Bankruptcy from both sides of the fence
No one wants to go bankrupt and no one wants their debtors not to pay them. However the 'Big B' is something most business people will have to deal with from one side of the fence or the other.
What do all these famous people have in common: Walt Disney, Henry Ford, Sir Henry Parkes, Abraham Lincoln, Oscar Wilde, Mark Twain, Donald Trump, MC Hammer, Meatloaf, and Mimi McPherson?
They were all bankrupt during their careers.
Bankruptcy is the legal process for people who can't pay their debts. Liquidation, administrations and receiverships apply to companies. As trustees, PKF Lawler administers the bankruptcy process in a fair, impartial way so that everyone gets a fair go according to the law.
Starting bankruptcy action is the biggest stick you can use to force a settlement from debtors that aren't paying. You must have a Court judgment for the debt of more than $5,000, then serve a Bankruptcy Notice that in effect says pay up by a certain date or we will ask the court to bankrupt you and all your assets will go to a trustee. Approximately 80% of Bankruptcy Notices result in settlement without proceeding to Court.
The process costs money so you should only proceed if there is a good prospect of a return. An assessment of the debtor's property and income is a good place to start, and our professionals can help with this. If the debtor or their family owns or controls valuable property or has a high income earning ability then bankruptcy action should be considered.
Consequences of Bankruptcy
If someone incurs more debts than they can realistically pay then bankruptcy can be a relief for all involved, ending the financial stress for the debtor and crystalizing the position for the creditor. Bankruptcy laws are designed to be fair and equitable to both sides.
When a debtor is made bankrupt all of their assets and property are assigned to a trustee to sell for their creditors, with some exceptions. They remain bankrupt for three years and during that time they:
- Might pay Compulsory Income Contributions if they earn income of more than $53,280 after tax. Contributions reduce based on the number of dependents they support;
- If they become entitled to property (say under a will or win lotto) it goes to the trustee for creditors;
- Are prohibited from managing a company or trading under a name other than their own;
- Must obtain their trustee's written consent to travel overseas;
- Must disclose that they are bankrupt when incurring credit of more than $5,387.
A bankrupt is entitled to retain items of personal necessity including:
- Clothes and household furniture;
- A vehicle to a value of $7,500;
- Tools of trade to a value of $3,650;
- Genuine superannuation;
- Proceeds from personal injury claims.
If, before going bankrupt, a debtor disposes of valuable property to try to defeat creditors, the trustee has powers to claw that property back for creditors.
The Cup's King faced hurdles
Bart Cummings faced bankruptcy in the early 1990s but did a Part Ten with his creditors, getting them back substantial funds in the process.
His debts arose from buying horses at yearling sales for syndicates which did not pay up. He was then forced to sell the horses after prices had plummeted leaving him with huge losses he couldn't repay.
His creditors accepted a scheme where he agreed to sell most of his personal assets, retain what he needed to keep training and pay in a percentage of his earnings over a five year period. He worked hard for his creditors and had much success in that time, including training Saintly to win the Melbourne Cup and a number of other races. His creditors did much better than they would have if he'd just gone bankrupt.
Later reflecting on his predicament he put it into perspective by saying: "I still had my family and my health and my confidence in the future. I still had racing. All I'd lost was money. And I'd never been in it for the money.'"
What are the alternatives?
Debtors facing bankruptcy may offer their creditors a Personal Insolvency Agreement (PIA) to avoid bankruptcy. Also known as a Part Ten, it is a formal deal between the debtor and all creditors and generally includes an extra benefit over what creditors can expect from bankruptcy. The extra benefit may be money offered up by family or others, a certain or quicker offer where bankruptcy recovery is uncertain and may take three years or more.
A Part 9 Debt Agreement is a similar process available to insolvent debtors who have few assets and relatively few debts but regular income. To qualify for this alternative debts and assets must be less than $106,561 and income less than $79,920 after tax. They can offer a repayment plan to their creditors.
While neither debtors nor creditors want to be caught up in the bankruptcy process, it is a risk of financial life.
PKF Lawler can assist as independent trustees to resolve the best possible situation for both sides - contact Mark Roufeil or any of our Bankruptcy specialists around Australia.