It is important for individuals to understand the potential impact of personal bankruptcy and what relief may be available to them in this evolving COVID-19 crisis.
What is personal bankruptcy?
Bankruptcy is a process that allows a person to manage their creditors. Before applying to the Court for a bankruptcy order you should engage with your creditors and ask for more time to pay, seek a flexible payment option or seek to enter into a debt agreement.
REMEMBER: Bankruptcy can have serious consequences on your ability to obtain future credit and deciding to declare bankruptcy should not be done lightly.
What is a debt agreement?
A debt agreement1 is a formal agreement you may be able to enter into with your creditors. To enter into a debt agreement you will need to meet the eligibility requirements and appoint a debt agreement administrator. More information on the process can be found here.
In a debt agreement, your creditors agree to accept a lower amount over a set period of time. While these agreements can be helpful, you must consider the consequences:
- The fact that you entered into a debt agreement will be registered on your credit report for at least five years.
- You must tell all new credit providers that you have entered into a debt agreement if you are seeking credit above an amount agreed with your current creditors.
- Your name will be listed on the National Personal Insolvency Index (NPII) for at least five years.
What are consequences of becoming bankrupt?
If you are unable to negotiate a different outcome, or if you fail to comply with the terms of a debt agreement, there are two common ways you may be declared a bankrupt:
- You present a debtor’s petition to the official receiver - your application must state you are unable to pay your debts as and when they fall due.
- If you owe a creditor more than $5,000, a creditor will present a creditor’s petition to the Court - your creditor must show you’ve committed an ‘act of bankruptcy.’2
REMEMBER: The Federal Government has announced plans to temporarily increase the bankruptcy debt threshold from $5,000 to $20,000, and the time for compliance from 21 days to 6 months.3
The legal term for a bankruptcy order is a ‘sequestration order’. By the terms of a sequestration order:
- All of your assets are given to a bankruptcy trustee to deal with (this is called ‘vesting’).
- You will be declared a bankrupt until your creditors have been paid off or in 3 years.
If you become bankrupt, the bankruptcy will stay on a register permanently and will be recorded against your credit report for a period of at least 5 years.
What happens to my property during a bankruptcy?
If a bankruptcy trustee is appointed to your property, it may take possession of various property that you own including your home (if you own it) and sell that property to pay your creditors.
Bankruptcy can last for three years or until all of your creditors have been paid. Your trustee may apply to extend this period if they need more time to sell your property.
During the period of your bankruptcy, you will be allowed to:
- Keep a vehicle up to the value of $8,000.
- Enter into purchase agreements for goods or services on credit up to $5,882.
- Earn an income up to a certain amount.4
REMEMBER: It is important to note that your bankruptcy can affect your partner’s assets if they own assets with you or are in possession of an asset that is owned by you.
Is there any relief from bankruptcy available during the COVID-19 crisis?
A number of banks and mortgage lenders are offering support packages, which can include putting your home loan repayments on hold for six months, with interest capitalised. You should consult the Australian Banking Association’s financial difficulty website for further details.
External Administration: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-happens-if-company-insolvent/#voluntary
What do I do if my company is insolvent: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/
What if my employer is insolvent: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-employees/
What is Bankruptcy: https://www.afsa.gov.au/insolvency/cant-pay-my-debts/what-bankruptcy
Can I declare bankruptcy: https://www.afsa.gov.au/insolvency/cant-pay-my-debts/am-i-eligible-bankruptcy
How does bankruptcy affect my life: https://www.afsa.gov.au/insolvency/currently-bankrupt
Important note: These updates are applicable to Australian law only and are generic in nature. If you have any specific legal concerns relating to the impact of COVID-19 on your people or your business, please reach out to our pro bono team (email@example.com) and we will consider your pro bono legal request. If we aren’t able to help you, we will try to find someone else who can. This update is current as at 1 April 2020.