Bankruptcy and its repercussions

Today, bankruptcy does not have the stigma that it once had. More and more people are declaring themselves bankrupt in order to start over again. And perhaps not surprisingly, younger people are declaring themselves bankrupt in greater and greater numbers. Many of these younger people will have accumulated large credit card debts that they find they are unable to repay and many will have racked up huge mobile phone bills. But while declaring bankruptcy will be a suitable option for some who find themselves completely unable to get out of debt, it does have its repercussions down the track.

 

What is bankruptcy?

Put simply, bankruptcy is a legal declaration that you are unable to repay your debts. By becoming bankrupt you are no longer responsible for repaying your creditors (those you owe money to). You can either declare yourself bankrupt or someone you owe money to can declare you bankrupt. If you declare yourself bankrupt, you will have to show that you are unable to repay your debts by completing the required paperwork. Once you have declared yourself bankrupt, your slate will be wiped clean and you can start again. You’ll have no more creditors knocking on your door or sending you threatening letters.

Alternatively, one of your creditors could declare you bankrupt if you fail to repay a debt of around $2,000 or more.

There are some debts however that you will still need to repay in the event that you are declared bankrupt. These include:

• HECS debts
• mortgage repayments
• any outstanding court fines.

Not having to repay my debts sounds great!
Well, hold on a minute. While initially it might seem like the easy way out, there are repercussions that you need to be aware of. You may not be too concerned right now, but your bankruptcy could come back to haunt you later in life as you’ll have a pretty poor credit rating for seven years.

Also, for the three years following your declaration of bankruptcy, you’ll have a trustee appointed to manage your financial affairs. This trustee will be able to sell certain assets in order to recoup some of the money that you owe. These assets include your house, vehicle (if it’s worth more than $6,150), any shares or other investments, a holiday home or boat etc. The trustee can’t touch your voluntary super contributions however.

There are other responsibilities too. When you borrow money or apply for credit you will need to declare that you are bankrupt. You cannot remain a director of a company or participate in a company’s management unless you have the permission of the courts, and you’ll have to notify your trustee of any changes to your name or address and you’ll have to apply to the court for permission if you want to travel overseas.
So, while bankruptcy might initially seem like the easy way out of repaying your debts, it can also be quite an embarrassing and humiliating experience.

Ways to avoid bankruptcy
For most situations it will be better to avoid bankruptcy if possible. Here are a few suggestions if you are finding yourself in hot financial water:

1. Try managing your debts more effectively. Consolidate your debts into a personal loan or your mortgage if possible. This way, you will be paying less interest (especially if you have a large credit card debt) and you will be making only the one monthly repayment.
2. Sell any assets that you have to repay your debts such as any investments, boats, caravans or second cars. If you hang onto these and you are declared bankrupt, the trustee can sell these anyway. So it will be better to sell them before you become bankrupt, no matter how hard it may be to let go.
3. Organise a debt agreement between yourself and your creditors. This will generally allow you to repay your loan at lower instalments over a longer term or to repay part of what you owe.
4. Get professional advice. A financial planner or debt councillor may be able to help you get your financial affairs in order so that you can avoid bankruptcy.

 

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