Bankruptcy Means Test
Bankruptcy is an accessible and readily available option for people to get out of severe debt. The eligibility criteria is minimal and the application process is as simple as providing the appropriate documents. However the consequences of bankruptcy are severe and it should never be entered into lightly. This bankruptcy means test will not so much help you to determine whether you can enter bankruptcy, but whether you should.
Each situation is unique
Whether or not you should enter bankruptcy is entirely dependent on your circumstances. Some things to consider might include your age, your financial portfolio, whether or not you own property, the severity of your debts, the kind of debt you owe, your occupation, your living arrangements and a number of other circumstances. While Bankruptcy could be the best, or the only option for some people, others might be able to get out of debt using other debt relief methods. To help you narrow things down, we have put together a list of how bankruptcy can effect some of these circumstances.
Money Management isn’t taught in schools so when we move out of home, get a job and earn money, we really only guess what we should do with it. Some people develop a structured, organised routine, budget their finances and get through their financial life unscathed. Others develop unpredictable spending habits and struggle from week to week, with some people just have a run of bad luck and fall into financial difficulties. Debt doesn’t discriminate and hard financial times could hit you in your 20’s just as easily as it could in your 50’s.
Age is certainly something you should take into consideration before you decide to declare bankruptcy. Bankruptcy has serious, long-term effects on your credit file which can make it difficult to borrow money and apply for lines of credit in the future. If you are young, you might want to avoid bankruptcy so you can recover your credit rating faster, allowing you better opportunities to get a car loan, a loan for a holiday and a mortgage. Bankruptcy generally lasts for 3 years, but it is marked on your credit file for 7 years. Your name is also listed on the national personal insolvency index for life. Whereas a Debt Agreement will generally remain on your credit file for 5 years and your name is removed from the National Personal Insolvency Index once the agreement has been repaid.
However if you are closer to retirement, Bankruptcy might make more sense for you. The consequences might not have such a large impact on your life. But age is not the only factor to take into consideration.
Generally, Bankruptcy won’t impact your employment. In fact, in most cases, you won’t even need to tell your employer about your situation. There are some licensed industries, such as real estate, building and the finance industry which won’t allow a bankrupt person to hold a license. If you are concerned if this might effect you, contact your industry union to find out what effect bankruptcy will have on your position, if any. Bankruptcy also has income thresholds where any dollar earned above this amount will be distributed to your creditors. The base income threshold (if you have no dependents) currently sits at $55,446.30 net per year. For a full list of indexed amounts, visit the Australian Financial Security Authority website.
If you have a mortgage, you might like to do your best to avoid declaring bankruptcy. Declaring bankruptcy is the act of legally declaring to your creditors that you don’t have enough wealth, either in cash or assets to repay what you owe. As such you are put into a position where any wealth you have over a set threshold will be sold and the proceeds will go toward paying back your creditors. As a mortgage is generally secured against the house, the Bankruptcy Trustee will more than likely sell your home to recover some of the money for your creditor. There are certain circumstances where you may be able to keep your family home.
For example, where you own your home with your spouse, you may be able to sell your share of the mortgage to your spouse, who will take full responsibility for the mortgage. However, we advise you to speak to a financial expert or consult with a bankruptcy trustee to see if this may be an option for you before going ahead with your bankruptcy.
Declaring Bankruptcy is as easy as filling in the appropriate forms and providing supporting documentation. That being said, the Bankruptcy process can be long, intrusive and difficult to endure. The period of bankruptcy has many restrictions and rules and the consequences last for years after. It should never be entered into lightly. You need to have at least $5000 of debt to declare bankruptcy, but if you owe less than $10,000 to only 2 or 3 creditors, there are a range of other options for you to get out of debt without having an impact on your credit file. You could try budgeting, consolidating your credit cards to a card with an interest free period, or using the equity in your home to refinance and pay off your debt.
Even if your debts are in excess of $10,000, you could consider:
- entering hardship arrangements with each of your creditors to relieve the stress for a few months,
- entering an informal debt agreement
- entering a Part 9 Debt Agreement. A Part 9 Debt Agreement will still impact your credit file, but the consequences are not as severe as bankruptcy.
You also need to be in genuine financial hardship to declare bankruptcy. You need to be able to prove you have absolutely no way to repay your debts and not just choosing not to. If your Trustee believes you are capable of repaying your debts, they will reject your bankruptcy application.
How to proceed
If you still aren’t sure about bankruptcy, or if you would like to explore your options, call Debt Rescue on 1800 00 3328. Our experienced Case Managers will talk to you about your situation and explain all the options available to you. This will give you the chance to ask any questions specific to your circumstances and wrap your head around the consequences and how they effect you. Or you can fill in the form below and we’ll get back to you with some options.