Bankruptcy’s impacts are wide-ranging on individuals, families

As more Australians worry about becoming personally insolvent, here’s what you need to know about bankruptcy’s impacts and available help.

Soaring interest rates and inflation are tipped to push more Australians towards bankruptcy in the coming months.

For some it will be their only option to dig themselves out of a debt hole, but bankruptcy should always be seen as a last resort, according to insolvency, law and finance specialists.

NDA Law managing director Joshua Michaels says creditors who backed off during the pandemic – such as the Australian Taxation Office – are back chasing debts.

“We’ve also seen more people enter the property market when interest rates were low, who will be under pressure as rates increase,” he says.

Oracle Insolvency Services partner Yulia Petrenko says she expects mortgage stress will push more Australians “to the brink of bankruptcy and beyond”.

BANKRUPTCY’S IMPACT

Petrenko says people can file for bankruptcy themselves, or a creditor can file a petition in court to have you declared bankrupt.

“A trustee will be appointed to manage your bankruptcy for three years and you must comply with their requests – otherwise the three-year term can be extended,” she says.

“During the bankruptcy term if you are working and have no dependants, half of any income earned over $64,264 after tax goes to paying your debts.

Oracle Insolvency Services partner Yulia Petrenko says bankruptcy becomes part of your permanent financial record. Picture: Naomi Jellicoe

“You can’t go overseas without permission from your trustee. While you can continue running your business, you cannot be a company director and you must tell your suppliers of your bankruptcy status if seeking credit over $6501.”

During bankruptcy a person can get a loan and a credit card, but must declare that they are bankrupt if the credit amount is above $6501, Petrenko says.

“The bankruptcy term is three years and it will become part of your permanent financial record,” she says.

“You will be listed on the National Personal Insolvency Index which can be searched by the public. Your credit score will also be lowered but lenders generally only ask for details of any personal insolvency in the past five years.”

SPOUSE STRAIN

It’s not just your own assets affected by bankruptcy. Petrenko says trustees can claim and sell jointly owned assets to repay debts.

“When the family home is jointly owned, the non-bankrupt owner will likely have to raise half the value of the property to keep it in their possession,” she says.

NDA Law’s Michaels says “there are nil to negligible prospects of obtaining finance in the years following the discharge of your bankruptcy, except for the limited availability of short term, high interest loans from less-than-savoury lenders”.

HELP AVAILABLE

Michaels says people worried about going bankrupt should not bury their head in the sand.

“There are free financial counselling services that can help you enter into payment plans to avoid bankruptcy or help guide you through recovering from bankruptcy,” he says.

“The National Debt Helpline is 1800 007 007.”

Instead of bankruptcy some people use debt agreements, a formal way to negotiate repayments to creditors, but this requires early professional help.

People should not be embarrassed about discussing money troubles with advisers, says dmca advisory director Tania Tonkin.

Tania Tonkin, director of dmca advisory, says Australians often overextend themselves.

“We live in a very consumeristic society, but you don’t always want to buy the biggest house on the street or the fanciest car, especially if you can’t really afford it,” she says.

“The stress of managing all the debt is probably not worth it.

“I think generally in Australia we have had a tendency to perhaps overextend ourselves because interest rates have been so low for such a long time and because Australia has generally been doing well. Interest rate rises are certainly putting many individuals under pressure and the rising cost of living isn’t helping either.”

A LONG RECOVERY

Jane* says her former husband secretly ran up a $140,000 debt in two weeks, ruining their marriage and eventually resulting in bankruptcy.

“Declaring bankrupt was a last resort and thankfully it immediately took the pressure off,” she says.

“It meant I no longer had creditors chasing me and I could just stop, regroup and then move on with my life.”

“I have spent years rebuilding my finances. There is a shame and sense of failure attached to bankruptcy.”

(* not her real name)

Originally published as Bankruptcy’s impacts are wide-ranging on individuals, families