Declaring bankruptcy can help relieve debtors from excessive debt, but it has serious ramifications that can negatively affect a person’s financial future; therefore, it should only be considered as a last resort.

Before even taking a step in that direction, it’s best for debtors to learn what bankruptcy means, what it affects, and what other steps they could take to avoid its consequences.

What is bankruptcy?

According to the Australian Financial Security Authority (AFSA), bankruptcy is a process wherein the bankruptcy court and appropriate authorities legally declares a debtor unable to pay their debts. Bankruptcy may give relief in the sense that some unsecured creditors could be disallowed from demanding repayments or taking legal action against the debtor.

However, filing for bankruptcy does not erase debt.

A bankruptcy status is temporary and typically lasts up to three years. It still requires the debtor to pay their creditors either in full or according to their debt agreement. This may be done if the debtor receives income in excess of regularly indexed income thresholds based on their circumstance.

Who is eligible to apply for bankruptcy?

Anyone who has a large sum of debt can voluntarily apply for bankruptcy, but debtors are discouraged to apply unless there are no other alternatives.

Creditors are also allowed to petition the Federal authorities to declare an individual as bankrupt. They are, however, disallowed to pursue this action if the money owed is less than $5,000.

There are only two eligibility requirements for declaring bankruptcy in Australia.

These are:

• A person is in Australia or has a business or residential connection in any state or territory; and,
• Insolvency or inability to pay debts when due.

For the second criterion, it must be the debtor’s financial circumstances that prevent them from paying creditors and not an unwillingness to do so.

Are there consequences to filing bankruptcy?

Bankruptcy is not a free pass from paying debts—there can be repercussions that are long-lasting or permanent.

Some of the results to expect include:

• Loss of control over personal assets and income
• Denial from taking legal actions
• Registration in the National Personal Insolvency Index (NPII)
• Bad record in credit file

Loss of control over personal assets and income
When a bankruptcy application is approved, a bankrupt individual is assigned a trustee that can help sort out their assets and income. In some cases, the trustee may find it fit to sell some of the individual’s assets in order to pay their creditors—in accordance with existing regulations.

There are also federal and state income thresholds that could dictate when an individual is earning enough to make repayments.

In some cases, bankruptcy can also lead to the revocation of occupational licenses causing a further reduction in one’s income.

Denial from taking legal actions
The authorities may demand that the bankrupt individual be refrained from taking or continuing any legal action.

The assigned trustee must be informed of any pending court case that the bankrupt individual must attend or cannot drop, or else they may not be permitted to attend the proceedings.

Registration in the National Personal Insolvency Index (NPII)
The relevant information of all individuals who successfully filed for bankruptcy are automatically listed in the NIIP permanently. These include the individual’s name, age, address, occupation, any aliases, and information with regard to the bankruptcy proceedings.

The only way that personal information will be limited is if there is a risk to the individual’s safety—such as when they are in the witness protection program. In such cases, a financial counsellor, the individual or relevant police department may file a request to withhold certain information from the index, but they must provide relevant documents as proof.

Bad record in credit file
Credit reporting agencies will include a person’s bankruptcy status in their credit file for two years. Debtors can also expect the information to be in their file upon reaching either of the two, whichever is later:

• Two years after being cleared from bankruptcy; or,
• Five years from the start date of the bankruptcy.

Increased difficulty in securing approvals for credit applications
Just like individuals with bad credit scores, those who declared personal insolvency would have a difficult time securing loans or even renting a home.

Alternatives to filing for bankruptcy

Declaring bankruptcy is as simple as accomplishing forms and submitting them to AFSA, but before doing so, it is best to consider alternate solutions to debt problems first.

Two alternative solutions to debt are:

Debt consolidation
A debtor may consolidate all their debt to one creditor and focus on paying that instead. This may be done by the individual or with the help of a financial counsellor who can arrange a payment plan.

Debt agreement with creditors
Debtors may also file a formal or informal debt agreement with their creditors, and draw up acceptable terms and schedules for debt repayments.

One way to do this is to ask the creditor about any hardship program that can help ease the payment burden by temporarily freezing the debt. They may also remove interest payments in return for full payment of the principal amount within an agreed time frame.

How to declare bankruptcy if there’s no other option

If all alternatives have been exhausted and personal insolvency is the only solution left, the individual may fill-in the necessary bankruptcy application forms in the AFSA website, provide necessary evidence and submit all documents to AFSA.

Note that applications are not automatically approved. A trustee would still be assigned to the applicant to assess their financial situation before any decision is made.

This information has been sourced from the Australian Financial Security Authority and the Federal Court of Australia.