The pros and cons of declaring bankruptcy in Australia

Filing for bankruptcy is a serious decision, and it is important that you are aware of the pros and cons of declaring bankruptcy before you make it. Understandably, no one wants to consider bankruptcy, as it can have a significant impact on your financial situation for several years. However, most people that file for bankruptcy usually find themselves stronger and more financially stable on the other side of it.

Everyone’s financial and personal circumstances are different. You need to understand what impact bankruptcy will have on your particular situation and be fully informed of your options. So, we recommend you consult with an experienced debt solutions expert before you make any decisions.

Being in debt is hugely stressful. When your debt only seems to increase, living life can become traumatic and frustrating, you want to stop the harassing phone calls from creditors and debt collectors, you can’t sleep at night, your relationships are affected and even everyday shopping like buying groceries can seem overwhelming. To keep yourself from drowning, you could take out more loans or use multiple credit cards, but the harder you try to get out of debt, the deeper you sink, and sometimes if you are only paying off the interest, it can feel like you are trapped.

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.

If you’re struggling with your debts and considering bankruptcy; it’s worth balancing the pros and cons to help decide if it’s the best option for you.

What is bankruptcy?

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.

You can enter into voluntary bankruptcy or it’s possible a third party (someone you owe money to) can make you bankrupt through a court process. Bankruptcy can be initiated by a third party (such as a

creditor, debt collector or solicitor) in Australia when someone is unable to pay debts of $5,000 or more. Bankruptcy usually only affects unsecured debts.

What happens if you declare yourself bankrupt in Australia?

There are a lot of “myths” (lies) out there about bankruptcy that leave people confused or afraid. However, most of these arise from misunderstandings, and sadly, all they do is scare people from getting help to get rid of their debt. Below is a list of the pros and cons of declaring bankruptcy in Australia to help you understand what happens if you declare yourself bankrupt. It is important that your fully understand the pros and cons in order to make an informed decision about whether bankruptcy might be good option for your specific financial and personal circumstances.

The Pros, or Positives, of Bankruptcy

The Cons, or Consequences, of Bankruptcy


Bankruptcy is not a life sentence. The bankruptcy term does end, and you can move on after bankruptcy.


Bankruptcy will permanently cancel most of your debts. This includes credit card debt, paydayloans, personal loans, the shortfall on secureddebt and even personal guarantees, and the listgoes on. However, there are some debts whichthe bankruptcy does not cancel.


  Creditors and debt collectors stop hassling you. Once your bankruptcy has commenced, creditors and debt collectors are unable to continue debt collection court proceedings against you.


Your superannuation paid by your employer is protected. Superannuation paid to you at the correct rate will be protected from the creditors and available for your retirement, or appropriate early withdrawal.


You can save money. There is no limit on the amount you can save during bankruptcy. Your savings are protected provided that they remain in your bank account until you have been discharged from bankruptcy.


Essential assets, such as household furniture and effects, are protected.


Vehicles can be protected. If you have cars and bikes that are valued less than $8,150, then these will be yours to keep and protected in bankruptcy. This amount is regularly adjusted for CPI. If you bought them on under a finance arrangement you must continue to make the loan payments.


Vehicles can be protected. If you have cars and bikes that are valued less than $8,150, then these will be yours to keep and protected in bankruptcy. This amount is regularly adjusted for CPI. If you bought them on under a finance arrangement you must continue to make the loan payments.


Your tools of trade that you use to earn an income are protected. Tools that are used to earn an income and valued less than the threshold amount (currently $3,800) are yours to keep. This amount is regularly adjusted for CPI.


You may be able to keep your house. In most cases, you can stay in your house, and a third party can work out an arrangement with your Trustee to keep the house.


Your income is protected to make sure you have money to live. However, if you are a high-income earner and earn over a certain amount, you may have to pay contributions towards your debts. This is called income contributions.


You can travel overseas while you are bankrupt. You need to get your Trustee’s written permission.


You can be the Director of a Company. You can be the Director of a company if approved by the court.


Bankruptcy usually lasts 3 years and 1 day. Your credit report will be impacted for up to 5 years or 2 years from your discharge, whichever is longer, and your bankruptcy will be publicly listed on the National Personal Insolvency Index indefinitely. This record is maintained by the Australian Financial Security Authority and requires payment of a fee to access.


Some debts still need to be paid. Whilst bankruptcy does cancel most of your debts, there are still others you’re liable to pay like court fees and penalties, HELP/HECS debt and child support. In addition, any debts that are incurred after you are declared bankrupt also have to be paid.


Some property/assets may be used to cover your debts. Valuable assets that are not protected by bankruptcy will be part of the estate administered by your trustee. As well, you are not able to buy assets while you are bankrupt.


Your bank account may be impacted. If you have over a certain amount of cash on hand in your bank account when you are declared bankrupt, it may be used to go towards your debts.


Some industries will not allow people to work in the profession if they are bankrupt. Check your employment contract or make enquiries with your appropriate office to find out what might happen if you become bankrupt.


You cannot be the Trustee of a Self-Managed Superannuation Fund.


Unexpected money is to be paid to the Bankruptcy Trustee. Should you receive a lottery win, gambling win or inheritance while you are bankrupt, it needs to be used to pay your debts.


Restrictions on borrowing and trading. You can only borrow up to a certain amount, accept goods on credit or hire purchase up to a certain value, or offer to supply goods or services up to a certain value without disclosing to the lender or customer that you are an undisclosed bankrupt.


If you breach your bankruptcy obligations your bankruptcy may be extended. There may also be penalties.

The point of this is not to recommend bankruptcy but to reassure you that it doesn’t need to be the disaster that you probably have been told it is. However, declaring bankruptcy is not a process to be undertaken lightly, as there are serious consequences of doing so.

If you’re considering bankruptcy, I suggest you contact us first. Once you have spoken with one of Fix Bad Credit’s Credit and Debt solution experts, we will help you with a no obligation review of your financial situation to identify your options, so you can choose the best option for you.

If bankruptcy is your best option, the friendly team at Fix Bad Credit will not only assist you through the process but be there for you when you come out the other end, to help you get yourself in the best financial shape possible.

The information in this article is general in nature as it has been prepared without taking account of your objectives, financial situation or needs. It should not be relied on as legal advice. We recommend that you consider the impact upon income, assets, employment and inheritances before you go Bankrupt.

B M Peachey

B M Peachey, has over 15 years of experience investing in property and the stock market, in both New Zealand and Australia. She has a post-graduate degree, with qualifications in Finance and Mortgage Broking and in Accounting and Bookkeeping. She is passionate about ensuring people have access to credible, reliable, and easy to understand information to help them get in control of the life they REALLY want to live.

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    Disclaimer: The information in this article is general in nature as it has been prepared without taking account of your specific objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.