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Bankruptcy Pros and Cons

When it comes to clearing your debts, bankruptcy should be seen as a great last resort rather than an easy first option.  The reason bankruptcy should be seen as a last resort is that it can impose quite limiting constraints on your life that other forms of debt help do not.

So what are the Pros and Cons of doing a bankruptcy?

Bankruptcy Pros

  • All eligible debts are cleared at the end of the bankruptcy period
  • Debt Collection and Legal Action Ceases
  • Stops the seizure of goods by sheriffs
  • Wage garnishees stop
  • There is property protected by bankruptcy –
    • normal household items (clothes, furniture, appliances)
    • Tools of trade, up to a certain threshold
    • Superannuation
    • Personal Injury Compensation
    • A vehicle if under finance, or up to a certain value
    • Items of a sentimental value (medals, trophies, your wedding ring)
  • Income to a certain threshold is protected
  • You can operate a business, as a sole trader
  • Bankruptcy is removed from your credit history after 5 years
  • Creditor have no choice about accepting the Bankruptcy
  • Creditors can’t change their mind at a later date

Bankruptcy Cons

  • The bankruptcy will last for 3 years
  • The bankruptcy will be recorded on your credit history for 5 years (or longer)
  • Your bankruptcy period could be extended if you do not comply with your Trustee
  • You will find it difficult to get to obtain finance while the bankruptcy is on your credit history
  • The bankruptcy will be recorded on the NPII (National Personal Insolvency Index) forever
  • Non-eligible debt will not be cleared
    • Secured Loans (Car Loans and Mortgages)
    • Fines and Penalties
    • HELP/HECS debt
    • Fraudulent Centrelink Debt
  • Non-protected property may be seized and sold by your Trustee
  • Inheritance received during the bankruptcy period may be distributed to your creditors
  • Travel overseas for the bankruptcy period is at the discretion of the Trustee
  • Some property agents will ask about bankruptcy
  • Certain professions will be restricted if you become bankrupt
  • Certain employment contracts will have an insolvency clause in them
  • You will need to resign as a company director

Bankruptcy thresholds can be found on www.afsa.gov.au and are updated periodically.