WHAT IS BANKRUPTCY AND WHAT ARE IT’S ALTERNATIVES ?
This information has been prepared to provide you with a clearer understanding of both bankruptcy and the alternatives available to you by mutual arrangement with your creditors.
We hope that it will also assist you in understanding the law of bankruptcy and the requirements that may be made on you.
Our experience shows that the circumstances of each person's insolvency are unique and therefore, the enclosed information is not intended to replace your accountant or solicitor. You should seek professional advice on your current financial position and how you should best deal with it.
To be or not to be: Bankrupt
Experience has shown that the circumstances surrounding the insolvency of each debtor is rarely the same. As a result, careful consideration should be made of all the options, including bankruptcy, that are available to you. The consequences of each of these options should also be examined. In reading this information kit, you should endeavour to spend some time in looking over each of the points raised and in particular, note down any points that you feel may be significant in your future financial planning or on your private life. We begin by discussing the most commonly known consequence of personal insolvency; Bankruptcy.
The concept of bankruptcy was that it releases you from the burden of your creditors and allows you to make a fresh start in life without the constraints that have been previously placed on you i.e. Garnishee Orders, Writs of Possession authorizing a Sheriff to take possession of personal effects and other remedies that creditors may have enforced on you. [With the amendments of the Bankruptcy Act, it is probably arguable, that the pressure is not entirely off].
There are two avenues in becoming bankrupt. You either voluntarily approach the Court to apply for the Court's recognition of your bankruptcy (Debtor's Petition) or alternatively legal procedures are instituted by a creditor through the Court system to obtain an Order that you become a Bankrupt (Creditor's Petition). The normal period of bankruptcy is three years but this can be extended.
Bankruptcy is a legal status offering protection from further action by creditors whose debts are `provable in bankruptcy'. A person can become bankrupt by filing a debtors petition and a statement of affairs with the Official Receiver or a creditor may petition for a person's bankruptcy in the Federal Court or Federal Magistrates Court .
The bankrupt's trustee will either be a registered trustee, if he has agreed in writing to be the trustee prior to the person becoming bankrupt (by filing a Consent to Act with the Official Receiver), or the Official Trustee (represented by ITSA). The duties of a trustee are very wide but the main ones are realizing whatever assets the bankrupt has that are not protected from bankruptcy, recovering contributions if the bankrupt is on a high income and reporting to creditors.
The property available to the trustee excludes certain categories of assets that are protected from bankruptcy such as most household goods, superannuation, limited tools of trade and a motor vehicle up to $7,050 *(indexed).
The trustee has considerable powers to claim back property or money which the bankrupt may have transferred to others in order to avoid it falling in the hands of creditors. Similar powers exist to claim back payments to creditors who may have had their debts paid in preference to other creditors shortly before bankruptcy.
Bankrupts on relatively high incomes are required to make contributions to their bankrupt estate from their income. The level of contributions depends on the net income after allowing for tax and any child support being paid and the number of dependants the bankrupt has.
If the trustee realizes sufficient funds, the trustee's expenses are paid, then the trustee's remuneration and if there is any money remaining, it is shared among the creditors in proportion to their provable debts.
The usual period of bankruptcy is three years. A trustee may object to a bankrupt's discharge prolonging their bankruptcy by as much as five years under certain circumstances.
A bankrupt's ability to obtain credit will be reduced, they will not be able to manage a corporation and they will require written approval to travel overseas.
There are a number of ramifications that result from bankruptcy and we briefly cover some of these below:-
Experience has shown that whilst bankruptcy is a word that describes a circumstance, it nevertheless can have severe psychological ramifications on some people, who feel that they are either failures in life or have been "labelled" a criminal by their creditors, associates and even friends. You should not consider yourself either!
It is at least interesting that a large percentage of bankruptcies result from the enforcement of personal guarantees provided on behalf of other parties to ensure that a credit facility is provided. Bankruptcy may also arise from the collapse of a business whereby considerable personal liability is levelled on the Directors.
It may also stem from an accumulation of debts as a result of changing economic climate, retrenchment from seemingly secure jobs, increases in interest rates and/or other external factors outside the control of the bankrupt.
Bankruptcy should therefore be clearly put into perspective. It is most often a consequence of circumstances and events and not solely the result of the person's own decisions.
2. Relationships in the Family Unit
The decay of the financial structure in the family unit often leads to a severe and irreparable wedge being placed on the relationships that have previously existed between husband and wife and/or relatives. While most financial counsellors are mindful of the strains that are placed on relationships during these difficult times, it is unfortunate that this matter is seldom addressed, nor is it adequately provided for under the Bankruptcy Act.
The common reaction to a pending bankruptcy is his/her attempt to distance himself/herself from the bankrupt. There are many reasons for this occurring, not the least being the emotional duress factor. The husband or wife may well feel that people's perception of them as a couple are that they are insolvent or that one may have contributed directly to the other's unfortunate financial state. The lack of understanding and knowledge by either party as to what bankruptcy really means and how the bankruptcy administration is conducted is also a contributing factor.
The ramifications on the husband or wife of a bankrupt should always be considered.
3. Requirement to Contribute from Income Earned
Amendments to the Bankruptcy Act now require that an assessment be made of the income of every Bankrupt. This is to determine whether the Bankrupt is required to make Compulsory contributions from his/her income.
The best way to determine whether you might be liable to contribute income is to firstly, determine how many dependants you have. There is a progressive scale and contact should be made with Queensland Administration Services or I.T.S.A. for the current criteria.
This income assessment includes any associated benefit that you might derive, which might be construed as a Fringe Benefit. For every net dollar in excess of this amount, 50% would be required to be repaid to the Trustee administering the estate. The monitoring of these income assessments is done stringently and at the completion of the twelve month period, the Trustee would normally require you to provide either a Group Certificate, copy of your Taxation Return or some other documentation to substantiate your income. No longer is it simply a matter of divesting oneself of excess income in order to avoid making contributions.
The Trustee is empowered to extend the bankruptcy; garnishee wages or place demands on either your employer or trust to ensure contributions of income are made.
The Trustee is also empowered to make amended assessments at the completion of each twelve month period if he discovers that the income previously estimated for the ensuing twelve months was in fact less than the actual income derived. The shortfall would then be required to be made up during the following twelve month period.
4. Property Available in Bankruptcy
The Bankruptcy Act provides that upon bankruptcy, the divisible assets of a Bankrupt automatically vests with the Trustee appointed. On a number of occasions, the question has been raised as to what are divisible assets. In a broad terms, divisible assets include any interest in real estate where there is some equity, motor vehicles equity in excess of $ 7,050 in value[ for individual bankruptcy $14,100 for joint bankruptcy], shareholdings in businesses or partnership equity, stock, debtors, cash at bank or in hand, works of art, interests in farms, crops and Charges over other people's assets, tools of trade in excess of $3,200. There are numerous additional assets including certain forms of Superannuation and term life insurance which is dependent on certain criteria. Businesses that you operate or have a shareholding in, may also be taken by your Trustee for the benefit of your creditors.
Creditors' rights are altered by bankruptcy. Their right to sue for their debt is converted to a right to prove in the estate for their debt.
If you have any reservations as to whether an asset might be considered to be a divisible asset available to the Trustee, then inquiries should be made with Queensland Administration Services or I.T.S.A..
5. Business Activities
Section 229 of the Corporations Law stipulates that if you are an insolvent you are precluded from acting as an officer of a company. The word officer includes a director or person that is in a position to make such decisions that alter the day to day running of the company's affairs.
The limitation does not apply to partnerships other than where a partnership trades in a separate name. In this regard, you should notify any potential credit provider of the partnership that you are an undischarged bankrupt/prior to incurring credit.
[This requirement also applies to a bankrupt who trades as a sole trader.]
It is presently an offence to incur credit in excess of $3,200 without notifying the other party that you are an un-discharged bankrupt. These figures change yearly.
6.Overseas Travel & passport
Should you wish to travel overseas and you have been assessed as being liable to make income contributions to your estate, you may be required to make application through the Court. The Application would be determined on its merits and it would be dependent upon whether you are currently up to date with your contributions and whether adequate provisions/arrangements have been put in place during your absence, for the continuity of these payments.
The Trustee is no longer required to demand your passport, but the requirement remains at his discretion. He will however often require 3o days notice of your intention to leave the country.
7. Scheme of Arrangements & Compositions by a Bankrupt
There are provisions in the Bankruptcy Act which provides that during the course of bankruptcy, you may apply through your Trustee to put a proposal to your creditors. If your creditors were to accept your proposal, the bankruptcy would be annulled.
8.Accumulating Assets During Bankruptcy
During bankruptcy any after acquired property will also vest with your Trustee as divisible property. The Trustee will constantly review your financial affairs to determine whether you have been accumulating assets or withholding funds either directly or indirectly (through some associated entity). The Trustee is empowered to investigate and inquire into any entities that you are associated with, including trusts, companies and any other entity where he feels there is some relationship back to you. Therefore, if you are employed by a trust and you are paid a token salary instead of wages that would be suited to your professional work, the Trustee may seek from the trust that has been employing you the balance that has been withheld.
Where you accumulate some wealth, a Trustee is empowered to seize these assets and realize them for the benefit of creditors.
The Act does allow you the latitude of working and in fact encourages you to try to obtain as high a wage as possible. This is so the Trustee would then assess the income contributions liable as previously explained.
There are obvious drawbacks to a salary increase. A higher salary would mean an increase in the taxable rate as well as an increase in the contribution payable to your Trustee.
9. Professional People and Their Rights to Practice
Where a solicitor ultimately is bankrupted by a creditor and there are no deficiencies in trust accounts or evidence of fraud then it appears that the solicitor may continue to practice as a solicitor.
Where a chartered accountant is subsequently bankrupted, he would normally be required to surrender his practicing certificate to the Institute of Chartered Accountants . The Corporations Law provides that where a Chartered Accountant is an auditor or liquidator, then he/she is automatically precluded from continuing in those official capacities. Registered Liquidators and auditors must file notice of their bankruptcy with the Australian Securities Commission.
- Tax Agent
The Australian Taxation Department takes a dim view of a bankrupt continuing to act as a tax agent without a practicing certificate. The Deputy Commissioner of Taxation has recommended that upon bankruptcy, a tax agent should notify the Tax Agent's Board.
- Other Professions
With respect to a doctor or other professional person, there are no preclusion's covered in the Bankruptcy Act. However, we recommend that you seek further advice from your professional body.
Depending on your circumstances, you may find that your lifestyle and the luxuries that you have enjoyed prior to bankruptcy, will change considerably. The private school for the children, housekeepers and overseas holidays etc. may no longer be available to you as you would now be making contributions to your Trustee. There are however, some situations where your income is such that even with the contributions that are compulsory during bankruptcy, you may be able to apportion funds to continue a similar lifestyle. Your solicitor or Queensland Administration Services may be able to advise you further.
OTHER OPTIONS TO CONSIDER
Bankruptcy may appear to be the easiest way to deal with your debts but
often it is not the only way . There are a number of options available to you to avoid bankruptcy and they are:-
- debt consolidation and refinancing
- informal arrangements with your creditors to repay them in part or in full
- An offer to creditors to finalize debts
- selling off your assets to discharge your debts
- signing an Authority under Section 188 of the Bankruptcy Act with a view to entering into an arrangement with your creditors pursuant to Part X of the Bankruptcy Act.
There are a number of other alternatives that can also be examined, however, the principal options available are listed above.
We suggest you prepare in advance information concerning your present financial position. This information should include a listing of all your creditors and the current status of any recovery procedures against you, a full and comprehensive list of all of your assets, including interests that you may have in property etc. and equally important, projected income or cash flows from business ventures that you may be involved in.
An important factor in determining whether these alternatives mentioned above are available to you, is to determine what your income and expenditure is on a week to week basis. Such information may influence the advice given with respect to putting up some proposal with your creditors.