Bankruptcy & Financial Difficulties
Bankruptcy is a legal process where you’re declared unable to pay your debts. You can be released from paying your debts and allowed to make a fresh start. The bankruptcy period usually lasts for three years. However, it’s not as good or simple as it may sound. Bankruptcy has many ramifications, including putting limitations on you and your business. Before you decide bankruptcy is your only option, read this information first. If you want to go ahead or you’re unsure, get in touch with our bankruptcy specialists at Vault who can guide you through the process and make sure you’re completely informed.
Limitations Of Bankruptcy
After you’ve declared bankruptcy, you may not be allowed to earn over a threshold set by the Australian Financial Security Authority (AFSA). This threshold can increase depending how many dependents you support. If you do earn over the threshold while you’re bankrupt, the trustee assigned to your case will distribute the income among your creditors.
While you’re bankrupt, there’s a limit on the value of the assets you can own. You can keep most of your household items and goods. However, your trustee can sell your jewelry, antiques and art, and distribute the money to your creditors. You can keep your car and tools only for work and only if their value is less than the AFSA threshold.
Owning A Home
When you declare bankruptcy, your trustee will sell any property you own and distribute the money among your creditors. This includes shares in property. If your home loan was secured, the creditor who secured it can repossess your house.
You can apply for a loan or credit while you’re bankrupt, but you’re not allowed to borrow more than $5398. Lenders will usually view your bankruptcy as too high a risk, but you can face significant penalties if you don’t disclose your situation to them.
You need permission from the court if you wish to travel overseas during your bankruptcy.
Protecting Your Assets Against Bankruptcy
Due to the risks of business and losing everything in bankruptcy, clients often ask our Vault lawyers and accountants how to protect their assets. The answer is great asset planning.
You should consider asset planning particularly if you:
- are a company director
- are a sole trader or in a business partnership
- provide professional advice or services, such as accountants, lawyers and doctors
- engage in activities with personal financial risk, such as guaranteeing other people’s debts.
However, many asset planning structures have limitations and there are no guarantees that any structure will give you the desired protection. Below we’ll examine common asset planning structures and how effectively they protect assets from bankruptcy trustees and liquidators.
Example 1: Transfer Between Spouses
A husband and wife jointly own their home and are joint borrowers on the mortgage. They contribute equally to mortgage repayments and household expenses. The husband needs a bank loan to start a business. The bank requires him to personally guarantee an overdraft. The family accountant advises the husband to transfer his interest in the family home to his wife for ‘natural love and affection’. This is basically a gift. The accountant says putting the home solely in the wife’s name will protect it if the business fails and the husband declares bankrupt. Is the accountant correct? The answer depends several factors.
Bankruptcy – Clawback Provisions
If the husband goes bankrupt, the bankruptcy trustee can actually set aside some pre-bankruptcy transactions, depending on when they occurred. This table shows the time periods before bankruptcy when some transactions may be at risk.
|Period before bankruptcy commences||Transaction by person who then becomes bankrupt|
|2 years||Transfer of property to an unrelated party for less than market value|
|4 years||Transfer of property to a related party for less than market value|
|5 years||Transfer of property to a related party for less than market value, if the transferer was insolvent in the fifth year before bankruptcy|
|Any time||Transfer of property specifically to defeat creditors|
In our example, if the husband transfers the home to his wife three years before declaring bankruptcy, the trustee can sue his wife and require her to transfer a half-interest in the home to the trustee. The wife has no defence.
Example 2: Assets Owned By Spouse
In our first example, an asset is owned by both spouses and transferred to one of them. Another common marital arrangement is for only one spouse to ‘purchase’ any assets – usually the one less likely to face bankruptcy or risk. Both spouses decide which property to purchase, and both make financial and non-financial contributions to the purchase. Both spouses will live in the property as their matrimonial home. Will this structure be safe if the spouse who doesn’t own the property goes bankrupt?
Bankruptcy – Matrimonial Assets
While having the non-risk spouse own the assets does provide some protection, it doesn’t guarantee that a bankruptcy trustee won’t try to claim those assets. When two spouses buy a matrimonial home and each pays part of the purchase price – even if they register the property in one name only – it does indicate that they intend to own the property jointly. How much each person pays towards the purchase price is irrelevant.
This is called the ‘inference of joint ownership’. Parties can rebut this with evidence of the actual intention of the parties at the time of purchase. Inference of joint ownership can apply in any committed relationship, including de facto and same-sex relationships. It can also apply to any property purchased during the relationship, not necessarily the ‘matrimonial home’. And it allows a bankruptcy trustee to claim an interest in a property registered only in the non-bankrupt spouse’s name. They will claim that the matrimonial home is a joint asset of the marriage and they are entitled to a half-share of this asset.
Getting Professional Help
So, as you can see, it’s not a straightforward task to protect your assets from a bankruptcy trustee or lawyer. Our bankruptcy and asset planning experts are very knowledgeable about the law and can advise you of the advantages and pitfalls of every option. If you need asset planning or are considering bankruptcy, make sure you get professional help sooner rather than later. The more information you have, the better.