What does life look like during or after bankruptcy in Australia?
According to Mitch Herrett, RSM Restructuring and Recovery Partner based in Queensland, life goes on and can be even better for many people post-bankruptcy, as they are no longer burdened with unmanageable debts.
Read on to receive general advice provided by Mitch who addresses some of the most commonly-held fears about bankruptcy.
A bankruptcy definition: Australian Government, AFSA
“Bankruptcy is a legal process where you're declared unable to pay your debts. It can release you from most debts, provide relief and allow you to make a fresh start. In most circumstances, bankruptcy lasts for 3 years and 1 day.”
Make a fresh start
“Bankruptcy is actually designed to help people and give them a new financial start. If people are drowning in debt, using credit cards and loans to juggle bills and getting further behind every week - becoming bankrupt can draw a line in the sand for them and their creditors,” Mitch Herrett said.
MoneySmart.gov.au provides simple and practical tips for getting debt under control - but for thousands of Australians every year, bankruptcy is the eventual outcome.
Common bankruptcy fears: Addressed by Mitch Herrett, RSM Restructuring and Recovery Partner
FEAR: Losing the family home
IN REALITY: It doesn't happen in all bankruptcy cases
When it does happen, it can be one of the most difficult and gut-wrenching impacts of bankruptcy. Upon bankruptcy, all of your assets, including the family home, vest in the bankruptcy trustee to be sold for the benefit of your creditors.
Non-bankrupt spouses or relatives may still own a significant portion of the family home. The trustee is only looking to realise the benefit of the equity that the bankrupt owner would be entitled to. That means a non-bankrupt spouse can potentially buy the equity from the bankruptcy trustee by agreement, without the need to vacate and sell the property on the open market.
FEAR: Never being able to get a loan again
IN REALITY: It may be more difficult, usually for 3 years
It may be more difficult to get a loan, particularly for the 3 years and 1 day following bankruptcy, but a credit rating can be rebuilt over time, and eventually, the credit rating will not disclose defaults or bankruptcy.
Re-shape your credit history
Critically, your income and spending habits post-bankruptcy will start to reshape your credit history. The best thing to do is work consistently for an employer, earn as much as possible and curb any previous bad spending habits. When the bankruptcy period has passed, you will be well-positioned to get finance again to buy a home or a car.
FEAR: Being financially ruined for life
IN REALITY: You can work and earn an income
During the standard bankruptcy period, you can work and earn an income, in fact - the more you can earn, the better! It’s a great job market to be looking for work right now too.
Getting a new loan: you can eventually secure new loans, but remember that loans may have been one of the reasons for your bankruptcy, so aim to use the bankruptcy period as a debt-free period, and assess what you need and don’t need in your life.
Losing assets: usually, you can’t wipe out your debts and expect to keep all your assets (unless you win the lotto of course). But there are allowances for you to retain superannuation, motor vehicles, household goods, tools of trade, and maybe the family home.
FEAR: Not being able to travel
IN REALITY: Pack your bags
There are no restrictions on traveling in Australia and you only need permission from the trustee each time you plan to travel overseas, which is ordinarily granted.
Think of it as obtaining a visa to exit Australia, which we have experienced recently during the COVID-19 pandemic, except getting consent from the trustee is simpler - with just a one-page form with some basic questions. Bon-voyage!
FEAR: Going to jail
IN REALITY: This is one of the biggest misconceptions
It’s a common fear that you automatically risk going to jail if you become bankrupt. It’s simply not true.
Know your rights and responsibilities (given to you by the trustee), and talk to the trustee about your affairs. Be truthful, honest and disclose everything required by law, and you have nothing to fear.
Obviously, breaking any Australian Law, whether it be traffic laws, property laws or bankruptcy laws, has consequences. If you have any questions about specific laws, speak to the trustee or to AFSA.
What are my financial options? Tip: Don’t just ask Google
"I have noticed in the last couple of years a dramatic increase in people seeking bankruptcy information or even advice from a variety of sources - including Google searches, their mate at the pub, or unlicensed professionals,” Mitch said.
“This can muddy the waters, fuel unfounded fears about bankruptcy and potentially lead to misinformation or delays in dealing with the financial difficulties.
It’s similar to people using ‘Dr Google’ to shop around for health information and advice and then attempting to self-diagnose. It can be a very dangerous thing to do.
It’s so important for people to speak to a trusted advisor and quieten all the noise. They need to understand all the financial options available to them because every situation is different,” Mitch said.
An outpouring of stress, often followed by a sense of relief
“It can be pretty confronting some days, working with people who are seriously distressed - financially and emotionally. I’ve had people really hitting rock bottom during the first meeting.
That’s where professionalism and experience comes into play. The RSM team calmly explains the options that are available to them and a sense of relief tends to start to be felt by the client,” Mitch said. We also mention national support services that are available to all Australians, including Beyond Blue and Lifeline.
“In a lot of cases, people often say that the bankruptcy process and the outcomes aren’t as bad as I thought they were going to be,” Mitch said.
“Many times, the thought of fear itself is greater than what it is we fear.” - Idowu Koyenikan
For further information
Start a confidential, free conversation with our RSM Restructuring and Recovery team on 1300 263 816 today, or find out what your options are here.