If you are facing financial difficulties and are contemplating bankruptcy as a potential solution, we’re here to help. Bankruptcy is surrounded by misconceptions, and it’s our goal to provide you with clear, accurate information to guide you toward a decision that’s in your best interest.
To help you understand what bankruptcy really involves, we explain the truth behind 12 popular bankruptcy myths.
Common Misconceptions about Bankruptcy
Myth 1: Having a job means you can’t file for bankruptcy, especially if you’re a high-income earner
Being employed doesn’t automatically disqualify you from filing for bankruptcy. Even if you’re earning a high income, you can still apply for bankruptcy if your debts are unmanageable.
But you may need to contribute some of your income towards your debts if you earn over a certain amount. This is known as ‘Income Contributions’.
The threshold is adjusted each year. As of this writing, the amount you can earn annually after tax without making any contributions to your creditors is $68,768.70. This amount increases with the number of dependents you have. You can check the Australian Financial Security Authority (AFSA) website for the exact numbers. If your after-tax income exceeds these amounts, 50% of the excess is used to repay creditors.
But note that not all income is counted towards the threshold. For instance, child support payments and some types of pensions are excluded. It’s best to ask for expert advice to help you understand the process according to the latest regulations.
Myth 2: There’s a limit to how much you can earn during bankruptcy
This myth is closely related to the misunderstanding we cleared up in the previous section. There is no cap on how much you can earn while bankrupt.
However, as we discussed, if your income exceeds a certain threshold, 50% of your income goes towards repaying your creditors. Just remember that higher income increases the amount you are required to contribute if you’re above the AITA or Actual Income Threshold Amount.
Myth 3: Your wages will be garnished
Wage garnishment due to bankruptcy is generally a last resort and only happens if you don’t make required income contributions on your own. In fact, if you have existing garnishee orders, declaring bankruptcy often stops garnishments on most of your debts unless it’s from the Australian Taxation Office (ATO).
Myth 4: Filing for bankruptcy means you’ll lose all your assets
Another common misconception about bankruptcy is that declaring bankruptcy results in the loss of all your assets. The reality is when you declare bankruptcy, only some of your assets will be taken or sold. Here’s an overview:
Cash or money in bank accounts
When you go bankrupt, any cash you have in your bank accounts or other financial accounts on the day you declare bankruptcy is usually given to the trustee managing your bankruptcy, but you will get enough for modest expenses.
Money received during bankruptcy
Any money you earn after you’ve declared bankruptcy is yours to keep and doesn’t automatically go to the trustee. But, again, if you earn over a certain amount, part of it goes to your creditors.
Certain types of payments are protected, meaning the trustee can’t claim them. This includes:
- income that doesn’t exceed the threshold
- lump sum super payment received after bankruptcy
- compensation for personal injury
- life insurance or endowment payments after bankruptcy
Tools of trade
You can keep the tools you use to earn money if they don’t exceed the limit, which is, as of this writing, set to $4200.
To determine how much your tools are worth, check their current market value, not how much you paid for them. If they’re worth more than the allowed amount, your trustee might sell them to help pay off what you owe.
Most standard home items, such as your furniture and appliances, can stay with you if they are reasonably priced.
While bankruptcy doesn’t prevent you from owning a vehicle, certain conditions apply:
- Your vehicle must not be worth more than a set limit, currently $9,100. To figure out if it’s under this limit, take the loan amount you still owe off the car’s current selling price. For example, if your vehicle could sell for $8,000 and you owe $3,000 on it, then it’s worth $5,000 after the loan. That’s your car’s equity.
- If your vehicle is under finance, you must keep up with the loan repayments. If you fall behind, the secured creditor (like a bank or lender) can repossess and sell the vehicle.
- You must primarily use the vehicle as your means of transport. This includes cars, motorcycles, scooters, trucks, trailers, bicycles, or boats. However, your trustee may sell items like caravans, motorhomes, and campervans, even if their value falls below the equity threshold.
When you go bankrupt, your trustee takes over your part of any property you own. This includes your house, apartment, land, or any business buildings. Your trustee now has the power to sell these properties to help pay off what you owe.
Even if you don’t have any equity, your trustee or the bank can still take action regarding the house. No equity means your home is in mortgage and is ‘underwater’—meaning you owe more on the mortgage than the house’s current value. For example, if the mortgage is $300,000 but the house is only worth $280,000, you’re $20,000 short.
Myth 5: Your debts remain post-bankruptcy
When declared bankrupt, most of your unsecured debts—those not tied to an asset like a house or car—are typically discharged. These are:
- credit and store cards
- unsecured personal loans and payday loans
- gas, electricity, phone and internet bills
- overdrawn bank accounts and unpaid rent
- medical, legal & accounting fees.
This means that once you’ve completed the bankruptcy process, which usually lasts three years and one day, you’re no longer responsible for these debts. But note that these companies may not provide you with their services after bankruptcy.
Other debts, such as the following, are exceptions:
- Court-imposed penalties and fines.
- Child support and alimony obligations.
- Debts incurred through fraud.
- Certain student loans.
Also, there are debts you have to confirm with your creditors if they’re cleared after the process. This includes debts you owe to Centrelink and the Australian Taxation Office, victims of crime debts and toll fines.
If you have secured debts, continue making payments to keep the asset.
Myth 6: Your spouse will be liable for your debts if you declare bankruptcy
Bankruptcy is an individual legal status. Your debts are your own unless your spouse has agreed to share responsibility for them by co-signing or guaranteeing them.
If you have joint debts with your spouse, they will not be protected by your bankruptcy and will become solely responsible for the entire amount of the joint debt.
While we are on this topic, note that your bankruptcy doesn’t affect your spouse’s assets directly. The trustee in bankruptcy will only look at your assets and your share of any jointly owned assets. Your spouse’s separate assets are not at risk unless tied to your debts.
Myth 7: Everyone will know if you declare bankruptcy
Even though bankruptcy is a public matter and your creditors will know about it, most people in your social or professional circles probably won’t find out unless you choose to tell them or they go looking for that information, which is on NPII.
When you declare bankruptcy, your name will appear on the National Personal Insolvency Index (NPII). AFSA keeps this list, and anyone can look at it if they pay a fee. But it’s not common for people to check this list unless they need to know about your financial situation for a specific reason.
So, your friends, neighbours, or boss are unlikely to learn about your bankruptcy unless there’s a reason for them to check the NPII or if your job requires you to report it.
Myth 8: You will be restricted from travelling overseas unless it’s for work
Applying for bankruptcy doesn’t automatically mean you can’t leave the country; it just means you need to get permission from your trustee first, and you have to comply with the provisions, such as:
- Staying within the destination country’s borders as approved by your trustee
- Returning to Australia by the agreed-upon date unless you’ve received an extension from your trustee
- Ensuring that your travel does not interfere with your bankruptcy obligations or ability to repay debts
- Other conditions your trustee has set
Failure to follow can mean penalties or imprisonment.
Myth 9: You will have post-bankruptcy credit challenges
While it’s true that bankruptcy can impact your ability to secure credit, it doesn’t mean you’re completely shut out from borrowing. You can still borrow, but lenders may be more cautious about offering you credit, and the terms may not be as favourable as they were before you were bankrupt. You’ll likely face higher interest rates and may need to provide additional evidence that you can manage the repayments.
After you’re discharged from bankruptcy, which typically occurs three years and one day after you file, the bankruptcy will remain on your credit report for an additional two years.
Then, you can rebuild your credit after bankruptcy by paying bills on time and not overextending yourself with credit.
Myth 10: Bankruptcy is a sign of personal failure
The stigma around bankruptcy often paints it as a mark of personal failure, but this perspective is both outdated and incorrect. There are many factors, often outside of your control, that can lead to bankruptcy, like medical emergencies, job loss, or economic downturns.
What bankruptcy does is provide legal relief to individuals who cannot repay their debts, offering them a chance to reset their financial situation.
Myth 11: Bankruptcy consultation and filing is costly
Applying for bankruptcy is free, meaning you can submit your petition without worrying about upfront filing fees. You also don’t have to pay any costs if you are discharged from bankruptcy without making any payments toward your debts. This can happen when you don’t have sufficient assets or income over the threshold requiring you to make contributions.
If you need assistance with your bankruptcy form or understanding the process, you can seek help from a financial counsellor for free.
Fees apply only when:
- you hire a private trustee or
- the Official Trustee appointed by AFSA sells your assets or recovers your money. You can check the AFSA website for these administration charges.
Myth 12: Bankruptcy is the only solution for debt
Bankruptcy isn’t the only path out of a difficult financial situation; it’s actually just one of several debt solutions available. Other options include debt agreements, personal insolvency agreements, and informal arrangements with creditors.
Each of these alternatives has its own impact on your credit rating, financial situation, and future borrowing capacity. They can also have different implications for your assets and income.
Before deciding on bankruptcy, speak with a financial counsellor who can help you understand all available options. They can assist in assessing your financial situation and guide you towards the most appropriate solution, which may be something other than bankruptcy.
Bankruptcy Help with Debt Negotiators
We understand the weight of financial burdens and the stress they bring into your life. Bankruptcy might seem the only path forward, but it’s a significant step with lasting impacts. That’s why we’re here—to guide you and help you explore every possible alternative. Contact us today.