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Settlement Guide: what is bankruptcy and its implications?

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Going bankrupt or being declared bankrupt by a creditor -who is owed money that can’t be repaid- is a serious matter and has legal consequences.

Going bankrupt or being declared bankrupt by a creditor -who is owed money that can’t be repaid- is a serious matter and has legal consequences.

Understanding what is bankruptcy

The journey into bankruptcy often starts with a small debt that wasn’t settled in time and then forgotten. But with late payment fees, penalty charges and high credit interest, that small debt can quickly become a crushing financial burden. 

Add to that personal factors such as unemployment, relationship breakdowns or ill health and a difficult financial situation can quickly become desperate.

“What I’m seeing a lot of is not necessarily that people are voluntarily going bankrupt. They are being issued with a notice that a creditor is commencing bankruptcy proceedings to make them bankrupt, so we’re getting these calls really late in proceedings,” she explains.

 Woman with Laptop having problems

The consequences of going bankrupt

There are many unpleasant consequences about going bankrupt.

Those who go bankrupt can lose their home. “A bankruptcy in Australia usually lasts for three years and one day. When a person is bankrupt, they lose the right to hold or sell their assets and instead a trustee is appointed who will take steps to sell their assets and potentially recover payments from their income,” says Michael Parkinson, who is from the Australian Financial Security Authority.

Bankrupts are also restricted in their movements and have to get permission from their trustee if they want to travel overseas.

The name of a bankrupt person is also made public. It can be checked by anybody, including landlords, employers and banks.

“The name of the individual will be put on the National Personal Insolvency Index which is a permanent record of all personal insolvencies in Australia. This public register is maintained by AFSA and can be searched by anyone for a fee,” says Parkinson.

Credit reporting agencies also keep a record of bankruptcies for a minimum of five years, which can make getting a loan from a reputable financial institution much harder. 

 Close up of cut pieces of credit card

Be wary of delayed payment schemes

According to our Reserve Bank, Australians owe more than 50 billion dollars on traditional credit cards.

Now, shoppers also flock to newer buy-now pay-later schemes, like Afterpay, which are less regulated than other credit providers.

Many young people are unaware of the consequences of debt.

“Because of the way that debt is marketed to us it seems not to be such a scary thing. I don’t think anybody really explains what it means when you acquire an item, but you don’t pay for the item upfront. The whole masks that a lot of the different methods of paying things in instalments or interest-free appeals to people until they come to the point where they spend more than they have,” says 23-year-old Sofija Petrovic.

 Couple dealing with financial or legal difficulties

The social stigma

Despite widespread public acceptance that debt is part of our lifestyle, the social stigma of going bankrupt is still strong.

“Culturally it seems to be a more private matter. People think it is a personal private matter and they don’t seek help, particularly people of ethnic background are often too embarrassed to speak to somebody about debt and aren't seeking the assistance early on to be able to avoid bankruptcy or things like bankruptcy,” says Ma’ata Solofoni.

She says some people are so desperate about the state of their finances that they seriously consider taking their own lives: “I have spoken to a couple of people who have said that the only option they can really think of is to commit suicide because of the amount of stress that their debt is causing them.”

Free and confidential advice in financial trouble is offered by the National Debt Helpline with qualified professionals who work in community organisations across Australia. They can be reached from 9.30am to 4.30pm, Monday to Friday, on 1800 007 007.

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