We are all open to possible problems with bankruptcy. Given the current problems with professional indemnity insurance, many professionals are asking what the implications are if a problem occurs with their professional indemnity insurance and they have to become bankrupt.

Anyone who runs a business, or is highly geared, or has credit card problems and so forth may become bankrupt. Below are answers to three commonly asked questions in relation to bankruptcy.

To what extent would my spouse's assets be caught in the event that I have to become bankrupt?

The spouse's assets will not be caught by your bankruptcy provided:
• the spouse is not a partner in your business;
• the spouse has not guaranteed your debts;
• the spouse's assets have not been encumbered to secure your debts; and
• the spouse's assets were legitimately acquired by the spouse and were not transferred to the spouse by you for the purpose of defeating your creditors.

To what extent is my superannuation safe in the event that I have to become bankrupt?

The Bankruptcy Act provides that a Bankrupt can retain:

• policies of life assurance or endowment assurance in respect of the life of the bankrupt or the spouse of the bankrupt; and
• funds in a regulated superannuation fund, an approved deposit fund or an exempt public sector superannuation scheme; and
• funds in a retirement savings account.
  provided that the total value of the above three (3) items does not exceed Bankrupt's Pension Reasonable Benefits Limit.

It should be noted that proceeds from the above three (3) categories that are received by a person prior to bankruptcy would be lost to the creditors of the bankrupt estate.

However, proceeds received on or after the date of bankruptcy would be retained by the bankrupt subject to the Reasonable Benefits Limit test mentioned above.

What would happen if my spouse died and left me her assets prior to my bankruptcy?

In the event that a person receives an inheritance prior to or during the three (3) years of bankruptcy, then same would vest with the Trustee for the benefit of the bankrupt's creditors.

To avoid this scenario, legal advice should be sought in regard to the spouse creating a Trust in his or her Will to ensure that any inheritance would not vest on the person who has the bankruptcy potential.

Debt and bankruptcy

Bankruptcy is an end point to insoluble financial difficulties and to a failure to meet outstanding debts of creditors. It is a formal legal process that seeks to balance the rights and obligations of both creditors and the bankrupt. If you are declared bankrupt it can have significant ramifications on your financial well-being, control over your financial affairs and your future financial creditability. If possible, it is better to reach some form of arrangement with your creditors.

How you can become bankrupt

There are two ways you can become bankrupt:

• First, you can declare yourself bankrupt if you owe money to another person, called the creditor. To declare yourself bankrupt you will need to complete a number of forms available from the Insolvency and Trustee Service Australia, known as ITSA. Its telephone number is 02 8233 7800.
• Second, a creditor owed more than $2,000 may take action to make you bankrupt. Once the creditor has obtained a judgment against you in any court, the creditor can serve you with a Bankruptcy Notice which requires you to pay the debt within a certain time, usually twenty-one days. If you fail to pay the debt, the creditor can take proceedings in the Federal Court to have you made bankrupt.

If a Bankruptcy Notice is served on you, you should contact the creditor or Martin Bullock Lawyers immediately. You may be able to extend the time to pay the debt or make other arrangements to satisfy the creditor's demands. If you do not act within twenty-one days, you may be made bankrupt even if you have enough assets to cover your debts. Alternatively, if you dispute the debt you should engage a solicitor to help you with your dispute.

You could also consider entering into a formal Debt Agreement with your creditor as an alternative to bankruptcy. Debt Agreements are available to persons with low levels of debt, few assets, and low income. In essence, a Debt Agreement is a formal proposal to creditors by you to deal with your debts. The proposal may provide for any matter relating to your financial affairs, such as payment by instalments, or part payment, or a transfer of property. Creditors have the option to accept or reject your proposal. There is no cost in setting up a Debt Agreement but there may be ongoing administration costs. Assistance and further information regarding the preparation and ongoing costs of a Debt Agreement are available through ITSA.

How will being declared bankrupt affect me?

When you become bankrupt, all of your financial affairs are controlled by a trustee – either a registered trustee or the Official Trustee in Bankruptcy. ITSA will appoint a trustee or approve your choice of a trustee.

When you become bankrupt you lose rights to most of your property. You can keep certain items, including clothing, necessary household furniture, tools of trade worth up to $2,650, a car to the value of $5,200, and other amounts agreed by your creditors. Likewise, most insurance policies and superannuation monies held in an approved fund are also protected.

The trustee can take property from you including houses and land, jewellery, an interest in a Will, any debt owed to you, a car valued over $5,200, and savings. The trustee has very wide powers over your financial affairs including selling any of your property or running your business.

If you dispose of some of your property in order to defeat or defraud a creditor or to give one creditor preference over other creditors, the trustee may be able to take back that property.

You may also have to pay some of your wages to the trustee once your income exceeds a prescribed amount. In addition, any obligation to pay maintenance does continue despite your bankruptcy.

Only your property can be controlled by the trustee. So, for example, where you own a house jointly with a person who is not bankrupt, the trustee takes only your share of the house. The person who is not bankrupt can either buy the trustee's share of the property or join in the sale of the house with the trustee.

If you and a non-bankrupt person hold a joint bank account the trustee can claim the proportion of the account contributed by you.

Are there any advantages to being bankrupt?

There are some possible advantages to being declared bankrupt:

• most of your debts are cleared when you are discharged from bankruptcy;
• your creditors must deal with the trustee and not you;
• you are allowed to keep certain items such as tools of trade and household effects;
• you are allowed to keep a basic income to cover your needs;
• your pensions and benefits cannot be touched.

What are the disadvantages of bankruptcy?

• You lose control of your financial affairs;
• the trustee will decide what property you may keep and what must be sold;
• you will find it more difficult to obtain credit;
• you cannot borrow more than $3,710 without disclosing your bankruptcy to the lender;
• you cannot do certain work – for example, some occupations will not let a bankrupt person hold a licence until a certain period of time has elapsed since discharge from bankruptcy;
• you cannot be a manager or director of a company without court approval;
• you may be required to give your passport to the trustee while you are bankrupt.

How long does bankruptcy last?

Normally, bankruptcy lasts for three years. You can apply to your trustee for a discharge from bankruptcy before that time is up if you meet certain criteria. On the other hand, the period of bankruptcy can be extended under certain circumstances.

Most of your debts are cleared upon your discharge from bankruptcy. However, you will remain liable for some debts including debts to the Department of Social Security (Centrelink), court fines, taxation debts, and child maintenance arrears.

In conclusion, if you are in financial difficulties, you should seek legal and financial advice immediately. There may be steps you can take to arrange your affairs so that you can avoid bankruptcy.

Further information

There are a number of financial counselling services available to advise and assist you:

• The Consumer Credit Legal Centre gives free legal advice on borrowers' rights, consumer credit/debt problems, contracts, repossession, bankruptcy, superannuation and insurance. Call (02) 9212 4111 or from outside of Sydney 1800 247 890.
• The Credit Helpline is a free service for people needing advice on debt and other financial problems. To contact the Credit Helpline call 1800 808 488. To contact Credit Line the organisation behind Credit Helpline call (02) 9951 5544 or 1800 467 941.
• Moneycare is a financial counselling service provided by the Salvation Army. Call (02) 9299 6744.
• Financial Counsellors Association of NSW Inc. is a voluntary organization made up of financial counsellors and credit advocates who provide information and services in relation to financial problems.

If you do have any bankruptcy questions, it is important to speak to a professional who works in that area. Martin Bullock Lawyers have experts in these areas and can assist you with any of your business, commercial or bankruptcy inquiries.