Bankruptcy: How to File and Which Type to Go For?

Bankruptcy is an option if you don’t think you’re able to repay all of your debts and you need some relief. That being said, it’s considered a last resort and should only be considered after consulting with an expert. Bankruptcy is a process in which you’re legally declared unable to pay your debts.

What happens when you file bankruptcy? Once you file, you’re classified as bankrupt for 3 years, and you’ll be appointed a trustee who helps look after your affairs. This bankruptcy status will also be listed on your credit report for 2 years after your bankruptcy officially ends, making it difficult to obtain lines of credit in the future.

If you’re unable to repay your debts, you’re not alone. Over 32,000 Australians declared bankruptcy in 2017, and this number is on the rise as consumer debt continues to grow. In this guide, we’ll discover how to file for bankruptcy as well as what type to go for depending on your situation.

How Does Bankruptcy Work?

First, let’s take a closer look at how it works. As we said above, it is a legal process that releases an individual from almost all of their debts. Who can apply for bankruptcy? Anyone who has any debts of any amount that they cannot pay.

If you’re unable to pay your debts, you’re able to voluntarily apply to become bankrupt. Once you’re declared bankrupt, you’ll have a trustee who is nominated to manage all of your financial affairs. This “status” of being bankrupt will last 3 years, and it will be listed on your credit for 5 years total.

Is bankruptcy a bad thing? There’s a lot of stigma surrounding this process, and with good reason. Being declared bankrupt comes with some big consequences like credit damage, but it also might be an opportunity for a fresh start. Many people find relief from their debts in this way.

When you’re bankrupt, you’re able to keep your household good and personal effects, but you might lose some of your assets like your house or your car. However, you also can earn an income up to $54,736 (as at 20 March 2019) after tax per person (with no dependents) without paying contributions to your trustee for your creditors.

There are a lot of hidden challenges of declaring bankruptcy like these listed below:

  • Your assets might be sold to pay your debts
  • If your income is over the $54,736 threshold, you’ll need to make income contributions towards your debts
  • You won’t be released from all types of debts like child support, penalties, fines, etc.
  • You will need written permission from your Trustee to travel overseas
  • Your ability to open lines of credit in the future will be affected
  • Your name will be listed on the National Personal Insolvency Index (NPII) forever

Ultimately, it’s up to you to decide if you’re a good fit for bankruptcy. There are usually other less extreme options that are a better choice if you’re considering bankruptcy.

Common alternatives include debt recovery procedures or community services for financial help. If you’re unable to pay your debts, it’s always a good idea to talk to your lender first to see if they have any assistance they can give you.

How to File for Bankruptcy

If you’ve decided to file for bankruptcy, you need to know a bit about the process. According to the Australian Financial Security Authority, you need to meet 2 requirements in order to apply for bankruptcy:

  • You’re unable to pay your debt when they’re due
  • You’re present in Australia or have business or residential connection to Australia

There is no minimum amount of debt you need to have in order to be eligible, and there’s no fee to apply. However, if you’re already in a debt agreement with a lender, you need to terminate this agreement before you apply.

If you apply, you need to simply download the the application forms and send your application to the Australian Financial Security Authority. From there, if your application is accepted, you and your creditors will be sent a confirmation in writing including your AFSA administration number.

Which Type is The Best?

There are two types of bankruptcy in Australia. There’s voluntary bankruptcy and involuntary bankruptcy. Voluntary bankruptcy is the process we’ve described above. It’s when you’ve decided you’re unable to pay your debts and you decide to voluntary lodge a petition (debtors petition) to become bankrupt.

On the other hand, an involuntary bankruptcy refers to the process where an outside creditor is unable to get payment from you. The creditor is forced to lodge an application with the court to make you bankrupt. In order for a creditor to do this on your behalf, you need to owe $5,000 or more.

The main challenge with an involuntary bankruptcy is that a private trustee will manage your financial affairs, and this will cost you much higher fees. While the effects of both on your credit will be the same, it’s better to voluntarily enter bankruptcy since you’ll have much more control over the situation.

Before You File Bankruptcy, Talk to an Expert

Filing for bankruptcy is a huge decision. While many people are able to finally find relief when they file for bankruptcy, this isn’t usually the best choice of action. If you’re in a situation to recoup your debt any other way, it’s usually better to save bankruptcy as a last resort.

Because of its intense effects on your credit and financial wellness, make sure you take the entire situation into account before taking action. One smart step is to talk to the debt experts at Debt Busters. As consumer debt continues to rise, we’re here to help you manage your own money so you can avoid bankruptcy.
Talk to us today to see what your options are. Even if you do decide that bankruptcy is right for you, it’s important to understand the process to make sure you’re applying correctly. Contact one of our dedicated team members on 1300 368 322 today to get started.

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