by Bruce Gleeson, FCA, FCPA, RITF & Mark Marlow, RITM, FIPA
Bankruptcy is a word, not a sentence. But it is also how the word is interpreted and explained that remains critical so that a fresh start and a focus on the future can begin.
Individuals in financial distress do not come running excitedly to us to enter into voluntary bankruptcy. However, nor do most people go running excitedly to the Dentist when they have a tooth ache. However, in certain circumstances and upon being fully informed, voluntary bankruptcy typically provides a solution to what is often an intractable or near intractable position for the individual which has also caused significant stress and anxiety. Entering into voluntary bankruptcy draws a line in the sand that allows the individual to start afresh and look forward to each day again. Working with a registered trustee such as us with decades of practical experience that take the time to:
- properly listen and understand the individual's position;
- advise on the best option to deal with the financial position; and
- provide proper and transparent guidance regarding the individual's pathway out of financial difficulties to enable them to reset their financial health;
the solution, not always, but often is to enter into voluntary bankruptcy.
The Federal Government Body that administers and regulates personal insolvency in Australia, the Australian Financial Security Authority (AFSA) defines bankruptcy as "a legal process where you are declared unable to pay your debts". It can release you from most debts, provide relief and allow you to make a fresh start. It currently lasts for three (3) years and one (1) day, though there is again discussion that it might be reduced to one (1) year.
To clarify, in Australia unlike say the USA jurisdiction, bankruptcy is for individuals, not corporate bodies such as companies, etc.
There are two (2) ways to become bankrupt, the first is via the individual lodging their own debtor's petition to make themselves voluntarily bankrupt or via a court order petitioned by one
of your creditors who remains unpaid. This article is mainly concerned with an individual looking to enter voluntary bankruptcy.
Your trustee can either be the Official Trustee via the AFSA or a registered trustee like us. Generally, when an individual is considering their financial position and options, we arrange a conference (telephone, via teams or in person) where we take the time to move through the above three (3) critical areas so that the individual can make an informed decision.
Upon entering into voluntary bankruptcy, there are obligations and actions which include, but are not limited to:
- You must provide details of your assets, liabilities and income to your trustee.
- Your trustee notifies your creditors in the bankruptcy - this will prevent most creditors contacting the individual further about collection of liabilities (or debts).
- Your trustee can sell certain assets, such as real estate to help pay your creditors.
- You may need to make compulsory income contributions if your income exceeds a set amount.
So, what are some of the benefits of bankruptcy?
- You won't be hassled by creditors any longer.
- Bankruptcy clears most of your debts, enabling a reduction of your outgoings thus putting more of your income in your pocket to meet your household expenses, etc.
- Bankruptcy won't affect your pay, however if you are a high-income earner you may have to make some compulsory income contribution payments to your trustee, but you won't have the outgoings you had before bankruptcy.
- No one, except your creditors usually needs to know that you are bankrupt.
- Many assets are not subject to your bankruptcy (non-vesting assets), in that they do not need to be sold. Examples of these are normal household furniture, tools of trade to a prescribed value, a means of transport to a prescribed value and superannuation you have in a regulated fund.
As outlined in our introduction, voluntary bankruptcy allows a fresh start and draws a line in the sand in situations that would without the process of bankruptcy likely be or become intractable.
When talking to financially and emotionally distressed individuals it is very important to have open dialog and work through each individual's situation, there is no one size fits all discussion. It is very important that there is disclosure of the individual's full position to properly assist both of them and the other stakeholders to achieve the best position and report the most likely outcome. It might be assumed that the interests of the individual and creditors are not the same and may be in conflict. Whilst this is true in one sense, it is also the case that when creditors see the real position of the individual presented to them by the trustee there is a greater chance that all stakeholders can draw a line in the sand and move forward. The adage you can't get blood out of a stone is easier for creditors to digest if they can see a realistic presentation of the individual's financial position by an independent and experienced registered trustee.
It is not uncommon for us to hear individuals express the stress and negativity about voluntary bankruptcy - but most of it arises because it is often easier for a period of time for the individual to avoid an informed discussion about their financial position and understand the myths and untruths that arise either from their own predispositions or from others who are not registered and experienced professionals. Whilst this step is difficult and understandably so, we find no matter how difficult an individual's circumstances might be, the discussion with us can be of relief and assist them to move forward with full knowledge of how the process will affect them.
What will happen to the family home if I enter into voluntary bankruptcy is also a stressful question an individual is concerned with and each situation should be considered on the facts and not in generality. Upon bankruptcy, any equity in the family home that belonged to the individual entering bankruptcy vests (or belongs to) in the registered trustee from the time of entering into voluntary bankruptcy. The loss or potential loss of the family home is very stressful for both the bankrupt and any co-owner. This is a sensitive issue for the family and the bankrupt, however in most instances it isn't solved by a forced sale of the family home. There are practical solutions that work for both the bankrupt, his or her family and the creditors of the bankrupt estate.
Satisfactorily dealing with a bankrupt's share in the family home is often negotiated to a successful conclusion with the non-bankrupt co-owner. When negotiating a position, it is important to take into account the costs of selling a property by force versus a negotiated settlement with a non-bankrupt co-owner. Any amount agreed upon needs to be clearly articulated to the creditors of the estate, so they understand the decision taken given the circumstances is the best or near the best achievable outcome. Once the reason for accepting a particular price is transparent to creditors, they are more likely to understand how the trustee had reached such a decision. In our experience it is often the case that the family home is not lost by the family in a voluntary bankruptcy of one of the co-owners. Upon bankruptcy, it can no longer belong to the bankrupt but can remain a family asset. On occasions families may decide the preferred option is to sell and start again, however as each case is different, it is important to seek advice from a registered trustee that can properly advise you of what might be achievable when balanced against the manner in which assets like this need to be dealt with in a bankruptcy scenario.
A frequent cause of bankruptcies we see occur are due to the liquidation of businesses where personal guarantees have been provided by the individual/s where those liabilities remain unpaid, personal credit card debts incurred that have been used to fund business expenditure or because of unreported and unpaid obligations the business has to the Australian Taxation Office (ATO) for pay as you go withholding tax deducted from employee wages, goods and services tax and employee superannuation guarantee payments.
In summary, personal financial distress is a highly stressful and tense process to go through. Often the stress is reduced once the individual has an idea of the process and how it might impact on them and their family. It isn't a magic panacea to solve all problems, however it does lead to a forward direction on what has often been seen by the individual as an inescapable situation and it allows individuals and usually those around them to move forward in life. Eventually the bankruptcy will be a distant memory in time and seen as a solution to the issues the individual faced at that time, hence why bankruptcy is just a word as opposed to a sentence.
We have decades of experience as registered trustees at Jones Partners and provide advice to individuals that are in some level of financial distress and are readily accessible at our multiple locations and also via telephone conference or video conference. We offer an initial free meet to help you get access to the right information.