According to statistics from the Australian Financial Security Authority, the number of debtors who entered a personal insolvency in the ACT rose 26.9% in the March quarter (compared to the December quarter 2016). The main contributor to the increase was Belconnen, with the biggest rise in new debtors, followed closely by Gungahlin.
The number of debtors who entered a business related personal insolvency in the ACT rose 84.6% in the March quarter, compared to the December quarter 2016. Again, the biggest contributors were Belconnen and Gungahlin.
Bankruptcy is a scary proposition for many people, and from the moment we’re old enough to understand how money works, we’re warned about the dire consequences of failing to pay bills or run a profitable business.
But is it really all doom and gloom? And what happens if you get to a stage where you’re backed so far into a financial corner that filing for bankruptcy is the only way out?
Frank Lo Pilato, Managing Partner at RSM Canberra and head of Restructuring and Recovery, sheds some light on what happens during bankruptcy.
Bankruptcy for individuals, sole traders and partnerships
Otherwise known as personal insolvency, going bankrupt as an individual or sole trader means that you are personally liable for the debt, and almost any asset you own can be seized in an effort to repay it.
“It happens,” says Frank. “People run up a lot of debt through over-spending and then lose their job and can’t make repayments. Interest gets compounded, the debt gets worse and they find themselves in a distressing situation.
For sole traders, they may be running a business with not enough working capital to support them, paying for things on credit cards, and the debt builds up. Tax time comes and there’s not enough to pay the tax bill.
If there’s no way out, you can choose to go into voluntary insolvency, or a creditor can force you into insolvency with a debt of $5000 or more.
As an individual, the majority of your assets are at risk. You’re able to keep a motor vehicle up to the value of $7700, plus your furniture and personal effects, money in super and tools of trade.
If you own your home with your partner, they can only take 50% (your share).
Once everything is sold, the funds are placed in a trustee account and distributed based on creditor’s claims.
Bankruptcy lasts for a period of 3 years, though it can prevent you from obtaining credit for many years after, depending on how well you strategise your recovery. An individual who goes bankrupt cannot be a director during those 3 years.”
Bankruptcy for companies
When a company goes into liquidation, the individuals behind the company do not go bankrupt unless they have signed personal guarantees on loans or leases for the business.
“What’s at risk is all company assets, cash, stocks, equipment, invoice owings and any investor funds,” says Frank. “All can be seized to realise benefits for unsecured creditors and employee entitlements.
The directors lose full control over the insolvent company, but it does not prevent them from being a director of another company. Companies do not often go bankrupt for duplicitous reasons – it’s usually the result of mismanaged funds or changes in economic climate outside of their control. Traditional brick and mortar businesses are suffering a lot these days, due to disruption caused by the online world.
For an individual to be penalised for the bankruptcy of a company would require a pattern of poor, almost fraudulent, behaviour.”
Frank’s best advice for avoiding bankruptcy:
- Live within your means
- Build your business on a strong foundation by structuring it properly with your lawyer or accountant
- Don’t underquote your services
- Avoid exposing all of your assets at once
- If you’re trading at a loss, more money is not always the answer. Before you add fuel to the fire, sit down with your accountant and work out a plan that ultimately helps you make more money, rather than accumulating more debt.
And if you have to go bankrupt?
“Get in a rental property before you go bankrupt. Landlords get nervous if people go bankrupt, and even though they can’t legally deny you, there can be an unconscious bias.
Then let the dust settle. Bankruptcy puts you back at ground zero: no debts, no assets.
You can rebuild, and with a solid income and proof of savings across a 3 year period, it’s possible to start improving your credit rating. Just give yourself time, and have an achievable recovery plan.”
For more advice on bankruptcy, restructuring and recovery, contact Frank Pilato on 6217 0300 or visit RSM.
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