What is bankruptcy? How does it work?

 

I do not know about you, but when I first considered bankruptcy I found it difficult to understand what it means and how it works. The best way I can summarise bankruptcy is that it is a legal term. It applies to someone – you or me – who is unable to pay their outstanding debts. Bankruptcy removes you from those debts and you become debt free.

When you declare bankruptcy, your debt (loans, credit cards, guarantees etc) is owed by the “Bankrupt Estate” and is no longer owed by you. The Bankrupt Estate is its own entity and you are debt free.  Your debt is gone forever (see Types of Debt). The “Bankrupt Estate” owes the money to the creditors and is managed by a bankruptcy trustee. The bankruptcy trustee takes care of everything related to debt. This means that creditors and debt collectors will stop hassling you for monies owed, as all the debt is owed by the Bankrupt Estate.

Something that helped me was to think of the bankrupt estate as a bucket. When you take the step of legally declaring yourself bankrupt, all your debts which are caught by your bankruptcy go into that bucket. At the same time, your essential assets (eg: household furniture, car and tools of trade) you keep and are protected while non-essential assets (eg: shares, boat and caravan) will be sold by the bankruptcy trustee, and the proceeds added to the bucket. If you are a high-income earner a portion of your wages may be paid to the bucket as well. I talk about this later on in this website.

The funds in the bucket are then paid by the bankruptcy trustee to the people (the creditors) who are owed the money from the bankrupt estate (bucket). This payment is made in accordance with the bankruptcy legislation.

If there is no money in the bucket because there are no assets or income contributions from your wages, your creditors can do nothing except write off their debt. The debt is gone. From when you become bankrupt your creditors – and their debt collectors – can no longer chase you for the money you owe them.

It may seem bankruptcy is an easy option, but my advice to you is to be careful not to abuse the system. The Bankruptcy Act has been designed to provide a fair deal for you and the creditors. It offers a great solution that I think is far better for you than the creditors. Having said that, make sure you do the right thing as there are harsh penalties for those who don’t.

You should be aware that there are a few rules and restrictions that should be noted when considering if bankruptcy is the right path for you. For example during bankruptcy you cannot own boats, caravans or shares in companies etc. To travel overseas you need written permission from your trustee. You also cannot be a company director, manage a corporation or be a trustee of a self-managed super fund for the duration of your bankruptcy. Once you have fully read this website you will have a good handle on restrictions you would need to adhere to. If you have any queries on this you are welcome to contact me by email hello@understandingbankruptcy.com.au or phone 1300 794 492.

When you become bankrupt, the credit rating agencies will place a mark against your name for five years. This makes it very difficult for you to get a loan during this time. However, you can continue to earn and save money during the time you are bankrupt.  I recommend you do this, so you can be seen as a “good risk” in the future. By the way, you are automatically discharged from bankruptcy. You do not have to apply to be discharged.

I have heard people describe bankruptcy as the “last resort”, but you won’t hear me saying it. From my personal experience, it is the key to freedom, a circuit breaker, a path to a better future. It could be the best thing you could do for yourself now – and for the life you want in the years ahead.

  • Bankruptcy will cancel most of your debt, but not all (see Types of Debt)
  • Your creditors and their debt collectors will stop hassling you
  • Saving is something you can start doing again
  • You can probably keep your car – as long as you keep up the payments
  • You may be able to keep living in your home
  • Overseas travel is possible – there are some rules, but you can go
  • You don’t have to go to court to go bankrupt
  • It is completely private. No media and no police involved
  • You will be you again, with peace of mind, improved health and able to sleep
  • Offers a fresh positive start

If you decide bankruptcy is right for you and you want some help with the paperwork, I can do that. Don’t feel obligated, just because you visited the site. That is not the way I work. But if you want help, I am happy to help, and the cost, all up, is $300 including GST. Please email hello@understandingbankruptcy.com.au or phone 1300 794 492 for further information.

A good article to read, which follows on from this article is Getting On With Daily Life which can be accessed here. ( https://understandingbankruptcy.com.au/getting-on-with-daily-life/ )

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