Hidden pitfalls of bankruptcy

Pitfalls of bankruptcy

What may sound like an easy escape can have some hefty consequences

If you’re at a loss as to how to solve your financial woes, declaring bankruptcy may seem like a tempting way to get yourself off the debt rollercoaster. But before you consider bankruptcy to be the potential answer to your money worries, it’s important to know that there’s lots of downsides you may not have considered.

Bankruptcy is a legal process that releases a person from almost all of their debts. Sounds good, right? Before you get excited, as always – there’s a catch!

You can apply to become bankrupt voluntarily if you have a debt of any amount you cannot pay. When you are a voluntary bankrupt, a trustee appointed by the Australian Financial Security Authority (AFSA) will manage your financial affairs. They’ll advise you of when you are officially bankrupt, and will nominate a trustee to manage your financial affairs. Bankruptcy lasts for three years from the day it is declared.

The big pitfalls

However, the financial consequences of bankruptcy may adversely affect you immediately and into the future. Bankruptcy has significant consequences, including:-

  • making it difficult for you to obtain credit for a considerable time
  • impact on your ability to enter a new phone plan, rent a home or get car finance
  • your bankruptcy will appear on your credit report for five years, and on a public record known as the National Personal Insolvency Index for life
  • limiting your future employment options – you can’t operate a business, be a director of a company or work in particular trades and professions
  • the likely loss of some of your assets including your house and a car worth more than $7,500
  • you’ll probably still need to continue to pay your Child support, Centrelink and Higher Education debts, and any court fines
  • while you are allowed to earn an income, if it exceeds the amount applicable to you, you will need to pay contributions to your trustee for your creditors.

Beware of debt agreements

Some debt management companies suggest something called a Part IX Debt Agreement as an alternative to bankruptcy.

  • But be warned – the truth is this is in fact a type of bankruptcy and will remain on your credit report and the National Personal Insolvency Index for up to five years.
  • A debt agreement may also leave you worse off because of the very high fees these debt agencies often charge you for their services.

So – what are the alternatives?

You need to act quickly if you are being pursued for debts and you wish to avoid bankruptcy. The good news is, there’s a few steps you can take to get help.

  • Get in touch with a financial counsellor, who can help you assess your financial situation and devise a plan to get you out of trouble.
  • Make your debt manageable by combining all of those overwhelming payments – each with its own amount, due date and schedule – into one easy repayment. This will help make your multiple debts instantly more manageable, and a lot less overwhelming.
  • Make an appointment to talk to Centrelink, or use their online payment finder. Ensure you’re registered for any help and benefits you may be entitled to.
  • You can also ask Centrelink to consider paying you some of your eligible benefits in advance, getting your money into your pocket faster to help keep up with your expenses.
  • Don’t despair if despite your best efforts your credit rating isn’t as healthy as you’d like. There’s a number of ways you can clean up your credit rating,
  • And once you’re feeling a little more on top of your finances, follow these simple tips to keep your credit rating in the clear.

Don’t be fooled into grabbing a quick fix!

So if you’re tearing your hair out desperately trying to make ends meet, remember that help is available. Bankruptcy can have some pretty dire consequences that will stick with you for a long time, so it should always be a last resort.

At City Finance, we’re different to other lenders – we understand how tough it can be to make ends meet and are here to help. We take the time to get to know you, and focus on your unique situation to tailor a loan and repayments around you and your needs.

Pop into your local branch today for a chat and some helpful lending advice from our friendly staff.