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In this Business Moreton Bay Region presentation, Shaun Reeves and Lee Crosthwaite discuss what bankruptcy means for an individual in Australia.
Key learning outcomes include:
Shaun Reeves:: Hello, I'm Shaun Reeves and welcome to our bankruptcy discussion as a part of the Business Morton Bay Region elearning series.
I’m Director of SRJ Walker Wayland and business advisors, tax agents, accountants, and auditors. I'm here today with Lee Crosthwaite to have a chat about bankruptcy, what it is, what it means and what to do about it.
Lee Crosthwaite: Thanks Shaun. I'm Lee Crosthwaite from Worrell’s insolvency and forensic accountants.
I head up the local office at North lakes. Worrell’s has been doing bankruptcy and corporate insolvency for around 46 years. We've got experience in the area and I'll thank Shaun for the opportunity to talk today.
Shaun Reeves:: No problem at all. Thanks for coming along and giving up your time. Lee, bankruptcy is often regarded as a bit of a four-letter word.
Although obviously there's a lot more letters than four in bankruptcy, but perhaps you can start off by giving us a bit of a rundown on what bankruptcy is and why is it a thing.
Lee Crosthwaite: Sure. In Australia, bankruptcy, we deal with the individual financial positions of people. And when they can't pay their debts, as when they forward, you that's a technical term, but it's effectively where they've accumulated an amount of debt that they can't pay, or they don't have the means to be able to come with a proper process to be able to address.
It's not an uncommon thing. There's about 15,000 people in Australia that go bankrupt each year. Of that 20% (or thereabouts) relate to business. The other 80% are average wage-earners who have accumulated excess credit card debt, or something like that, and they've got no means to be able to pay.
In other jurisdictions around the world, bankruptcy can also include companies and other entities. In Australia we’re governed by the corporate legislation of the bankruptcy act. That's purely for individuals dealing with their financial position. The corporations act separately deals with companies, but that's essentially the process in Australia.
Shaun Reeves:: Okay. So you do hear about companies filing for bankruptcy in the US which sort of does confuse things a little bit when we're talking about our regime, but that puts a lot of context around that.
In 25 words or less, what is bankruptcy?
Lee Crosthwaite: Bankruptcy, as I said to the legal process, effectively, a bankruptcy trustee gets appointed independently. They take possession of the assets of the individual, and then the idea is to disperse those equally amongst the creditors of the individual.
Shaun Reeves:: So we'll get into a little bit more detail specifically about exactly what the trustee does a bit later on. But perhaps we can start with a rundown of what the key consequences of bankruptcy are.
Lee Crosthwaite: There is often negative connotations in relation to bankruptcy. That it's sort of the end of the road, or that sort of thing. It's not. And you've got to remember in the context of an individual, they continue on with their life. This is effectively a line in the sand. All the creditors and debts that are owed at that point in time are all effectively frozen.
Then a bankruptcy trustee steps in the picture to be able to have a look at what assets that individual has, and how they can be recovered and then paid to the creditors. It won't obviously won't be the full amount because they're not able to pay everyone as when they fall. Basically there's equal sharing amongst the creditors for that process.
Shaun Reeves:: The trustee in bankruptcy is there to act on behalf of the credit, is the people that arrived money by, by the bankrupt?
Lee Crosthwaite: In essence, yes. But they've got duties both to the individual (the bankrupt themselves) and also the creditors.
So they're there as an independent party, so that it can be dealt with in a civil manner.
Shaun Reeves:: So it's not necessarily an all out attack on the bankrupt?
Lee Crosthwaite: It shouldn't be. In fact, a bankruptcy - whilst it does have negative connotations and there are consequences to it - it's also an ability for them to move forward. Yes, they've had to address their issue. The bankruptcy period is for three years during which they're subject to some restrictions, and we'll talk about perhaps later, but it's for them able to be able to move on in their life as well.
Shaun Reeves:: Okay, so in a weird sort of way, this is an opportunity for a bankrupt or a person to draw a line in the sand and actually get protection through this process to make sure that things don't get any worse, and go through a mechanism by which they might be able to rebuild at some point.
Lee Crosthwaite: Definitely, Shaun. In terms of the mental wellbeing, and that anxiety side of things that individuals are facing as they're trying to deal with their financial affairs. Particularly if they're in financial distress. The bankruptcy is a line where they are able to address those issues through a legal process, and have that independent person with the creditors and those that are pursuing them for payment.
Shaun Reeves:: Whilst we're saying that it is a protection, obviously it's still a reasonably invasive process. So can you be a bit more specific about what it means for a bankrupts assets in relation to the various sort of assets they might have?
Because they'll possibly have a house, car, and some personal possessions. Is there a summary of what it means for each of those different types of assets that the bankrupt might have?
Lee Crosthwaite: Definitely. In general terms, all of their assets will vest in that bankruptcy trustee as of the time of bankruptcy. That's quite a key point.
Those assets that were broken down into a few different categories. There's those assets that they had a pre-appointment up to the date of the bankruptcy. That might be a house or an interest in the house. It might be shares. It might be motor vehicles. If they're running a business, then business assets, equipment, things like that.
Then there's assets that accumulated after that date of bankruptcy. For the three-year period, they're also subject to what we do here. Then the bankruptcy trustee also has the ability to look back in time and see what transactions have happened. If there's assets that have been sold to somebody else or transferred or hidden away or something of those sorts. All of those assets fall within the bankruptcy trustees control.
There are allowances under the bankruptcy act for the individual. They are entitled to have a motor vehicle after this threshold amounts at the present time motor vehicle, about $8,000. Okay. There's tools of trade, so they can still continue on to work. That's up to about $4,000. Personal home and effects and that sort of thing. So you're entitled to have a washing machine, your fridge, your bed, those type of personal effects to be able to live life.
You're not getting thrown in jail. We don't have bankruptcy jails anymore. You're entitled to continue on to earn money as well. So those personal effects are put to the side, and then the bankruptcy trustee looks at the other assets. The idea is basically that they need to bring those assets into a pool that can be distributed amongst the creditors.
Shaun Reeves:: So it sounds like you still get to live a reasonable life with photos of your family and your television and CD player, so long as obviously your TV is not a full-on cinema.
Lee Crosthwaite: Yes, you're entitled to those. You're entitled to live a life. Certainly not a luxurious life, but a quiet, decent life in terms of income. You’re entitled to any job or income you want to do once you reach certain thresholds amount. Presently that's $60,000. If there's no dependent children or others, $60,000 (after tax) before you need to contribute back to the estate.
Shaun Reeves:: I imagine there’s even more stress though, when you are potentially a bankrupt and you have a family to look after as well. So how does that $60,000 scale if you've got dependents.
Lee Crosthwaite: So it scales up to $80,000 thereabouts on a sliding scale, depending on one, two, three up to five pluses. That is where it taps out. And that's an after tax income.
If you're running a business, that's your net income after all your expenses and that sort of thing. And then after tax. So in terms of the average income for Australia, that's a fairly reasonable income.
And that doesn't preclude you from earning more than that. You can earn substantially more than that. It just means that you need to contribute back to the estate.
Shaun Reeves:: So we don't lose all of it?
Lee Crosthwaite: No, you don't. 50 cents in the dollar after tax.
Shaun Reeves:: So it is a bit of a four-letter word. If I become a bankrupt who gets to know about it,
Lee Crosthwaite: It is a public record. There's a public register called the National Personal Insolvency Index. The private credit ratings that the banks and other finances rely upon, it'll be published on their bankruptcies. For a three year period, that's when the restrictions apply to you. But the note that you've been bankrupt will be there forever.
Shaun Reeves:: Hypothetically speaking, I'm looking at potentially a situation where I'm going to become bankrupt. I have a family and I'm a hard worker, and I want to try to accumulate assets and so forth in relation to being able to accumulate assets to borrow money for a house, or to increase my income.
Lee Crosthwaite: There's a few different aspects to it. There's the line in the sand, as we discussed before, from both the mental perspective, basically you put those aside.
Yes, you give up your assets to the bankruptcy trustee so it can deal with your creditors. But all the creditors are captured within that so you can move forward.
There's the three-year bankruptcy period where you're subject to some of those restrictions, such as contributing money for your income. You can't be a director of a company. There's a few other things associated with that.
But by and large, once you've finished that three-year bankruptcy period, then you can go off and continue on accumulating assets, running a business, doing all those types of things, in relation to accessing credit and finance.
Yes, there's a note in relation to the bankruptcy itself. You might have to explain to finance use whilst it's on the credit rating periods, which is five to seven, depending on the type of credit agency. But most of the time people can still access finance and alike if they want to borrow for a mortgage to buy a house and things like that.
The bankruptcy three year period is restrictive, but after that, you've done your time in relation to whatever happened in the past and you can move on from that.
Shaun Reeves:: So let's just say for a moment that I'm still suspicious in our belief that there is life after bankruptcy. Are there any for the former bankrupts that I may know about that can prove that there is life after bankruptcy?
Lee Crosthwaite: Of course I can't name names, Shaun, but if you do a quick Google search, you will be able to find some well-known businesses, people, sports people, and community people. There's plenty of entrepreneurs and things like that have gone through a bankruptcy at their point in time in life.
And that's the important thing we're dealing here with individuals that they've dealt with the bankruptcy, but they continue on living and they need to be able to continue on living.
Shaun Reeves:: Okay. So there is hope.
Lee Crosthwaite: Yes.
Shaun Reeves:: Are there any common myths about bankruptcy that you’d like to share with us?
Lee Crosthwaite: The common one is that the world's going to end. It's not going to end. The legal mechanism allows people to move on creditors, get dealt with whatever assets are available at that point in time. The people, the individuals can move on. Bankruptcy lasts for three years in Australia.
They’re are main things in terms of your assets. Yes, you've got to give up a lot of your assets, but all the creditors are then dealt with as well. So there's that offsetting component to it as well. It's not the be all and end all, as I've said before, people need to continue on with their lives.
Shaun Reeves:: If I'm still a little bit cautious about this bankruptcy thing, is there any other way to go around dealing with what might be insurmountable debt?
Lee Crosthwaite: There are a few. So the bankruptcy act provides, deals with bankruptcies we've discussed so far today.
There are other processes within the bankruptcy act. These are formal processes. There's Part 9, which is Debt Agreements, which you'll often hear. Promoted on the radio and things like that. Debt agreements to deal with creditors they're often designed for those 80% of wage-earners that have just accumulated credit cards and things like that.
If you've got less than broadly, a hundred thousand dollars in assets, liabilities, and income, you can go through that process. That's putting a proposal to the creditors saying there's no point making me bankrupt. I don't have any real assets or alike, but I am earning income. How about over the next few years I'll pay you a certain amount in the dollar and we'll call it quits.
Then there's part 10 of the bankruptcy act, which is similar, but it's more designed for business people. Where they're operating a business, or they might have substantial assets that are illiquid and they need some time or some other way to be able to pay those creditors.
Shaun Reeves:: So part 10 provides some other protections to allow that time to pass and things to happen.
Lee Crosthwaite: It's a formal legal process under the bankruptcy act to compromise the debts with creditors and move on. And then of course if you only have one or two creditors, you can engage people to help you assist in negotiating informal arrangements.
You don't have protection of the bankruptcy act, but that might be an option.
What impact does COVID have in relation to bankruptcy?
Shaun Reeves:: Is COVID changing anything in relation to the bankruptcy?
Lee Crosthwaite: Funnily enough, the number of bankruptcies has dropped quite a lot over the COVID period.
Since March, the government's incentives - their assistance packages and things like that - have seen a reduction in bankruptcies. In particular, in relation to creditors not being able to pursue debts that are less than $20,000, and the response time for those bankruptcy notices is six months versus the normal 21 days. So, the government has - through the legislative framework - given a long period of time, hopefully so there's some time for the individuals to be able to deal with their creditors and settle their own personal positions.
Shaun Reeves:: I guess, if you want to call it that, potentially that there may just be a stay of execution. You certainly don't want people to automatically think they don't have to deal with it. So I'll just put it aside for the moment.
What are the danger signs? What are the for preventative financial maintenance?
What are the danger signs and where should, when should you seek help?
Lee Crosthwaite: Certainly when people start seeing, the likes of credit cards they're not being able to make the monthly payments. So you're getting interest accumulating and the debt is starting to increase at quite a rapid rate. With those defaulting on mortgages.
The job uncertainty and things like that as well. So they're the main signs that we see from an individual basis.
Shaun Reeves:: When those things start to happen, I know that there are a number of companies around the place saying that we can help you with their household budget and consolidate your debts and get things back on track. I imagine that they play a role, but I'm guessing you've got to make sure that you're getting good advice from a reputable advisor in that regard.
Lee Crosthwaite: That's right. Look, certainly they've got their place and they help out. And some people generally need assistance with budgeting and things like that. I guess it's being realistic in relation to what those budgets are doing and where you're ending up.
Are you just extending the problem for a long period of time, but never really getting on top of it and delaying the inevitable. Delaying the inevitable credit card interest and things like that that are accruing at such rates that you're never going to get on top of them.
Shaun Reeves:: So last question, just to wrap up our session here. When you’re finding it all too hard to cope financially and mentally. Where would I go to first for help?
Lee Crosthwaite: There's a lot of support framework around financial and emotional stress in this area. There's a lot of counseling services, both government APHSA, which is the governing body that deals with bankruptcy.
They've got a number of services. There's other private financial services, some associated with different charities and things like that that you can look at. If you've got accountants professionals you can approach them as well. They've got networks that can put you in touch with different people.
But the biggest thing is communicating and talking to people about it, particularly having those conversations with people who can either talk directly with the creditors will give you advice how to go about those sorts of things.
Shaun Reeves:: That's a really good tip. Like in these situations where the potential bankrupt thinks the world is caving in around them, the hardest thing to do is communicate, but it's probably the most important thing to do.
You’ve shown us here that it's a line in the sand. It isn't the end of the world. And probably the best thing to do is start having conversations and, hopefully, you won’t to ever get to this point, but if you do it, it doesn't mean the end of things. Reach out and get some assistance.
Lee Crosthwaite: That's right, Shaun. And yet it's got to be approached. It's a legal process, but it's protection from both the creditor side and the individual side. And there's a whole raft of benefits, both mentally and in relation to addressing the problem if you're willing to talk about it.
Shaun Reeves:: Okay, well, thanks very much for joining me today for a chat about that Lee and I hope, the audience listening to our discussion has picked up a few points and, more of an understanding and may even be feeling a little bit more comfortable about what may be in store if you're going through considerable stress just at the moment.
So thank you for joining us today. it's been a pleasure to have this discussion with you, Lee. Thank you.