Advantages and Disadvantages of Bankruptcy

Bankruptcy should only ever be considered as a last resort. While every debtor’s particular circumstances will vary there are advantages and disadvantages that should be weighed when making a decision about whether or not to proceed with bankruptcy. For insolvent non-business debtors with little or no valuable property bankruptcy provides an opportunity to start afresh without continual harassment and the threat of legal action. However, for the insolvent business debtor with high standing in the community or for those insolvent non-business debtors with valuable assets bankruptcy may be devastating. Loss of assets, income and status are some of the detrimental affects that may flow from bankruptcy.

It is strongly recommended that all debtors contemplating bankruptcy make an appointment with a financial counsellor or accountant to discuss how bankruptcy will affect them and whether there are more appropriate alternatives.

Advantages

• Discharge from bankruptcy clears most debts.
• Once a debtor is declared bankrupt, most unsecured creditors are unable to pursue further legal action (although in rare cases the courts have allowed creditors to continue with court action).
• When a person who has a number of debts is being harassed by creditors to pay these debts, the pressure on the debtor can be almost unbearable at times. Generally speaking, the harassment will stop once the person enters bankruptcy. All further communications regarding the debts should take place between the creditors and the bankrupt’s trustee in bankruptcy.
• A bankrupt with no dependents and an income of less than $47,693.10 net per annum (indexed – see contacts and resources section for link to index table) cannot have any of that income taken off of them to pay their debts. Low income earners can make voluntary payments to their bankruptcy trustee but are not required to pay contributions.
• The Bankruptcy Act 1966 (Cth) grants significant protections to superannuation payments (Part IV, Division 3, Subdivision B), life assurance payments (s116(d)(i)) and compensation payments for personal injuries (s116(g)(i)). The Act also grants some protection to assets bought with these payments. However, these payments and assets are not protected if the debtor is not bankrupt and the creditor is successful in having a court order payment of a debt.

Disadvantages

• The ability to access credit will be difficult to obtain for a period of time after bankruptcy. This is partly because a record of the bankruptcy is added to the debtor’s credit report and stays there for seven years.
• A permanent record of a debtor’s bankruptcy is kept with the Inspector General in Bankruptcy. For a fee, anyone can access these records on an electronic index known as the National Personal Insolvency Index (NPII).
• The bankrupt may be required to hand over their passport and must obtain permission from their trustee to leave Australia (s272, Bankruptcy Act). Penalties apply for attempts to defeat or delay creditors by leaving the country.
• Trustees are able to investigate bankrupt’s past dealings and in some instances will recover property that the trustee has transferred up to five years before the date of the bankruptcy.
• Obtaining credit above $5,043 – including the hiring of goods or writing cheques- is a criminal offence if the person extending the credit is not informed about the bankruptcy (sections 149D(1)(c), 269(1)(a), and 304A(1)(g), (h) & (j), Bankruptcy Act).
• Bankrupts will not be able to seek employment in particular areas because of the rules and legislation that governs those types of employment. This is not a matter under the Bankruptcy Act, but that of particular industry associations and licensing authorities. Employment difficulties will be encountered for those bankrupt debtors seeking work as a lawyer, accountant, police officer, estate agent, company director or anyone wanting to work in a managerial setting. This list is not exhaustive and it is strongly recommended that a person considering bankruptcy make enquiries regarding the type of work they want to be employed in.
• If a bankrupt does not co-operate with the trustee and fulfill certain duties (such as notifying details of earnings and changes of address), he or she may be dealt with by the courts.
• Bankrupts will lose most of their valuable property.