01 Mar 2017

Ignoring your bankruptcy: only costs money, time, and stress


6 min

Make like an ostrich—bury that head in the sand!

In the beginning…(no this is not a biblical story, but perhaps a lesson for the ages) Tracey’s elderly father sold his home and together they bought a house for the whole family to live together.  Dad owned 80% and Tracey and her husband owned 20% jointly.  In late 2012, Tracey’s father passed away and she organises the funeral. Unfortunately, Tracey is a habitual non-payer and these funeral expenses are no exception.  Not only does Tracey not pay her bills, in the face of a bankruptcy notice: she chooses to bury her head in the sand and do nothing.  This results in her becoming bankrupt by court order via a creditors’ petition.  This is where we come in…

Keeping with her tradition of ignoring the problem, Tracey refuses to communicate with us (her bankruptcy trustees) and will not complete and lodge a Statement of Affairs.  This document’s main purpose is to assist the trustee to investigate the bankrupt affairs and allow us to realise divisible property, in an orderly and commercial way, to meet the provable debts in the bankrupt estate. In Tracey’s case, we knew from our own investigations that she held 10% interest (her share between her and her husband) in the real property, but we also knew it was likely that Tracey would inherit part of her father’s 80% interest, given his passing. We did not have any knowledge of any other property nor the extent of her creditors (except for the mortgage on the home).

With the Australian Financial Security Authority’s (AFSA) assistance, Tracey was summonsed to court for “failure to lodge a Statement of Affairs”. At this Court hearing, we met with Tracey for the first time and tried to encourage cooperation and disclosure of her full financial affairs, which may have resulted in a simple resolution; unfortunately, this did not occur. Another court hearing weeks later sees Tracey given a small fine and she eventually lodged her Statement of Affairs.

The Statement of Affairs disclosed she is the sole executor and beneficiary of her father’s deceased estate.  It also demonstrates that her debts were relatively small compared to her pool of assets; had she not ‘stuck her head in the sand’, bankruptcy could have been avoided. We provided her with ample time to have her bankruptcy annulled, (paying her creditors in full) while keeping administration costs to a minimum. Again, she persisted with ignoring the situation.

Her refusal to engage meant we had to had to take action to realise the property’s equity.  Many think this is a simple task for bankruptcy trustees, however this case was far from simple.

Stage 1 - Obtain the last will and testament of the deceased father and seek property distribution from deceased estate
Not surprisingly, Tracey would not supply the Will. Again, with AFSA’s help, Tracey was compelled to provide the requested documents or face further sanction from the court and risk extending her bankruptcy to eight years.

Tracey refused in her capacity as the deceased estate executor to distribute the property (i.e. 80% interest in the home) to herself (as beneficiary) in fear of losing it to the bankrupt estate…so there it sat…and sat, until we applied to court to have the property distributed out of the deceased estate to the beneficiary. This had the effect of transferring the deceased’s registered interest in the property to the bankrupt, which we then ‘entered transmission’—transmitting the title into our name, as bankruptcy trustees.

Stage 2 – Appointment of statutory trustee for sale of the property
We then explained to Tracey and her husband that we now had 90% registered interest in the property (being 80% from her father’s deceased estate and Tracey’s 10%) and therefore we should now proceed to sell the property without incurring further costs.  However, we needed the husband’s cooperation with his 10% interest to proceed to realise the property. We can only assume, they must have thought ‘we’ve come this far…no point playing ball now’.

So, back to court we went, this time applying to the court for the appointment of a Statutory Trustee (third party) to take vacant possession of the property, sell it and then distribute the proceeds in accordance with the registered owners’ interests (90% bankruptcy trustee, 10% Tracey’s husband). Would you believe, that was the easy part!

Stage 3 – Sale of property by the statutory trustee
Getting vacant possession was onerous and a lengthy process as Tracey would not leave.  It required a further court application, the Court Bailiff to attend the property and order the bankrupt’s family to vacate, arrange removalists, locksmiths, and offsite storage (in the event we needed to empty any belongings to prepare for sale). A final ‘vacate or be physically removed’ date was set, and on that day, we arrived to find the home empty. The home was sold and the statutory trustees distributed the proceeds in accordance with the respective interests in the property (less costs).

The wash up
This bankruptcy could have been a relatively simple administration with little effect on creditors, Tracey and her family.

The increased costs incurred due to Tracey’s refusal to engage and comply with the process meant creditors were not paid in full. Given Tracey could have avoided being made bankrupt (in the first place), and all the opportunities offered and explained around an annulment or being paid a surplus from the property sale (i.e. market sale value, minus mortgage, less bankruptcy costs and fees: balance from equity funds)—the stress, time lost, and any future consequences of being a non-compliant bankrupt, was totally and utterly pointless.

Tracey and her husband lost their home and received zero dollars from the years of accumulated property equity. The unfortunate reality for Tracey is, due to her actions (or inaction), she will remain bankrupt until 2022 (contravention of section 149D of the Bankruptcy Act 1966—failure to supply information) when her creditors have long since moved on.

These events all occurred because Tracey did not pay $5,000 in funeral expenses and she stuck her head in the sand and ignored her potential bankruptcy, and in bankruptcy she ignored the possibility of annulment.  We find it difficult and disappointing when we openly communicate and want to work towards the best-case scenario for all parties affected. As insolvency practitioners, we want to work together, without the need for expensive and time consuming processes that usually don’t end up benefiting the bankrupt and in many cases the creditors.

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