02 Dec 2013

How to Turn a Small Debt into a Large Debt


3 min

Every bankruptcy trustee has stories like this; a bankrupt who loses almost everything over a relatively small debt because they ignore their financial problems. I have recently been dealing with one such bankrupt estate.

This is the (not so) hypothetical scenario:

  • A debtor owns unencumbered property or property with large amounts of equity after paying out the mortgagee.
  • The debtor becomes bankrupt upon the petition of a single creditor for a relatively small amount of money (often less than $30,000).
  • There is sufficient equity in the property to pay the costs of the bankruptcy in full and annul the bankrupt estate with equity left over for the debtor.

The best solution for all parties is simple. Firstly, the bankrupt should lodge their Statement of Affairs as quickly as possible. Then there are two options:

  1. Borrow funds from a financier or family member to pay in to the bankrupt estate sufficient to annul the bankruptcy (this may be less than $40,000 by this stage); or
  2. If option 1 cannot be achieved, assist the trustee to sell the property to minimise costs of the bankruptcy.

Unfortunately, we often see bankrupts in this position and they rarely follow this simple and logical process. The more common scenario is:

  • The bankrupt is in a state of denial about the judgement debt and the bankruptcy. The trustee wastes time and resources trying to compel the bankrupt to lodge the Statement of Affairs, and trying to determine who the other creditors of the estate are (if any).
  • The bankrupt refuses to assist the trustee or to comply with their obligations. The trustee wastes more time and resources obtaining information not provided by the bankrupt (such as certificates of title) and lodging offence reports with AFSA.
  • The bankrupt resists any effort by the trustee to realise property. The trustee wastes yet more time and resources going to court to obtain orders for possession of the property.
  • The bankrupt defends such proceedings, wasting yet more time and resources.
  • The property is sold and proceeds are used to annul the bankruptcy. Surplus funds are returned to the bankrupt. The bankrupt suddenly comes to the realisation that the costs of the estate were high, but does not recognise that the bankrupt’s own behaviour made that necessary.

The Bankruptcy Act requires a trustee to realise the property of a bankrupt. The trustee can rely on the support of the Courts to fulfil such statutory obligations. The surplus funds will be returned to the bankrupt after payment of all costs of the estate. The folly of resistance is that it forces the trustee to incur greater costs at the bankrupt’s own expense.

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