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  • Bankruptcy a last resort but not the end of the world
  • By Garry Shilson-Josling, AAP Economist
  • 14/07/2006 Make a Comment
  • Contributed by: admin ( 61 articles in 2006 )
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Bankruptcy can be a last resort when our finances get out of control, but it need not be the end of the world.

In the past year, 27,269 people sought the shelter of bankruptcy and its cousins - debt agreements and personal insolvency agreements.

Most took that step after personal, rather than business-related financial failures. And most of those were due to unemployment or the excessive use of credit, according to Terry Gallagher, chief executive of Insolvency and Trustee Service Australia (ITSA).

For those in the unenviable position of not being able to meet their obligations, ITSA - which runs Australia's personal insolvency system - would be a useful first stop. Anyone making an enquiry with ITSA is strongly encouraged to see a financial counsellor, Mr Gallagher said. "We give every debtor who makes and enquiry with us a debtor pack."

The pack includes the names of financial counsellors as well as "prescribed information", which debtors must read before filing a debtors petition, the first step in applying to become bankrupt. (The vast majority of bankruptcies - about 90 per cent - are initiated by the debtor.)

The prescribed information is available in a booklet produced by ITSA. "That booklet explains what bankruptcy is, what the consequences of bankruptcy are, what the alternatives are," Mr Gallagher said.

For those on after-tax incomes less than about $55,000, and relatively modest levels of debt and assets (about $73,000), a debt agreement may be a less complicated option.

It involves the debtor making a deal with their creditors, for example to pay off a percentage of the debt or to delay payment, with a vote among creditors supervised by ITSA.

For those on higher incomes or with larger debt and asset levels, a personal insolvency agreement might be possible, although that is more complex and also requires the appointment of a trustee to take control of the debtor's property and business affairs.

Failing that, bankruptcy is an option. The consequences of bankruptcy are not trivial.

For many, the major drawback is the stigma of bankruptcy, although this does not pack the punch it did in years gone by. "There is a stigma, but in today's modern age I have to say that stigma's almost non-existent, and in some circles it's almost a badge of honour - you haven't really tried unless you've been bankrupt at least once," said Mark Robinson partner at chartered accountants and business reconstruction specialists PPB.

The real downside, he said, is that bankrupts are prevented from borrowing, from being a director of a company and from engaging in some professional activities, including chartered accountancy or some aspects law.

The standard period of bankruptcy is three years, during which a trustee may sell off assets to pay debts and decide how much income will be diverted into additional repayments of debt.

But there is an upside. "I think the thing to remember is that bankruptcy is there for the benefit of the debtor not for the creditor." "It is there for protection against the creditors, but also to give the debtor an opportunity to start again once they've served their time in bankruptcy," Mr Robinson said.


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