Bankruptcy - Advantages and Disadvantages of Bankruptcy
Author(s):Charuna Shah LL.B.
Publish Date: January 16, 2009
Bankruptcy involves you handing over control of your property and finances to a Trustee (the person who takes control over your property) in exchange for protection from legal action by your creditors (the people/companies you owe money to). You do not have to have a minimum amount of debts or property to enter bankruptcy.
Some of your assets may be sold to pay your debts. If your annual income is over a certain amount you must make payments to your Trustee, which go towards paying your debts.
Bankruptcy usually lasts 3 years but can be shortened (applies only to persons who became bankrupt before 5 May 2003) or extended. At the end of the bankruptcy your debts (with a few exceptions) will be cleared.
When should I consider bankruptcy?
You will not have sufficient money to live on if you make all the monthly repayments you are required to make to your creditors and you are on social security or on a low income (under $43,000 gross) and you do not have assets that could be sold to repay the debt and you can live with the restriction on access to credit for 7 years (the bankruptcy listing on your credit report)
Once bankrupt you can no longer sell or deal with most of your assets or items of value, the exceptions being property protected under the Bankruptcy Act. LAC Lawyers will be able to help you determine which properties are protected.
Only the trustee (ITSA or a registered trustee), or a secured creditor will be able to deal with your assets. The trustee may dispose of your property for the benefit of creditors.
Assets include anything of value belonging to you at the date of bankruptcy together with assets acquired by you before your discharge including lottery wins, prizes of value etc. Your interest in land, money in bank accounts etc, are all included.
Certain assets are protected by the Bankruptcy Act which means they cannot be sold by your trustee to pay creditors. We will be able to advise you what these protected assets are. Make an appointment now!
Advantages of bankruptcy
Most debts are cleared when you are discharged from bankruptcy. Examples of debts not cleared by bankruptcy are:
- Court fines
- HECS debts
- Child support payments
- Debts incurred by fraud
- Student Loans
You will need to continue to make these payments while you are bankrupt.
Once you become bankrupt your creditors and their debt collectors must cease collection of the debt(s) from you.
Disadvantages of bankruptcy
Your assets that vest in your Trustee might be taken and sold to pay your debts. There are some assets which do not vest and so they cannot be taken. Call us and make an appointment to find out what these assets are.
Warning: Your home may be taken and sold by the Trustee even after you have been discharged from bankruptcy.
- You cannot borrow more than a specified amount without informing the lender that you are an undischarged bankrupt.
- Your bankruptcy will be recorded on your credit record for 7 years from the date you become bankrupt. After you have been discharged from the bankruptcy you can have this fact noted on your credit report. The listing may cause you problems with borrowing money.
- Your bankruptcy will be recorded permanently on the National Personal Insolvency Index which is a public record
- You may have to surrender your passport to your Trustee. You will need the permission of the Trustee to travel overseas.
- You may not be able to continue working in some professions and you cannot be a company director or manager while you are bankrupt.
My spouse is about to become bankrupt. Will I lose our home?
The trustee has to deal with any equity or interest you have in a property, for the benefit of your creditors. This may mean that the property has to be sold. If the property is jointly owned the trustee may consider selling his interest in your property to a non-bankrupt joint owner. A house property that is subject to a Defence Service Homes mortgage cannot be sold by the trustee without the approval of the Secretary of the Department of Veterans' Affairs.
A secured creditor could sell your property should you be unable to meet the mortgage repayments. Any shortfall will be a debt in your bankruptcy. If a surplus exists following sale, these monies will be paid to your trustee.
If only one joint owner becomes bankrupt the trustee will become registered as a 'tenant in common' of the home with the non-bankrupt owner, or will lodge a caveat on the title to protect the bankrupt's interest. The registration of the trustee does not prevent the mortgagee selling the property if the mortgage payments fall into arrears. The jointly owned home may be sold in any of the following ways:
- the other owner has first option to buy, either for cash or by instalments, the bankrupt's interest (or share) in the home from the trustee.
- a joint owner who cannot afford to buy the bankrupt's share may agree with the trustee to sell the home. Both the trustee and the non-bankrupt joint owner usually receive equal shares of any money left over after the mortgages and expenses are paid depending on the tenancy.
- if the joint owner refuses to co-operate, the trustee can apply to the Supreme Court under the Law of Property Act 1936, for an order that the property be sold and the proceeds divided between them.
Contact us now for Fast, Accurate and Timely legal advice
Phone LAC Lawyers on NSW 1300 799 888 or VIC 1300 734 638 or send us an email
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