If you're trapped under a mountain of debt that you can't repay and being hassled by debt collectors, bankruptcy may seem like an attractive solution for wiping the slate clean. However, like any major decision, it needs to be researched carefully to make sure you know the risks.
When you go bankrupt, in most cases you will be released from your debts (depending on how many dependants you have and income you earn) but there are exceptions to this rule and other complications that could cause problems for you further down the line.
What debts are cleared by bankruptcy?
If you declare bankruptcy, debts may be written off (meaning you'll no longer have to pay creditors), but there are certain exemptions you need to be aware of.
These are debts that are not tied to specific property like a house or car. For example:
- credit cards and store cards
- unsecured loans and payday loans
- overdrawn bank accounts
- unpaid rent
- unpaid utility bills
- Secured debt
These are debts that are linked to an asset such as property or a vehicle. In most cases, the trustee appointed by the court has the right to sell these assets to help cover the debt. For example:
- home loans
- car loans
- secured personal and business loans
- pawn shop loans
What debts aren't affected?
Declaring bankruptcy won't wipe out all debts and some types of debt will survive the bankruptcy. In other words, if you declare yourself bankrupt, you will still be required to pay:
- court-ordered penalties and fines
- child support and maintenance payments
- government student loans (HECS, HELP and SFSS)
- unliquidated debt or damages
- new debt incurred after bankruptcy
What are the dangers of bankruptcy?
If you're considering bankruptcy, there's more at stake than just debt. The consequences can include:
- Losing your assets – your trustee has the right to sell assets to help cover your debt. This could mean losing your house, vehicle, high-value personal belongings, inheritance and cash in bank accounts over $1,000. You must declare all your assets, including new assets acquired during bankruptcy.
- Compulsory payments – you may have to make regular payments to your trustee if you earn over a certain amount.
- Employment and business restrictions – you may not be permitted to run a business and may have limited employment prospects.
- Travel restrictions – you will need to seek permission to travel overseas.
- Harder to access credit – credit providers will see your bankruptcy on your credit file for up to 5 years after it begins, or 2 years after it ends. This can make it harder to obtain a loan or credit.
National Personal Insolvency Index – your name will feature in the NPII register (aka a public register) forever, which can be searched by anyone.
What are the alternatives to bankruptcy?
Bankruptcy is the right option in some circumstances, but it's not the only one. If you're thinking about bankruptcy to get out of debt, it's important to be aware of other personal insolvency solutions that could offer more protection from creditors, such as a Debt Agreement or Personal Insolvency Agreement (PIA).
To find out what your options are, call Debt Fix today on 1300 332 834 for a confidential, obligation-free analysis.