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There can be a lot of stigma surrounding declaring bankruptcy, and the consequences may be misunderstood or may not be relevant to your circumstances.
As such, it is important to have a reasonable understanding of the potential consequences before filing for bankruptcy.
This article outlines specific consequences of bankruptcy during and after the end of the bankruptcy period.
During the Bankruptcy Period
Your debts are frozen – upon the commencement of the bankruptcy, your debts are captured and effectively frozen to prevent creditors from continuing to pursue you. A common impact of this is that you may no longer have access to any credit cards or personal loans held.
Capacity to operate a business – bankruptcy does not prevent a person from operating as a sole trader, but does have specific requirements which should be met to continue to operate. Under the Corporations Act, a bankrupt is automatically disqualified from acting in the capacity of a director for the period of the bankruptcy.
Employment restrictions – there may be restrictions imposed by the relevant regulatory or licensing bodies in relation to certain professions. Common examples include solicitors and accountants.
Credit restrictions – a person is unable to obtain credit in excess of the indexed limit (currently $7,266) without disclosing their bankruptcy status for the duration of the bankruptcy period.
Overseas travel – a person is unable to travel overseas without the written consent of their bankruptcy trustee during the bankruptcy period. Interstate travel is not restricted.
Divisible property vests – specific assets owned by you may be collected and sold by your bankruptcy trustee. Common examples include real property, shares, cryptocurrency, and motor vehicles up to a certain indexed limit.
After the Bankruptcy Period ends
Extinguishing of certain debts – upon discharge from bankruptcy, a person is released from most debts captured at the commencement of the bankruptcy period. There are exceptions, which include court fines and penalties imposed and HECS & HELP debts.
Credit reporting – your bankruptcy status is recorded with credit reporting agencies for a period, the later of 5 years from the commencement of the bankruptcy, or 2 years following your discharge from bankruptcy.
National Personal Insolvency Index (NPII) – this index records when a person becomes an undischarged bankrupt and the date of their discharge. This is publicly available information that can be identified via paid search and is recorded on the index permanently.
Parliament is currently considering reforms to the current bankruptcy legislation, which is proposed to reflect a person’s bankruptcy status on the NPII for 7 years instead of permanently. Such reforms are only in a proposal phase at this juncture.
Conclusion
Whilst there are impacts upon a person whilst bankrupt, these limitations are not meant to restrict a person from having a financial fresh start.
