Bankruptcy: What you need to know

If you find yourself unable to repay your debts, you can apply for bankruptcy as a final resort. If you're considering declaring bankruptcy or entering into a debt agreement, you'll need to consider your options and speak to a financial counsellor to ensure it's the best choice for you. You can use this guide to understand how bankruptcy works and the consequences it will have on your finances in the future so that you can make a more informed decision.

What is bankruptcy?

Bankruptcy is the legal state that absolves you from paying your debts. You can apply for bankruptcy in two ways: the first is through a debtor's petition which is involves applying for bankruptcy yourself. The second involves you being forced into bankruptcy through the courts, which is called a sequestration order. In both cases, a trustee is appointed to manage your finances. A trustee can sell certain types of assets you own, take any income you earn over a certain amount and investigate your financial affairs.

Once you declare bankruptcy you’re released from your debts. If you have a secured debt like a mortgage on a property, the asset can be sold to repay your debts. If you have an unsecured debt like a credit card or personal loan, assets like your house or car cannot be repossessed.

Before you enter bankruptcy, you may consider a Declaration of Intention.

Declaration of Intention

A Declaration of Intention (DOI) gives you 21 days to decide whether you want to declare yourself bankrupt or take out a debt agreement or Personal Insolvency Agreement (PIA). Creditors with unsecured debts are prevented from taking action during the DOI period. Your creditors are alerted when you lodge a declaration of intention and they’re provided with information about your finances. A DOI is not an act of bankruptcy and your name is not recorded on the National Personal Insolvency Index. At the end of the 21-day period, if you haven’t entered into a formal arrangement, creditors can take you to court and force you into bankruptcy.

How long does bankruptcy remain on your credit report?

The most current information states that bankruptcy stays on your credit report for at least two years from the date of discharge before it’s deleted.

A bankruptcy listing on your credit report will also lower your credit score, which will make it harder to apply for products like credit cards, loans and mortgages in the future. The laws around bankruptcy and reporting do change, so keep an eye on government sites like the Australian Financial Security Authority (AFSA) for the latest information.

How to declare bankruptcy

Before you declare bankruptcy it's important to speak to a financial counsellor for free personal advice about dealing your debt. You may be able to organise alternative payment plans with your creditors or create a budget with the help of a financial counsellor. If your options are exhausted, you may decide to enter bankruptcy or be made bankrupt by the courts.

Voluntary bankruptcy: Debtor’s petition

You can apply for bankruptcy by completing a debtor's petition form, which is available on the AFSA website. This includes signed acknowledgement of prescribed information and a statement of your affairs. You'll need to complete and lodge the debtor's petition with the Official Receiver within 28 days of signing the forms. You'll need to provide details of your debts, income and assets to a trustee. Your trustee can be the Official Trustee (AFSA) or a registered trustee (which you can nominate if you have a preference).

Your trustee will notify creditors that you're bankrupt and they can sell assets to help cover your debts. You may also need to make compulsory payments if your income exceeds a set amount. This amount changes twice a year, so check out the AFSA website for the latest numbers.

Involuntary bankruptcy: sequestration order

If you owe more than $10,000 to a creditor you can be asked to attend court and be forced into bankruptcy. A creditor can issue a sequestration order if they’ve gotten a court judgement against you in the previous six years. You are generally given a 21-day period to pay your debts before the court hearing and have a chance to be heard by a judge before the actual court date. If you can’t pay your debts in this period, the court will issue a sequestration order declaring you bankrupt and a trustee will be appointed to manage your case.

If your bankruptcy application is accepted, you'll receive a confirmation with an AFSA administration number.

When does bankruptcy end?

The length of your bankruptcy will depend on your situation, but can last from three to eight years.

• Debtors petition bankrupts. If you became bankrupt by presenting your own petition, you'll be due for discharge three years and one day after filing your petition with the AFSA.
• Sequestration order bankrupts. If you were made bankrupt by an order of the court, you are due for discharge three years and one day after your complete statement of affairs was accepted by the AFSA.
• Exceptions for all bankrupts. In some cases, bankruptcy can be extended to five or eight years if your trustee lodges an objection to your discharge.

Once you're discharged, you're no longer considered bankrupt. However, your name remains on the National Personal Insolvency Index (NPII) permanently and your bankruptcy listing will remain on your credit report for 5 years from the date you became bankrupt or 2 years from when your bankruptcy ends (whichever is later). This means that creditors will see that you've been bankrupt when you apply for loans or a credit card, which could reduce your chances of approval.

What are the consequences of bankruptcy?

Declaring bankruptcy can help you get a fresh start with your debts, but it can also impact your income, employment and ability to access credit in the future.

• Income, employment and business. If you earn over a set amount, you'll need to make compulsory payments to your trustee. You'll also need to keep your trustee informed if you change jobs, receive an income increase or decrease or stop working. Bankruptcy can also pose limitations if you're operating as a sole trader, managing a trust account and if you're a director or manager of a company.
• Access credit. As mentioned, bankruptcy will remain on your credit report 5 years from the date you became bankrupt or 2 years from when your bankruptcy ends. This will also lower your credit score and decrease your chances of approval when applying for loans and other lines of credit card. For example, Australian credit card issuers only approve applicants with a good credit history and no evidence of bankruptcy. However, you may be able to compare bankruptcy loans and other lines of credit designed for applicants with bad credit.
• Travel overseas. Before you travel overseas, you'll need to request permission from your trustee. This is because travelling overseas without written consent is considered an offence if you're bankrupt.
• Assets. Your trustee may be able to sell assets including your house or property, which you must declare when you apply for bankruptcy. You're able to keep ordinary household goods, tools up to a set amount that are used to earn an income and vehicle(s) up to a specific amount.
• Listed on NPII. You'll be listed on the searchable public register National Personal Insolvency Index permanently.

Alternatives to bankruptcy

Before you declare bankruptcy, you can consider the following options to get your debts under control.

Debt agreement

A debt agreement is an agreement between yourself and your creditors that you will repay your debts. It essentially freezes interest on your accounts and gives you time to pay off your debt. While this may seem like a convenient option, it's important to note that a debt agreement is an act of bankruptcy and will be noted as such on your credit report.

Think about the following if you’re considering a debt agreement.

• Not everyone can get a debt agreement. There are income limits and other eligibility requirements.
• Secured creditors may still claim debts.
• A debt agreement ends when you pay out the contract or if the agreement is terminated by the courts or creditors.

Your name is permanently recorded on the NPII and the debt agreement is listed on your credit report for five years from the date the agreement was entered into or two years from the date the agreement was terminated or declared void.

Personal Insolvency Agreement (PIA)

Any insolvent Australian resident can apply for a Personal Insolvency Agreement (PIA). This is not like a debt agreement, which has income and debt eligibility requirements. But like a debt agreement, when you appoint a trustee to manage your financial affairs, you’re committing an act of bankruptcy and this can be used in formal proceedings to make you officially bankrupt. The listing is recorded on your credit report for five years from the date the agreement was entered into or two years from the date the agreement was terminated. Your name will also remain on the NPII permanently.

Informal debt agreements

An informal debt agreement is an arrangement to pay back a lender outside the terms and conditions of your original contract. It doesn’t involve the court and you’re not declaring yourself bankrupt. It’s important to seek financial advice if you want to enter into an informal debt agreement. Some companies specialise in helping you set up and run informal debt agreements. For example, Fox Symes offer informal debt agreement services and can work with you to get your debts back under control.

If you default on a payment of $150 or more by more than 60 days, it will remain on your credit report for five years. If you've defaulted on a payment but made arrangements with the lender to pay it back in a manner that's different to the original terms and conditions, it will stay on your report for two years from the date the creditor listed the default to credit reporting body.

Credit repair after bankruptcy

If you've declared bankruptcy or are a discharged bankrupt, there are some steps you can take to improve your credit history. Bankruptcy remains on your credit report for up to seven years, so you can set short and long-term goals to get your finances back in order. If you've been discharged from bankruptcy, whether you can apply for a credit card will depend on your credit score and other factors.

How to repair your credit after bankruptcy

By following the positive financial steps below, you can start to improve your credit position after bankruptcy:

• Work on your employment circumstances. The financial security that comes from having stable employment can improve your credit rating and shows lenders that you have a regular source of income. A permanent or ongoing job will also help your overall financial circumstances, so it is a great first step to take.
• Grow your savings. Savings can demonstrate to lenders that you have the ability to financially manage your finances. Start by regularly putting money aside, even if it is just a small amount that you transfer to a dedicated savings account. You can also use finder's guide to budgeting to get started.
• Consider getting a term deposit. If you have a lump sum of money you can put into a term deposit account, you may be able to use it to get a secure loan that will help re-establish your credit accounts. You can learn how they work and compare our options in finder's comprehensive guide to term deposits.
• Limit your credit applications. Too many credit applications can negatively affect your credit history. Even if you've been discharged from bankruptcy, it's important to be selective about the types of credit you apply for to increase your chances of approval. If possible, only apply for one product at a time and look for options that are likely to be approved, such as secured loans, options with a guarantor or joint accounts. You should also wait until you've built up your credit score before you apply for any lines of credit. Otherwise, any rejected applications could further hurt your credit score.
• Make payments on time. Whether you have a secured loan or an electricity account in your name, paying the balance on time will help you build up good credit history after bankruptcy.
• Talk to issuers. If you want to apply for a particular product after bankruptcy or learn what options are available, consider contacting banks and other lenders to discuss your situation. They will be able to advise you on your eligibility and answer any specific questions that you have to help you find options that will work for you.

The credit repair process takes time, but each positive behaviour will have a good impact on your credit file. You can check out finder's guide to credit repair for more tips.

Have more questions about bankruptcy?

• Can you pay out a debt agreement early?

  It is possible to pay out a debt agreement early. Whether you pay the debt agreement early using a lump sum payment or you pay the agreement over time, the listing is still recorded on your credit file for a number of years. Remember that you don’t pay any interest on the outstanding balance, so ask yourself whether you can put the money to better use.

  If you wish to pay out a debt agreement early, your bankruptcy administrator will let you know about the best course of action for you. You may need to provide a supplementary statement to support your request to have the terms of you debt agreement changed.

• How can I get a personal loan, credit card or home loan after bankruptcy?

  You have limited options for credit while you are bankrupt, but after you are discharged your options open up significantly. If you're considering your bankrupt loan options you can learn about them here.

• Will being listed on the NPII affect my chances of being approved for a loan?

  There may be a question in the application for some unsecured forms of credit that asks whether you’ve declared bankruptcy before in the past, if you answer yes to this question, the lender may look up the NPII to see when the bankruptcy was discharged; however, this doesn’t necessarily mean you’re immediately excluded from obtaining credit. The lender makes a decision based on your current financial situation.

• What’s the difference between voluntary and involuntary bankruptcy?

  There’s little difference between lodging a debtor’s petition and receiving a court summons. There may be extra paperwork if you get a court order.

• How much do I have to owe before I can declare bankruptcy?

  There is no minimum amount you have to owe before you can declare bankruptcy. Claims are submitted to and administered by the ASFA.

• I’m bankrupt, can I keep my home?

  If you’re bankrupt, your home can be sold to cover your debts. The home is not a protected asset under the Bankruptcy Act 1966.

  • If the property is owned and is not mortgaged, the property can be sold by the trustee at market value to cover the bankrupt’s debts.
  • If the property is jointly owned and with no mortgage, the trustee may give the co-owner of the property a chance to buy the bankrupt’s share of the property. There are a number of different options that depend on the ownership structure of the property, the level of gearing and the bankrupt’s willingness to sell. Consult a financial counsellor for the best information for your personal circumstances.

• How do I know if I’m eligible for a debt agreement?

  There are certain requirements you must meet if you wish to enter into a debt agreement.

  • You must be unable to pay your debts when they’re due.
  • Your assets and income, unsecured debts must all be less than the prescribed limits.
  • You must not have been declared bankrupt in the previous 10 years.

• If my business goes bankrupt will I still be able to keep the family home?

  The consequences of business bankruptcy depend entirely on how your business is structured. If you’re a sole trader, the loans are under your name, your house may be liable to be repossessed. If your business is structured as a company, as the director, you should have limited liability and your home is safe from seizure.

• What assets can I keep if I’m declared bankrupt?

  If you’re declared bankrupt, a trustee has the power to administer the sale of your assets.

  Asset:	What can happen?
  Home / House.	Can be sold by the mortgage provider or the trustee to cover debts.
  Income from investment property.	Used to pay debts and becomes part of the bankrupt’s estate.
  Car.	If the vehicle is secured to a car loan it can be reclaimed by creditors. Vehicles over a certain value can be sold by the trustee.
  Household items.	Bankrupt can keep personal household items.
  Cash and banking.	Any cash or money held in accounts can be used by the trustee to pay the bankrupt’s debts.
  Wage / salary / income.	After-tax income over a certain amount will be docked and given to the trustee. Low income earners are exempt from compulsory contributions.
  Tax refunds.	Tax refunds are kept by the Tax Office or given to the trustee. The rules are different depending on when the funds were tax — before or after your bankruptcy was declared.
  Business tools.	Tools up to the value of $3,600 can be kept.
  Superannuation payments.	Go to the trustee if received before the date of bankruptcy. Payments received after the date of bankruptcy can be kept.
  Life insurance.	Speak to your financial counsellor.
  Business leases.	Administered by the trustee and can be sold.
  Shares and other assets.	Are used by the trustee to administer the bankrupt’s estate.

Written by

Sally McMullen

Producer

Sally McMullen was a creative content producer at Finder. Sally wrote about credit cards for almost 5 years, authoring almost 900 articles on Finder alone. She has also been published in Yahoo Finance, Dynamic Business, Financy and Mamamia, as well as Music Feeds and Rolling Stone. Sally has a Bachelor of Communication and Media Studies majoring in Journalism (Hons) from the University of Wollongong. See full bio