What are the consequences of bankruptcy?

There’s many bankruptcy myths and facts, but somewhere in between is the truth. In this article, we get to the bottom of how does bankruptcy work with Damien Kane, MyBudget’s insolvency team leader. Depending on what you hear and who you hear it from, the consequences of bankruptcy are either a silver bullet for debt problems or the fast-track to financial ruin.

If you’re struggling with debt, you know what financial stress feels like. It doesn’t stop at your pocket. It affects every area of your life, from your health, to your relationships, to your work performance. It feels like being trapped in a maze. That’s when you start thinking about the consequences of bankruptcy. But should you do it?

Your mum says it’s the sensible option. Your hairdresser says it ruined her sister’s best friend’s brother’s life.

Google says… Well, Google says lots of stuff. This is how bankruptcy myths and facts are born and no less so when it comes to financial advice. The reality, as you’re about to discover, is that there are as many ways to get out of debt as there are to get into it and bankruptcy is just one alternative. It might be a great option for you, or it might not. What’s for certain is that it’s better to take advice from an insolvency expert than your mum or a hairdresser.

How does bankruptcy work?

Before we get into the ins and outs of the consequences of bankruptcy, let’s first clarify exactly what bankruptcy is. According to the Australian Financial Security Authority (AFSA):

Bankruptcy is a legal process where you’re declared unable to pay your debts. It can release you from most debts, provide relief and allow you to make a fresh start. You can enter into voluntary bankruptcy. We refer to this as a debtor’s petition. It’s also possible that someone you owe money to (a creditor) can make you bankrupt through a court process. We refer to this as a creditor’s petition. Bankruptcy normally lasts for three years and one day.

Damien Kane is the insolvency team leader at MyBudget.

“I’m lucky enough to lead an extraordinary team of dedicated and passionate Client Success Coaches, Bankruptcy, Personal Insolvency and Debt Agreement Specialists,” says Damien.

“The team takes a holistic, long-term approach to financial wellness and, when needed, we help clients to navigate the complex steps of bankruptcy and Part IX Debt Agreements.”

What are the consequences of bankruptcy?

Now, before you start searching for ‘How to apply for bankruptcies in Australia’, there’s a number of factors you need to consider.

Damien says that for approved bankruptcy petitions, AFSA appoints an official person called a ‘trustee’ to manage the bankruptcy. “Your appointed trustee acts on your behalf with creditors, as well as works directly with you throughout the entirety of your bankruptcy.”

“It’s really important to understand the risks versus the benefits of bankruptcy,” Damien says. “For example, if you own a property, your trustee may look at selling the asset and distributing the proceeds to your creditors. There are lots of consequences and variables for consideration.”

Some of the consequences of bankruptcy include:

• Your name permanently appearing on the National Personal Insolvency Index
• The bankruptcy appearing on your credit file for five years
• Your ability to obtain future credit, such as a home loan
• You may be required to make financial contributions to your creditors, depending on your level of income
• The impact on your current or future employment opportunities in certain roles or professions
• Being unable to travel overseas without the written permission of your trustee for the period of the bankruptcy

“There are practical considerations to keep in mind, too,” warns Damien. “For example, your credit cards would be taken away. With no access to credit, people with cash flow problems often find it hard to make their cash stretch from pay to pay. This is one of the reasons that budgeting is essential for people going through bankruptcy.”

Breaking down the bankruptcy myths and facts

“One of the issues with bankruptcy is that people often have preconceived ideas about it,” says Damian. “My job is to make sure that people base their decision on facts, not fiction.”

So what are the popular myths surrounding bankruptcy and what does Damien, an insolvency expert, have to say?

Myth 1: “Bankruptcy will ruin my life”

Damien says: “Impact your life, yes. Ruin your life, no. There’s no avoiding the fact that bankruptcy will have an impact on your life. There are definitely serious consequences of bankruptcy, which is why at MyBudget we consider bankruptcy a last resort.

But in a lot of cases, it can be the catalyst for a fresh start – one that might never be possible without pursuing a bankruptcy. If coupled with a strategy based on developing great habits around money, it has the potential to transform your life. The first step, however, is to explore all of your other options by creating a detailed budget plan. Only then can you properly know if bankruptcy is the way to go.”

Myth 2: “Bankruptcy is a quick fix for debt problems”

Damien says: “I wish it were true, but I’m sorry to say there are no quick fixes when it comes to debt. Bankruptcy is a three-year process in itself and it remains on your credit report for a further two years. That’s why our first objective is to help clients avoid personal insolvency, if possible.

We do that through tailored personal budgeting and by doing the heavy lifting for our clients — we pay their bills, set aside savings and talk to their creditors for them. If it turns out that bankruptcy is the right path, budgeting and money management support is even more important because you’ll be embarking on three to five years of carefully managing your money.

Myth 3: “I’ll never be able to borrow money again”

Damien says: “This is not true. Your name will be listed on the National Personal Insolvency Index, but it doesn’t mean you’ll never be able to borrow money again. Once you’re discharged from your bankruptcy, banks and lenders will consider applications from you, just like anyone else. What lenders need however is confidence that you’ll be able to pay back your loans and credit.

My recommendation is that you should view your bankruptcy period as an audition to prove you can be financially responsible. Create great habits around money and how you spend it and achieve your savings goals. That could be saving up for a house deposit or holiday or a new car or whatever’s important to you. As a MyBudget client, we may even be able to assist you with finance directly through our MyBudget Loans Team.”

Myth 4: “Bankruptcy has a social stigma”

Damien says: “Financial stress is everywhere and bankruptcy is more common than most people are aware of. To put it in perspective, there were over 15,000 bankruptcies in Australia from 2018 to 2019. The reason you don’t notice a bankrupt person is that they look like everybody else. AFSA doesn’t send you a neon sign or t-shirt.

In certain situations, you may be required to disclose that you are bankrupt – in certain professions, for instance – but the cases are very specific. Otherwise, it’s totally up to you who you choose to tell. At MyBudget, we don’t see our clients as anything other than amazing people willing to embrace change for themselves and their families.”

We’re here to help you understand the consequences of bankruptcy

Damien’s final piece of advice is, “If you’re struggling with debt, book a free budget consultation with MyBudget. We’ll analyse your finances, help you understand the consequences of bankruptcy, and help look at all of your options. If bankruptcy is the right approach, our insolvency team will explain how to apply for bankruptcies in Australia, help you navigate the process and make sure you get back on your feet. You don’t have to do it on your own.”

If you’re still wanting to know more about how bankruptcy works or need help separating bankruptcy myths and facts, then have a chat with us today.

Ready to find out more? Call 1300 300 922 to book your free budget consultation or enquire online.