GOING BANKRUPT

Does this scnario apply to you?

You are in business but over the past six months you have became increasingly aware that income has been insufficient to pay all outgoings. You borrowed some more money until things improved. Now, you cannot keep up the repayments on the loans. Creditors are sending you nasty letters. You get threatening phone calls. Summonses have started arriving. The finance company is threatening to repossess equipment if payments are not kept up. You live in dread of the bailiff appearing on your doorstep to seize some of your goods. You have managed to stave off your creditors for the past few months by paying those that have made the loudest noise.

Now, you have sat down with pencil and paper and done some calculations. You have added up all the amounts that you owe. You have been stunned at the total. You have valued your equipment. It has not been maintained in top condition for some time and its value has decreased. You have valued your house and your other assets, such as your car. You have added up the values of your assets. It has become apparent to you that the total of the amounts that you owe greatly exceed the value of your assets. You despair of ever being able to pay back your loans. What can you do? You wish you could start again with a clean sheet. You can! How? You declare yourself bankrupt.

Statistics issued by the ITSA show that the major causes of bankruptcy are given as follows.

Economic conditions   30%
Lack of business ability   22%
Lack of capital   12%
Excessive interest    7%
Inability to collect debts    3%
Failure to keep proper books    1%
Gambling    1%  
All other reasons   24%
TOTAL 100%

Amendments were made to the Bankruptcy Act in 1992 to ensure that bankrupts cannot stockpile money overseas and then go to live overseas to enjoy their ill-gotten gains. The amendments also ensure that well-off bankrupts must make contributions during their period of bankruptcy so as to pay off their creditors.

HOW DO I GO ABOUT DECLARING MYSELF BANKRUPT?

Before taking the fateful step of declaring yourself bankrupt, you should seek counselling. The first person you should consult should be your accountant. He will be able to give you a down-to-earth appraisal of your situation. In your community, you will also find organisations which offer free financial counselling. You might also consult these. Consider all of the options and then make up your mind.

Once you have made up your mind to go bankrupt, go along to the Registry of the Federal Court in your State capital city. Ask them for the necessary forms to declare yourself bankrupt. Alternatively, you can obtain these by post.

One of these documents is called a Statement of Affairs. In this document, you must list out the names and addresses of all the people to whom you owe money. These include loans, Bills of Sale and mortgages. You must also show the amount owing to each.

Next, you must list out all the assets owned by yourself. This must show private assets like your home, car, bank deposit accounts as well as your business assets like equipment, other vehicles etc.

You must also provide a lot of personal information. This is generally the kind of information that you would include in a Tax Return. Once you have completed the Statement of Affairs, then you go on to complete the second document that is required. This is called the Debtor's Petition. This document asks the Registrar to make you bankrupt. You take these documents along to your local Federal Court Registry. The Registrar examines them. You swear an affidavit as to their correctness. As soon as the Registrar is satisfied with the documents and accepts them from you, you are automatically declared bankrupt, then and there.

The Registrar will then arrange an appointment for you with the Insolvency and Trustee Service Australia (ITSA). If you prefer, you can have a private trustee such as an accountant appointed instead. This is rarely done and happens mainly with large bankruptcies. In the majority of cases, it is the ITSA who acts. The ITSA is a government body which will administer your estate and look after you during your term of bankruptcy. Often, the Registrar will arrange the appointment with them on the same day that you present your bankruptcy petition. The Registrar will forward your Statement of Affairs to them. When you go to meet the official of the ITSA, you must take along all of your documents. You must also take along your passport, if you have one. The ITSA will retain your passport. They will ask you a lot of questions and obtain any further information that they need. You will not have to pay any fees to either the Registrar or the ITSA.

Until 1989, the names of bankrupts had to be published in a local newspaper. This is no longer the case. The names of bankrupts are now only published in the Commonwealth Government Gazette. The ITSA will write to each of your creditors and inform them of your bankruptcy. These days it is possible to go bankrupt and nobody need know about it except your immediate creditors.

It should be noted that going bankrupt is quite distinct from winding up an insolvent company. If you are trading as a limited company and the company cannot pay its debts, then you must take steps to have a liquidator appointed and the company wound up. You may also have to declare yourself bankrupt. The reason for this is that financial institutions invariably insist upon a guarantee from the directors before advancing money to a private limited company. Consequently, if you have to personally repay the loans owing by the company, you may find that you are personally bankrupt.

Your creditors can also apply to the Court to make you bankrupt. They can only do this if you owe more than $2000 and you fail to pay the debt.

WHAT ARE THE EFFECTS OF GOING BANKRUPT?

The main effect is that the ITSA will take over all of your assets, with some exceptions. It is important to note that all assets will be taken over and not just business assets. The ITSA has wide powers to enable them to get control of your assets, including any assets that you may have overseas. The assets to be taken over will include 1) your home, 2) business assets, 3) any private vehicle valued at more than $5,000, 4) all bank balances, both business and private.

The following will not be taken over 1) personal effects, 2) necessary clothing and household furniture, 3) equipment used by you to earn income, 4) motor vehicle up to value of $5000, 5) assets held in trust.

It should be noted with regard to the motor vehicle that if it exceeds $5000 in value, the ITSA will take it and sell it but will give you $5000 back in cash. Household furniture that you can keep include a TV, fridge, washing machine etc. If you receive a superannuation pay-out during the period that you are bankrupt, the ITSA will take it. However, they will not call in your superannuation unless you become entitled to a pay-out. Of course, any assets belonging to your wife will not be taken by the ITSA.

The ITSA will sell all of your assets and pay out your creditors with the proceeds of sale. Of course, your wife can offer to buy the house or any other assets from the ITSA. The creditors can no longer demand payment from you or harass you. If they contact you, you just refer them to the ITSA. Private debts as well as business debts will be wiped out. Any debts that you owe to the Taxation Office will be wiped out. However, there is a catch. If you subsequently become entitled to a tax-refund during the 3-year bankruptcy period, the Taxation Office will take this in part satisfaction of your debt due to them. However, the following debts will not be wiped out by your bankruptcy 1) child maintenance payments and 2) Court fines.

If your bankruptcy is in any way complicated, the ITSA may require you to attend at the Federal Court for a Public Examination.

Generally, you will remain bankrupt for a period of three years. After this period, you will be automatically discharged from bankruptcy. However, you can apply to the ITSA for discharge after six months and this could be granted if certain conditions have been fulfilled. The main conditions are a) no further money is available to pay creditors and b) you are not liable to pay compulsory contributions from income. If your conduct has been especially bad, the ITSA can prolong your bankruptcy to five or even eight years. During your period of bankruptcy, there are certain things that you must not do. If you do, you could be prosecuted.

1. You must not obtain credit for more than $3358 (indexed) without telling the lender or supplier that you are an undischarged bankrupt.

2. If you operate a business under a Business Name or an assumed name, you must tell suppliers that you are an undischarged bankrupt.

3. You cannot be a director of a company or take part in the management of a company without the permission of the Court.

4. You cannot leave Australia without the permission of the ITSA or the Court. However, you are free to travel anywhere within Australia.

If you acquire any property in excess of that mentioned above i.e. household items, car etc, the ITSA will take it away from you and sell it.

If you earn income above a certain amount, then you will have to pay part of it to the ITSA. A single person with a net income of less than $26,000 will not have to make any contribution. If you have children to support, the limit will be even higher. However, "income" is widely defined and can include free benefits supplied to you by someone else.

Let us take an example.

Bill, a bankrupt had the following income.

Gross wages for year 50,000
less tax payable 14,102
Net wages 35,898
less child support payment    5,000
ASSESSABLE INCOME   $ 30,898
less threshold 26,000
EXCESS INCOME   4,898

Bill will have to pay half of the Excess Income to ITSA i.e.   $ 2449.

You must keep the ITSA informed of your current address and employment.

You must continue to file your own Tax Returns.

There is an alternative to declaring bankruptcy and this may work for you. You make a private arrangement with your creditors. The procedure is as follows. You see a solicitor or a registered Trustee in bankruptcy. He calls a meeting of all of your creditors. You put forward a proposal at the meeting. This proposal could be to hand over all of your assets to the Trustee and also to hand over loan moneys provided to you by a friend. Additionally, you could offer to pay off the balance of the debts due, in time, out of your future earnings. The Trustee would then pay the creditors off. Each creditor would get a proportion of the debt due to him. If the creditors agree, an agreement is drawn up and it is filed with the Court and advertised. Bankruptcy is avoided. None of your former creditors can now take any further action against you.

DISCLAIMER: See disclaimer on home page.

Copyright 1997



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