When bankruptcy is the best way forward

As interest rates and debt levels rise, many individuals and small business owners are feeling the pinch. Most will make it through with some belt-tightening, but some may need to take further action.

As a last resort, a debt agreement or bankruptcy may be an option. But what are the implications?

Solutions to financial pressure

There are many reasons consumers and businesses are finding it harder to pay their bills, with pandemic closures, natural disasters and now an energy crisis piling on the pressure.

Figures from the Australian Financial Security Authority (AFSA) show in April 2022 there were 700 new personal insolvencies across the country, with the majority (61.4 per cent) being bankruptcies. Within these, 37.7 per cent were business-related bankruptcies.

But bankruptcy is not the only option. If you find yourself unable to pay your debts, you can also consider making a debt agreement, a personal insolvency agreement, or seeking temporary debt protection (TDP).

A TDP prevents creditors from seizing your assets or wages and gives you time to seek advice, while the other formal insolvency options (such as debt and personal insolvency agreements) are a longer-term answer for pressing financial problems.

Debt and declaring bankruptcy

The best-known formal insolvency option is bankruptcy. This is a legal process where you are released from most of your debts and can make a fresh start with your finances.

In 2020-21, around 6,800 Australians declared bankruptcy. This was 46.7 per cent down on the previous year, due largely to the special debt forgiveness rules in place due to COVID-19.

Although bankruptcy is tempting when you or your business are drowning in unpaid bills, it’s a serious step so please speak to us to understand the consequences before taking any action.

Once you file for bankruptcy, a Trustee is appointed to manage your ‘bankrupt estate’ and dispose of assets to pay your debts. If you earn over a set amount during your bankruptcy, you may be required to make compulsory ‘contributions’ from your income to your Trustee.

Impact of bankruptcy

Bankruptcy has serious consequences. Your name will permanently appear on the National Personal Insolvency Index, which is likely to affect your ability to obtain credit in the future. When applying, you must inform any credit provider you are bankrupt and credit reporting agencies will keep a record of your bankruptcy for five years from the date you become bankrupt.

You are required to request written permission from your Trustee to travel overseas, even if it’s for work. Travelling without permission could extend your bankruptcy or result in a prison sentence.

Bankruptcy doesn’t stop you from working and normally the AFSA doesn’t inform your employer, but there are limitations when operating as a sole trader. Court permission is required to be a company director or manage a company.

Your Trustee may sell your assets to help repay your debts, although you are able to keep ordinary household goods, tools up to a set amount used to earn your income and vehicles valued under a threshold.

Recoverable debts

Once you are discharged from bankruptcy (which usually lasts for three years and one day), your creditors can’t recover any remaining pre-bankruptcy debts.

Bankruptcy doesn’t, however, release you from all your debts. If you have secured debts (such as a mortgage over your home), creditors have the right to take possession of your property even if you are in bankruptcy.

While most unsecured debts (such as credit cards, personal and pay day loans, utility bills and unpaid rent) are covered by bankruptcy, some debts must be paid. These include court-imposed penalties, child support and debts incurred after your bankruptcy starts.

Tax and bankruptcy

If you declare bankruptcy, you still need to lodge a tax return and outstanding personal returns and Business Activity Statements must be filed.

The ATO ranks equally with other unsecured creditors, so if it’s one of your creditors, your Trustee will not necessarily pay this debt first. The only priority tax claims are unpaid Superannuation Guarantee Charge (SGC) debts if you have employees.

If your Trustee decides to sell some of your assets to clear your debts, this may create a capital gain or loss and the CGT event must be recorded in your annual tax return. The ATO may also offset any tax refunds you become entitled to against any tax, child support or family assistance debts.

If you are experiencing financial difficulties, please contact your adviser to discuss your options via email or call us on 03 5120 1400.

Source: Australian Financial Security Authority

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

Easy ways to boost your credit score

Most Australians are only vaguely aware – or completely unaware – of the fact that credit-reporting agencies monitor their financial transactions.

While most Australians don’t give much thought to what’s on their credit report, the credit score that’s based on the contents of that report can have a significant impact on your financial choices. A modest score may mean you miss out on getting a mortgage or business loan.

There’s no shame in relying heavily on your credit card or delaying bill or loan payments to help ride out the financial impacts of the pandemic. However, it is worth understanding how the financial decisions you’re making can affect your creditworthiness.

Know the score

Australia’s credit reporting agencies make it as easy as possible for people to access their credit scores. You should be able to get a free copy of your consumer credit report by contacting the relevant credit-reporting agency or putting in a request via its website.i

The two big players in the credit-reporting industry are Equifax and Experian, but Illion may also have a ‘consumer credit report’ on you. If you’re based in the Apple Isle, the Tasmanian Collection Service will be keeping an eye on whether you’re paying your bills.

Credit scores range from 1 to 1000 or 1200, depending on the agency rating it. If you discover your score is around 500 or better (again, depending on the agency) you can take comfort in the knowledge you’re of above-average creditworthiness. If your score is lower, there are some simple remedies.

Credit repair 101

While credit reporting agencies guard the finer details of their credit-score calculations, they are transparent about what will cause people’s credit score to fall and what is required to rectify the situation.

Here’s what you need to do to boost your creditworthiness.

Sort out any unpaid bills

People often discover unpaid bills – the technical term is ‘delinquencies’ – on their credit report that they either didn’t know existed or which they assumed were ancient history and covered by a statute of limitations.

If you’ve been wrongly charged for something, act quickly to get the charge removed. Start by contacting the business that has mistakenly billed you. If that doesn’t resolve the issue, contact the credit reporting agency.

If you’ve been legitimately charged but didn’t get the bill or were unable to pay it, contact the creditor and negotiate repayment arrangements.

Stop applying for credit

In the current unpredictable environment, it can be comforting to know you have access to plentiful credit in an emergency. But credit agencies view multiple applications for credit in a short period of time as a sign of financial distress, so think twice about applying for another credit or store card. Even if you don’t ever get the card, the fact you’ve enquired about doing so is listed on your credit file.

On this point, it’s worth considering alternative options before applying for credit. While applying for JobKeeper or JobSeeker, or withdrawing money from your super account, may have other financial implications, your credit score won’t be impacted.ii

Don’t put off paying bills for too long

The Australian Banking Association recently announced that borrowers who have deferred bank loans will not have their credit rating affected until at least March 2021.iii That’s welcome news, but don’t assume all companies will be as generous.

Unless the business you owe money to has put in place other arrangements, if they send you a bill for $150 or more and you don’t pay it off within 60 days of the due date, your late or missing payment will stay on your credit report for the next five years.


Get on the front foot

Even if you think you’ve been careful in your spending, debts can quickly mount up or get lost in the bottom of a drawer, so it’s worth getting into the habit of checking your credit score from time to time just to be sure.

This is particularly important if you are hoping to borrow money to buy a home, start a business, or for a major purchase. If you’d like advice about getting your finances back into shape and maximising your ability to access credit in the future, please get in touch with our team on 03 5120 1400.

https://moneysmart.gov.au/managing-debt/credit-scores-and-credit-reports

ii https://www.societyone.com.au/blog/early-access-to-super

iii https://www.smh.com.au/business/banking-and-finance/credit-rating-amnesty-for-loan-deferrals-extended-20200913-p55v5y.html

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.