It’s hard to miss all the news stories at the moment about companies declaring bankruptcy. But what is bankruptcy, and more importantly, how do you survive bankruptcy in Australia?
Bankruptcy is a formal legal process where you’re declared unable to pay your debts. When you become bankrupt, you don’t have to pay most of the debts you owe. Bankruptcy provides relief from the stress of debt and the harassment from debt collectors, allowing you to make a fresh start.
If you find yourself in a position where you feel you are unable to pay your debts and cannot come to a satisfactory arrangement with your creditors, bankruptcy could be your best option. However, bankruptcy understandably has a bad reputation and can seem like a horrifying prospect. It certainly has its disadvantages and should never be considered as a first option if you can otherwise pay off your debts. However, it can offer you a chance to start over.
While bankruptcy can free you from some of your debts, it can have a significant impact on your financial situation for several years. However, most people that declare bankruptcy usually find themselves stronger and more financially stable on the other side of it.
One of the many causes of bankruptcy is, quite simply, poor financial management. So, while bankruptcy is a horrible situation to get into, it also provides an excellent opportunity to reflect on what it was that go you into trouble in the first place, develop good management habits and streamline your finances, so you can start afresh and never find yourself in a tough financial situation again.
In this article, I will cover five of the things you can do while you’re bankrupt to help you survive the bankruptcy period, improve your long-term financial situation, and come out of it stronger than ever before.
1- Sign up to a rental before you declare bankruptcy
Depending on your situation, if you’re living in a home you own when you file for bankruptcy, your trustee may seize it to sell, so you’ll have to find a rental home for your accommodation. However, be aware that it may be difficult to be approved for a rental property once you’re made bankrupt as few landlords would be willing to rent out their houses to you with your bankruptcy record. And if you even find one, you are more likely to be charged a higher rental because of the default risk taken by the landlord for renting out their house to you.
If you are living in a mortgaged house and haven’t yet filed for bankruptcy, you should consider renting a house as soon as possible to avoid the trouble of finding accommodation after you become bankrupt and to avoid paying a premium in rent.
2- Save your income
Bankruptcy normally lasts 3 years and 1 day. While you’re bankrupt there is no limit to the amount of income that you can earn and there is no limit to the amount of money you can save. However, if your after-tax earnings exceed the indexed statutory limits set by the Australian Financial Security Authority (AFSA), you may have to make income contributions. Income contributions are compulsory payments from your income. If your income exceeds the threshold set by AFSA for your specific circumstance half of any income you get over this amount goes towards repaying creditors.
The threshold depends on how many dependents you have and is updated twice a year to reflect changes in the change in Consumer Price Index (CPI) or the base pension rate, so I recommend you check the AFSA website if you think you might be affected.
At the time of writing this blog, the base income threshold amount for a person with no dependents was $61,789.00. Therefore, if you have no dependents and your after-tax annual earnings are $75,000, you’ll have to contribute 50% of the amount exceeding the actual income threshold, ($75,000 – $61,789) = $13,211 x 50% = $6,605.50 to your bankrupt estate.
In this example you’d still be allowed to keep $68,394.50 to meet your day-to-day expenses. But, given your circumstances, the best thing you can do with your spare income is to save up a portion of it each month for emergencies and peace of mind, particularly as you will struggle to get credit while you are bankrupt.
What is more, the money you save in the bank account during bankruptcy is available for you to spend once discharged from bankruptcy. This means, if you are ready to turn your life around after bankruptcy it will be available to you to use to meet your money goals, like buying a new home.
3- Don’t buy unprotected assets while you’re bankrupt
The purpose of being able to keep most of your income while you are bankruptcy is to give you enough money to buy essentials, rather than spending your money on “unnecessary” items. If you buy unprotected assets, such as shares, jewelry, valuable items, vehicles (valued up to a certain limit), etc., during your bankruptcy, the trustee can seize them and sell them to pay back your creditors. So, you should either save the money in a bank account or spend it on buying protected assets, such as daily-use household items, and life insurance policies, which your trustee won’t seize. This will allow you to survive your bankruptcy period without facing too much difficulty.
4- Make a budget and stick to it
If you don’t have one already, I encourage you to create a budget to account for each dollar you earn and spend. A budget allows you to allocate money to different types of expenses and helps you to achieve your savings targets. You can use a budgeting and expense recording app for creating a budget and tracking your expenditures. Once you continue to track your spending for a month, you can draw valuable insights from your recorded data that will highlight the areas where you can cut your expenses.
Successfully getting out of bankruptcy requires you to maintain strict financial discipline, which is only possible if you make a budget and stick to it. These small changes in your financial behavior can have a long-lasting and significant impact on your future financial wellbeing.
5- Work on improving your credit score
While bankruptcy lasts for three years and one day, it remains on your credit report for five years. And while bankruptcy is removed from your credit report after five years, your name will appear on the National Personal Insolvency Index (NPII) indefinitely.
Your chance of getting approved for a new credit after bankruptcy can be low, given the poor impact it has on your credit report for the first few years. However, below are some tips that can help you improve your credit score, even while you’re declared bankrupt:
- Make consistent, on-time payments – for instance pay your rent, power, phone and other periodic payments on time, every time.
- Keep saving money – consistently increasing your savings will demonstrate to your bank that you are responsible with your money and provide a safety net to pay for any unexpected costs like car repairs to held avoid incurring future debt.
- Don’t have an overdraft balance in your bank account.
- Avoid applying for new loans while you are in bankruptcy or even after the bankruptcy has ended until you have rebuilt your credit score and have a healthy record of saving money. First, even if the bank agrees to loan you money you will likely be required to pay a higher interest rate than normal because of your low credit score. Second, you might struggle to repay it and might fall again into a debt trap. You need to be prepared to fund your needs from your savings and, if you can, delay your big purchases to a later date until you can fund them from your own savings.
- Be patient, rebuilding your credit after bankruptcy doesn’t happen over night but by sticking to responsible money habits you will get there.
- And remember to regularly monitor your credit report for any red flags that may signal errors, identity theft or other issues.
Final Thoughts
After bankruptcy, it is important to reflect on what got you there and take steps to improve your money habits. Bankruptcy gives you the necessary time to organise your finances and make changes so that you don’t fall into such a situation again. Surviving bankruptcy can be difficult, but if you change your financial behavior and follow the tips that I highlighted above, you can turn your situation around and come out of bankruptcy stronger than ever before.
