If you have been served with a bankruptcy notice, it is important to know that failing to take any immediate steps can have severe consequences.
In particular, a failure to comply with a bankruptcy notice is deemed to be an “act of bankruptcy” and allows a creditor to apply to a court to have you declared bankrupt, which usually lasts for 3 years.
So what does it mean to be declared bankrupt? While most people understand that once you are bankrupt, your creditors cannot continue to chase you for repayment of their debts, other significant consequences are often overlooked. Some of the key consequences are outlined below.
1. Financial affairs managed by third party
Once bankrupt, you hand over management and control of your financial affairs to a trustee in bankruptcy. That trustee has various powers, including the power to sell your assets to pay down your debts (discussed further below).
You must also report any changes in your financial circumstances to your trustee such as, for example, if you obtain new assets (including if you win money or prizes) or if your income has changed.
In addition, you must also obtain your trustee’s permission before travelling overseas (your trustee can ask you to hand over your passport).
2. Assets may be sold to pay debts
Although creditors cannot make demands on you to repay their debts when you are bankrupt, that does not mean you no longer have to pay those debts. If you have assets, a trustee can sell those assets to reduce or pay out those debts. The assets a trustee may sell include your house or car (depending upon its value).
3. It may affect your employment
Some trades or professions have certain eligibility requirements or conditions in order to work in that trade or profession – being a declared bankrupt may affect your eligibility to work in those industries. For example, a bankrupt cannot be a director of, or manage, a company without the Court’s permission. Other trades or professions which may have conditions or restrictions include lawyers, accountants, real estate agents, builders, plumbers and electricians.
4. Credit rating
The Australian Financial Security Authority maintains a register called the National Personal Insolvency Index (NPII) and records information relating to insolvency cases which can be searched by the public. Once declared bankrupt, your name will permanently appear on the NPII.
Credit reporting agencies usually include information obtained from the NPII in their credit reports on individuals for 7 years. Credit providers, such as banks and utility companies, often use these credit reports when deciding whether to lend you money. As such, bankruptcy can make it very difficult for you to obtain loans or credit in the future, even after your bankruptcy ends.
Seek legal advice
Given the serious consequences of bankruptcy, you should seek legal advice immediately after being served with a bankruptcy notice to discuss your available options, which may include applying to a court to have the bankruptcy notice set aside.