company, please visit the ASIC website.

Seek Legal Advice

It is essential that directors are aware of the duties involved in preventing civil and criminal penalties for insolvent trading.

If you require guidance or advice regarding insolvency or if you are a creditor of an insolvent company please contact us on (02) 9963 9800 or via our contact form here.

COVID-19: Temporary Changes to Insolvency Laws

COVID-19: Temporary Changes to Insolvency Laws

Businesses are facing major challenges amid COVID-19 pandemic leading to massive job cuts. In light of the challenges, the Australian Government has announced temporary changes to insolvency laws to help businesses and individuals manage the current economic crisis.

Companies: Insolvent trading

Directors will be relieved of any personal liability from their duty to prevent insolvent trading for a period of 6 months. This applies to debts incurred in the ordinary course of business and companies will still be liable for debts. Dishonesty and fraud cases will still be prosecuted.

Companies: Statutory demands

The threshold at which creditors can issue a statutory demand will be increased from $2,000 to $20,000 for a period of 6 months. Further, the time limit to respond to a statutory demand will be increased from 21 days to 6 months.

Individuals: Bankruptcy

The threshold amount for issuing a bankruptcy notice against an individual will be increased from $5,000 to $20,000. The time limit to respond to a bankruptcy notice will be increased from 21 days to 6 months. These will last for a period of 6 months.

Further information

If you would like further information, please do not hesitate to contact one of our experienced litigation solicitors on 9963 9800 or via email at [email protected].