29 Sep 2016

There is life after bankruptcy!


3 min

By delaying the inevitable, things often get worse.

People contemplating bankruptcy often ask us, is there a life after bankruptcy?

Sometimes we see people who have such major financial problems, it does not matter what they do, in the absence of a miracle: those problems can never be overcome. Often in these discussions, their accountants attend and confirm that their clients have no way out of their financial problems.

Most of these individuals know they should go bankrupt, particularly as their financial problems are affecting their physical and mental wellbeing, and life as a whole. However, the problem is often seen as 'the elephant in the room'. And therefore they hope that by putting off the decision their problems will go away.

To give an example, a person recently filed for bankruptcy, after creditors, who he hoped would go away, obtained orders for substituted service (as he was avoiding being served) regarding his bankruptcy proceedings. When we first spoke to this person in 2012, when his debts were over $20 million and he had no real assets or income to support that debt position, we strongly recommended he go bankrupt.

It was only after it became abundantly clear that his creditors were not going to relent: he filed for bankruptcy in August this year.

If he had gone bankrupt as recommended in 2012, he would now have been discharged from bankruptcy, by some six months.

The longer a person delays the inevitable there is no chance of a greater benefit as any assets acquired will be lost in a bankruptcy. Once bankrupt, a person can immediately start saving for their financial future (subject to income contributions thresholds). Those savings can go a long way to giving them a new future, for example a deposit for buying a property.

People fail to appreciate that a bankruptcy will not, subject to some exceptions, affect a person from being able to earn an income, nor is a bankrupt required to advise an employer of their bankruptcy.

Having been bankrupt will not prevent a person from borrowing money from a financial institution. Generally, all financial institutions consider four major elements in deciding whether to lend funds. They are:

  1. A person’s income level—to see if they can service the loan.

  2. How consistent their income level is, i.e. is their current income level indicative of what they have earned in the past and therefore an expected income level for the future.

  3. How much of a deposit is available towards the purchase (security over the loan).

  4. How many working years (before retirement) are projected to continue servicing the loan.

Regardless of whether the loan applicant has been bankrupt or not, if they fail any of the above pre-conditions: a prudent lender will not grant the loan.

So in many ways, it can be easily argued, that for people in financial difficulty, bankruptcy should be considered as means of relief—not punishment—and is the means to a bright new financial future and a new life.

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