What is Bankruptcy?
Bankruptcy may occur when a person is “insolvent” (see below) and either declares bankruptcy, or a creditor or creditors bankrupts the insolvent person by way of a Court action. Bankruptcy is a public and legal financial condition where a Trustee in Bankruptcy is appointed under law (see Bankruptcy Act, 1966) to administer the bankrupt’s affairs, in order to provide for a fair distribution of the bankrupt person’s assets to their creditors. In Australia, the term “bankrupt” applies to people, as distinct from businesses or other entities.
What is “Insolvent”?
In the case of an individual, the term “insolvent” refers to that person not being able to meet his or her financial obligations (pay his or her debts) when they fall due. The term applies whether or not assets (including for example real estate property, vehicles or artworks) are held, when there is no ability to quickly “liquidate” those assets — that is, to sell them or convert them to cash. Remember however, that TAP’s role is to help you rationalise your situation and deal with creditors.
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What are the consequences of Bankruptcy?
Although bankruptcy is a legitimate way for a debtor to solve his or her debt problems, and is the correct way for creditors to take action against someone for unpaid debts, you should note that the consequences of bankruptcy are both long-term and serious. From the time of being declared bankrupt until you are discharged by your appointed Trustee, you would be referred to as an “undischarged bankrupt”. As such, you cannot act as a company officer, or trade under a name other than your own name (ie, a business name), without advising your customers or potential customers that you are bankrupt. You will be required to make all your divisible assets available to your Trustee. You cannot obtain credit over an indexed amount of money without advising the lender that you are bankrupt; you may be required to surrender your passport and will have limitations placed on overseas travel; and you must make available all your accounts, bank records and financial statements, including those of associated entities such as companies and trusts. In addition, a permanent record of your bankruptcy will be kept on the National Personal Insolvency Index (the NPII), an electronic register of all personal insolvencies. Personal information including your name, address and date of birth may be revealed by a search report of the Index.
How Does Bankruptcy Work?
Bankruptcy is a word that sends chills down the spines of many businesspeople, but it is in fact a very practical and sensible option for many businesses to take when they find themselves in rough times financially.
Nonetheless, the reasons for bankruptcy’s negative reputation are clear: it comes with many negative consequences and, if it can be avoided, it most certainly should be.
But whilst bankruptcy is such a common word – and indeed a common occurrence – in the modern world, the question remains: exactly how does bankruptcy work?
Essentially, bankruptcy refers to when a business declares itself as being unable to pay off the debts that it owes to its creditors in a reasonable time. After a business has declared itself bankrupt, its assets will be sold and the net sum of these assets will be used to pay off as much of the remaining debt as possible.
All remaining unsecured debts will be written off, but the business’s bank accounts will be immediately frozen and it will have a number of highly frustrating financial restrictions placed on it until it is eventually ‘discharged’ from bankruptcy.
Even then, the name of the business (or individual) will be permanently recorded on an electronic register, which can be accessed and viewed at any time by members of the public – so future business partners will easily be able to see their financial history, making business harder to conduct indefinitely.
The Consequences of Bankruptcy and The Alternatives
As already mentioned, the consequences of bankruptcy can be highly significant in determining the future success of a business or the future financial security of an individual.
Whilst bankruptcy does present the opportunity for you to enjoy something of a ‘fresh start’ with all of your burdensome debts relieved of you, it nonetheless means giving up all of your assets and quite literally starting anew.
Unfortunately however, starting anew after bankruptcy means starting anew with a very serious disadvantage: in the immediate future, you’ll find it extremely difficult to conduct even the most basic of financial transactions – and even in the long-term, your ability to access credit or engage in business affairs will be significantly diminished as a result of your past bankruptcy.
The good news is that there are plenty of other options available for individuals and businesses who have found themselves in difficult economic situations. Whilst many people get highly stressed as a result of their debts and falsely conclude that bankruptcy is inevitably imminent the truth is that a professional financial expert can always open your eyes to other, far preferable opportunities.
It’s very often possible to come to an agreement with your creditors, and arrange to pay back a mutually acceptable fraction of your current debt – either upfront or in instalments.
But even when such avenues have been explored and no agreement has been struck, the guidance of a financial advisor will ensure that you make the very best possible decisions to safeguard your future financial security.
Simply get in touch with a member of staff here at TurnAround Pros today to arrange a free consultation with a member of our highly experienced team, and discover for yourself just how many options there are to explore before you even need to think about filing for bankruptcy!
TurnAround Pros are Queensland’s best professionals for financial distress. If your business is becoming insolvent or you are facing bankruptcy, you are not alone. Work with debt advisors who will help you find alternatives to bankruptcy. Visit our website or call us on 1300 518 070 to learn more.
Are there alternatives to Bankruptcy?
Yes, there are alternatives to bankruptcy, which Turnaround Professionals can help you to arrange and negotiate. For example, you might enter into a Personal Insolvency Agreement, where you make an acceptable arrangement with your creditors, without being declared bankrupt.
For more information, refer to Section — Alternatives to Bankruptcy
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