Understanding bankruptcy

Bankruptcy is commonly understood as the state of financial insolvency in an individual or a business. If people are unable to reach a formal or informal agreement to repay their debts to their creditors then they can proceed with bankruptcy. In Australia, the law provides protection for the borrower, if they are unable to repay your debts. It also allows them to present a feasible solution to creditors.

Conditions for applying

There is no set limit on the amount of debt people need to be in order to file for bankruptcy. Nor is there a limit on the amount of income earned or the amount of property people possess. There are however a few stipulations that do exist in order to file for bankruptcy in Australia:

  • You have to be an Australian resident and must be residing in Australia at the time of insolvency.
  • You must either own a business or a home in Australia in order to be eligible to file for bankruptcy.
  • You don't need to be an Australian citizen, but you must prove that you have strong 'Australian connections' therefore having a business, house or partnership in an Australian business is sufficient to declare bankruptcy.

Process

The Insolvency and Trustee Service Australia (ITSA) is the government body that administers bankruptcies and sets the various rules and regulations relating to it. Typically it is the debtor that files for bankruptcy voluntarily. However, this is not always the rule and if one or several creditors are convinced that that an individual is unable to pay their debts, the creditors can seek to have them declared bankrupt through the courts. They would file a Bankruptcy by Creditors Petition, which is designed to force debtors into involuntary bankruptcy. All legal forms are filed with ITSA and this includes a debtors' petition, a statement of affairs and an acknowledgement that the borrower has read and understood the prescribed information. Unlike the United States, where bankruptcy requires court action, ITSA is the chief body in Australia that manages the bankruptcy process. Upon completion of filing relevant documents, the bankruptcy process beings.

Bankruptcy in Australia is usually granted for three years, yet this is can be extended to five or eight years until an individual is discharged from bankruptcy, all pertaining to individual cases. A government-nominated trustee decides the extent to which bankruptcy can be declared. A number of factors are taken into consideration including debtors' declarations and calculation of assets and liabilities. The trustee will sell some of your assets and decide how much the creditors will be paid from the sale. At any given point, bankruptcy status may change if there is a change in personal or financial situations, thus allowing for certain agreements to be altered. All bankruptcy cases are permanently registered at the National Personal Insolvency Index, an online public register that is accessible by anyone on payment of a nominal fee.

While most creditors will cease to collect debt there are still some debts that do not qualify for bankruptcy and will require continuous payments to be made. These include court-imposed fines and penalties, outstanding income contributions, child support and other maintenance orders, debts incurred by fraud and some Centrelink or HECS obligations.

Effects and consequences

Businesses and individuals often reach a level of financial difficulty where filing for bankruptcy is the most logical course. Yet, declaring bankruptcy should not be seen as an easy way out of financial obligations. The consequences that come with filing for bankruptcy should be taken into consideration and weighted against the benefits. Filing for bankruptcy will create bad credit history and impact an individual's credit score for at least six years, making it difficult for them to obtain credit in the future. It can also impact future career opportunities as individuals may not be eligible for consideration as a director in some companies and would not be able to hold certain positions in national organisations. After filing for bankruptcy individuals may be prevented from obtaining various licenses such as a real estate license, tax agent's license, builder's license and liquors license amongst others. Depending on individual cases, filing for bankruptcy can also mean losing personal assets such as property, cars, homes and other assets that are able to be seized and sold. Losing assets do not happen in every circumstance, but creditors often petition for the courts to take such action.

It is important to understand the bankruptcy laws and regulations in Australia in order to make the right decision if ever faced with the possibility of bankruptcy. All Australians should be aware of their responsibilities and rights if they decide to file for bankruptcy. However, filing for bankruptcy is something that should only be utilised as a last resort. It is important to consider all alternative arrangements in order to pay off debt before engaging in declaration of bankruptcy.

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