Nobody can deny the last twelve months has not been easy for anyone, least of business operators.  With the associated significant business disruption, we are seeing more and more people file for bankruptcy.  For the uninitiated, bankruptcy is the legal process whereby you are legally declared insolvent that is, unable to service your debts as and when they become due.  It can either be voluntary or forced.  The Trustee appointed to your bankruptcy will liquidate your assets (that is:  sell your assets) in an effort to pay off as many creditors as possible.  It can serve as a stress buster as it releases you from paying most debts and can allow you to make a fresh start.  There are some downsides however, which can be painful and lasting.  So it’s important to thoroughly understand the implications of entering into bankruptcy before taking this very final, non-returnable journey.

Bankruptcy can be entered into voluntarily or forced.  The process of entering into a voluntary bankruptcy is quite simple and merely requires you to complete and submit a form (not something to be done at midnight after a bottle of wine!).  Take note, just because it is easy, doesn’t mean it is something you should do without due consideration.  A Trustee is then appointed to your affairs, who will sell any remaining assets in order to satisfy as many debts as possible, and notify any remaining creditors of your bankruptcy.  Whilst it is possible to earn income whilst bankrupt, your nominated Trustee will review your income levels and determine whether you are required to make compulsory payments.

Forced bankruptcy is a little more laborious and will generally involve one of your creditors applying to the courts to have you made bankrupt.  The amount you owe needs to be “significant” at $5,000 or more.  Something to think about when you fail to pay your bills on time.  The court process is called a Sequestration Order and it starts with the creditor applying for a bankruptcy notice using the non-payment of your invoice as an indication of bankruptcy.  From here the creditor can apply for a creditor’s petition to have you made bankrupt.  Similarly to a voluntary bankruptcy, a Trustee is appointed and you are required to file a statement of affaris within 14 days of being notified of their appointment to the Australian Financial Security Authority (‘AFSA’).  They will then sell your assets, recover any income over a certain limit and investigate your financial affairs.  Your obligations involve you providing details of your debts, income and assets to the Trustee.  Your Trustee notifies your creditors you are bankrupt preventing them from continuing to contact you about your debt.  Your Trustee can sell certain assets to help pay your debts.  You may also need to make compulsory payments if your income exceeds a set amount.

How long does bankruptcy last for?  Generally it is the same for both voluntary and forced bankruptcies at 3 years and 1 day however, your Trustee can lodge an objection to extend the bankruptcy for up to 8 years.  However, if applying for credit (over a certain level) you will be required to notify the potential lender of your bankruptcy for 5 years; or two years after the bankruptcy ends, whichever is the later date).  Your name will also appear on the National Personal Insolvency Index.  Forever.

Are these the only consequences?  Unfortunately no:

• if you would like to set up a business, you will have to be a sole trader, you are not allowed to take on a directorship whilst a declared bankrupt;
• whilst you can work whilst bankrupt, earn over a certain amount and you will be required to make compulsory payments.  The amount will be determined by your Trustee and will take into account any dependents you may have;
• you will be unable to maintain any sort of savings whilst bankrupt;
• whilst bankruptcy shouldn’t affect your employer (in that they will not be notified of your bankruptcy), some professional or licensing bodies have restrictions, there may be limitations to operating as a sole trader, you cannot  manage a trust account if you are a lawyer or accountant, you can’t be a director without the court’s permission and you may not be able to hold certain public positions (i.e. senator or member of parliament);
• bankruptcy doesn’t release you from all your debts, generally only unsecured debts are covered by bankruptcy and you will need to confirm with your creditor whether the bankruptcy covers Australian Tax Office (‘ATO’) debts, Centrelink debts, victim of crime debts or toll fines.  Nor does it cover:  court imposed penalties and fines, child support and maintenance, HECS and HELP debts, debts you incur after the bankruptcy begins, unliquidated debts or secured debts (such as a mortgage, car loan or hire purchase agreement);
• you will need to obtain the permission of your Trustee before you can travel overseas (in writing); and
• you may lose the right to continue or take legal action.

Your tax obligations do not change.  You will still be required to lodge any outstanding tax returns and in fact, your Trustee will need to be informed when you receive official notification from the ATO (such as a Notice of Assessment).  Any refunds you receive will need to be provided to your Trustee or the ATO withhold amounts to offset any ATO debts, child support, Family Assistance or another Commonwealth Agency.  They are able to continue to withhold refund amounts even where debts owed to them have been listed in the bankruptcy.

If you are suffering from financial hardship, bankruptcy is only one (and the most extreme) option available to you.  Other options include:

• temporary debt protection – this option provides you with a 21 day protection period from being pursued by unsecured creditors whilst you seek help and advice;
• debt agreements – these are binding agreements between you and your creditors to pay a sum you can afford; or
• personal insolvency agreements – these are agreements between yourself and your creditors to pay an agreed amount in instalments or a lump sum.

Before entering any type of bankruptcy or debt agreement, it is important to understand your options and your financial position.  There are financial counsellors in every state and territory, their services are free, they are independent and confidential.  They can provide you with help with your financial situation and talk to you about your options to deal with unmanageable debt.  To speak to a financial counsellor, contact the National Debt Helpline on 1800 007 007.  It can also be an incredibly stressful time (which is likely to be the understatement of the century) with a massive toll being taken on your mental health so it is important to take time for yourself and reach out for help if you need to.

In our experience, bankruptcy should be used as a last resort, rather than the first port of call. Your accountant should be able to provide you with many of the answers you need to help you make an informed decision as to which path and option to take.  Reach out to them first, as your trusted advisor who knows your financial affairs as well as you do.