What happens when you declare bankruptcy in Australia? 

How much do you know about bankruptcy in Australia? Understanding the full impact of what happens when you declare bankruptcy is important, as it can affect so many areas of your life.

Declaring bankruptcy is a serious decision that should not be made lightly, but for some individuals, it may be the only option to regain control over their financial situation. In this blog article, we’ll break down everything you need to know about declaring bankruptcy in Australia, from the immediate effects to the long-term consequences and the steps to take if you find yourself in this situation.

What is bankruptcy in Australia?

Bankruptcy is a legal process designed to help you when you are unable to repay your debts. When you declare bankruptcy, you are essentially asking for relief from your creditors because you are insolvent – which means you cannot meet your financial obligations when they are due. 

Bankruptcy can provide immediate relief from creditors, but it comes with big consequences, including potential loss of assets, restrictions on future credit, and long-lasting effects on your credit rating.

What’s the immediate impact of declaring bankruptcy? 

If you declare bankruptcy, there are a range of immediate consequences.

A trustee is appointed

A trustee will be appointed to oversee the bankruptcy process. This trustee is responsible for managing your financial situation during bankruptcy, including: 

• The trustee will take control of your assets, deciding what can be sold to pay off your creditors.
• They will liaise with creditors on your behalf, ensuring they are notified of your bankruptcy so they can stop the collection process. 

How is the trustee appointed? In most cases, the trustee will be from a government agency like the Australian Financial Security Authority (AFSA), though private trustees are also used for more complex scenarios.

Protection from creditors

When you declare bankruptcy, you will receive protection from your creditors under the Bankruptcy Act. Creditors won’t be able to take legal action against you to recover debts and you will stop receiving phone calls and letters from debt collectors. There is also no chance of wage garnishment or repossession of your property after you have declared bankruptcy. 

This protection is so helpful if you are feeling overwhelmed by constant creditor pressure, but it’s important to note that some types of debts, like child support or certain government fines, may not be included in the bankruptcy and can still be pursued by creditors.

Asset seizure and sale 

While it depends on your individual situation, the trustee can sell some of your assets to repay your creditors. Assets subject to sale could include: 

• Real estate – like your home (unless it is exempt or low value)
• Vehicles (if they exceed a certain value)
• Other valuable items, such as collectibles or investments. 

What can you keep? You are generally allowed to keep basic household items, a vehicle (up to a certain value), and tools of trade that are necessary for your employment. The specific assets that can be seized will depend on your personal circumstances.

Listing on the NPI – National Personal Insolvency Index

Once you are declared bankrupt, your details will be added to the National Personal Insolvency Index (NPII). This is a public register that lists individuals who have been declared bankrupt. It remains on the register permanently, which means that anyone can search for your name to see if you’ve been bankrupt.

It will also appear on your credit report for up to five years, making it more difficult for you to secure loans, credit cards, or other forms of credit during this time.

How long does bankruptcy last in Australia? 

Wondering how long bankruptcy lasts in Australia? It typically lasts for three years and one day from the date your bankruptcy application is accepted. Once this period has finished, you are generally discharged from bankruptcy, which means you no longer need to repay debts included in your bankruptcy. 

What happens after bankruptcy? 

Once you are discharged from bankruptcy, you are legally free from the debts included in your bankruptcy, however there are long-lasting effects, including: 

Impact on your credit history

The record of your bankruptcy will stay on your credit history for up to five years, making it hard for you to get approved for loans, mortgages, credit cards and even rental properties. With this on your credit history, you may also be subject to higher interest rates, and need a larger deposit when applying for loans. 

Rebuilding your credit history after bankruptcy takes time and discipline and Fix My Credit can help. We will dispute inaccuracies, and provide tailored guidance on responsible credit management, debt reduction, budgeting, and positive credit habits to manage credit effectively and improve long-term credit scores.

Impact on employment

Bankruptcy can affect your employment opportunities if you are applying for jobs in some industries. For example, you may be prevented from working as a company director or in other financial management roles. If your job is affected, you may need to disclose your bankruptcy status to your employer.

In general, if you’re employed, you are allowed to continue working, but you must notify your trustee if your income changes or if your job status is affected by your bankruptcy.

International travel restrictions

During the bankruptcy process, you may not be able to travel overseas without the written permission of your trustee. If you want to leave the country, you’ll need to ask for approval, and in some instances, the trustee may even require that you surrender your passport.

What types of debt are covered by bankruptcy?

Not all types of debt are covered by bankruptcy in Australia. Generally, bankruptcy can eliminate or reduce the following debts:

• Unsecured personal loans
• Credit card debt
• Medical bills
• Unpaid utility bills
• Tax debts (in some cases)

However, some debts are excluded from bankruptcy, including:

• Child support or spousal maintenance payments
• Court fines or penalties
• HECS-HELP or student loan debts

It’s important to remember that bankruptcy doesn’t automatically clear all types of debts, and you’ll need to work with your trustee to understand exactly what debts are covered.

Alternatives to bankruptcy

Before declaring bankruptcy, you may want to consider other options that could help you avoid the long-term consequences. Some of the alternatives to bankruptcy that Fix My Credit offer include:

• Debt negotiation: An agreement with your creditors to pay back a portion of your debt over time.
• Personal insolvency agreements: A formal arrangement to negotiate with creditors and pay off a reduced amount of your debt.
• Debt consolidation: Combining your debts into one loan with a lower interest rate, making it easier to manage repayments.

These options may have fewer long-term consequences and may be suitable if you want to avoid the more severe impact that bankruptcy can have on your credit and employment. You can talk with Fix My Credit to get advice on your specific situation. 

Repairing credit with Fix My Credit

Declaring bankruptcy is a big decision, and it’s not the easy option. It can provide immediate relief from overwhelming debt and give you a fresh start, but it also comes with long-lasting consequences, including asset seizure, a damaged credit rating, and restrictions on certain types of employment.

If you’re considering bankruptcy, you should weigh all your options and fully understand what it will mean for your financial future. Chatting with Fix My Credit can help you make the right decision and guide you through the process of credit repair. 

Contact us today!