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THE STIGMA OF BANKRUPTCY

For many years, going bankrupt has had a horrible social stigma attached to it. People who went bankrupt were shunned like lepers and it was embarrassing for others to be seen in their presence. Today, bankruptcy is more of a private affair, as the social environment has changed and news of your bankruptcy no gets passed around quickly on the street. Nevertheless, the stigma is still unavoidable when your colleagues become informed.

There are many negative connotations that are placed upon a bankruptee and their way of life. The most obvious would be the assumption that they can not handle their finances properly, whereas this is not always the case. Many bankruptcies are caused by illness or other reasons unrelated to the handling of money.

The stigma is most prevalent in the business community. Since business involvement is linked to financial success, a bankruptee is considered a failure in business circles and someone to be avoided. If another businessman were to be involved with a bankruptee, others would be reluctant to deal with them upon gaining this knowledge.

It is an almost childish association that our society continues to invoke. Just like the school days where if you were friends with the person with bad body odour, it was naturally assumed that you suffered from the same affliction. Today, if you are associated with the ex-bankrupt, it is also assumed that you are also a failure in financial matters.

BANKRUPTCY EFFECTS

Bankruptcy isn’t just a magic formula that removes all monetary liabilities. There are repercussions in making the decision, of which many will be ongoing for a number of years after the minimum 3 year bankruptcy period has ended. Some of the issues facing bankruptees are:

• A personal income cap threshold will be enforced during bankruptcy; of which the bankruptcy trustee will be entitled to claim a 50% portion of any income earned above the cap. The threshold is set relatively high; ensuring the majority of people will never be affected. It is also adjusted bi-annually to allow for inflation, as well as being increased if the bankruptee has dependants.

• Loans will be virtually impossible to secure whilst undischarged from bankruptcy. After being discharged, the bankruptcy will remain on the persons credit file for a further 4 years. During this period, most banks will outright reject applications for unsecured lending products such as personal loans and credit cards. Loans backed by security such as cars and houses will still be possible, although the lenders may impose stricter approval conditions such as higher loan deposits.

• Overseas travel could be affected. Although the bankruptcy does not strictly enforce a ban on travelling overseas, it does have restrictions, and permission needs to be sought from the bankruptcy trustee before travelling. In some cases, the trustee will request you to hand in your passport when becoming bankrupt.

• Major assets will be lost and any assets aquired during the bankruptcy period may face the same fate. Any investment properties, shares, boats and other investments will be sold to pay back your creditors. If you have an expensive car, that will disappear too, as only cheap cars are free from the asset sale. Your house of residence may be sold depending on how much equity it contains and whether it is jointly owned. However, superannuation can not be touched by the trustee unless you have used it to stash your assets pre-bankruptcy.

• Bankruptcy law requires you to reveal that you are presently an undischarged bankrupt to all business partners. If you operate under a trading name, you must disclose this fact to all parties that you have financial dealings with. The ATO must also be advised so they can separate pre-bankruptcy GST from the post-bankruptcy amounts.

• Future employment opportunities will be limited, as a large number of jobs require licences; even for simple roles such as car salesmen or security guards. Being an undischarged bankrupt will prevent you obtaining most licences. Any jobs involving handling of money will be difficult to obtain, and you will also be prevented from being a director of a company without special court approval.

• Everyday home comforts will be more difficult to secure. To get basic utilities such as water, power and the telephone connected at your residence, you may be required to pay an upfront bond. Insurance may also be hard to get or renew.

• Your details will remain on the public record forever and some of your information will be available to be searched by the general public. Whilst bankrupt, you will have to obtain permission from the courts to hold certain public positions. Additionally, you will be unable to continue most legal actions or take them while being an undischarged bankrupt.

RISING FROM THE ASHES

After biding your time through the bankruptcy period, it is clear there are still lingering effects after being discharged. Fortunately, you are not branded with a mark on your forehead to advise the public that you have previously been bankrupt; although there may be internal scars that will never heal. But does a bankruptcy mean that your dreams of being a financial success are gone forever?

The bankruptcy stigma may be hard to shake, but there have been a number of people who have managed to become financially successful after being bankrupt. We only need to consider their examples as what can be achieved after bankruptcy as proof that it is certainly possible to escape the stigma and become a success.

Donald Trump is one of the more high profile ex-bankrupts to have rebuilt his empire. Like many other businessmen, he has used his misfortune as a learning experience and taken lessons from it, rather than sulking about for the rest of his life.

Even the notorious Alan Bond has recovered from his financial troubles, and in 2008 was named in Business Review Weekly’s Rich 200 list, with an estimated wealth of $265 Million. BRW has stated that Bond’s fortune estimate was ‘conservative’, so it has the potential to rise even further in the 2009 list figures.

Trump and Bond were both successful businessmen before their bankruptcy, so they had the knowledge and contacts to rebuild their empires after being discharged. But, there are also many individuals who have made their fortune only after finding failure first.

Walt Disney is a classic example. After losing $15,000 of investor’s funds in his first animation company, he went bankrupt in 1923. Although unlike Bond, Disney didn’t hide behind the bankruptcy forever and went on to repay his investors after hitting jackpot of success with Mickey Mouse.

Individuals who have fallen hard on financial difficulties shouldn’t despair over a potential bankruptcy. They should gain inspiration from the stories of people who have risen from ashes and found success in life.

TOUGH TIMES

The global financial crisis has put numerous Australians under extreme financial strain. People are losing their jobs, getting lower working hours and receiving pay cuts. Business owners are seeing their profits shrink as customers and sales decrease. Overall, most people are now having to get by on less income. They can no longer maintain the same lifestyle and afford the same expenditure.

The people under the most pressure are the ‘debt junkies’. This is a term coined to describe people who are addicted to using credit to fuel their Hollywood lifestyle and material desires. Debt junkies are known for their ‘I want it now’ attitude and are constantly living above their means, with expenditure exceeding income.

When you are spending more money than you earn, you naturally get further and further into debt just to survive. A drop in income can have disastrous consequences and lead to the inevitable feeling of the world crashing down upon you. The inevitable has finally caught up with the debt junkies and the moves they make today will define their future.

Unfortunately, financial pressure does not limit itself to the debt junkies. There are a number of other groups who are presently experiencing problems. People with very low levels of debt, but are out of work for an extending period of time also fit the bill. Of course they prioritise spending on the essentials such as rent and food, often leaving personal debts unpaid so they can put food on the table.

Businesses too, are not immune to cash-flow difficulties. Rent and supplier payments take precedence over lending expenses. Often businesses may attempt to renegotiate their debt arrangements, but are met with stern resistance from the lenders, as the lenders are also experiencing financial hardship.

THE BANKRUPTCY SITUATION

When the creditors being on their backs are too much to handle, many Australians turn to bankruptcy as a solution. This current financial quarter could see the most personal bankruptcies in history. The first 3 months of 2009 saw 7,164 personal bankruptcies, which fell just 5 short of the record amount of 7,169 recorded in June 2001.

Whilst the economic situation is partially attributable to these figures, another factor is the increase in Debt Mediator firms. The competition in this market segment is hot, with an increasing number of companies looking to profit from the financial misfortune of others. The Reserve Bank has recently reduced interest rates to weather the storm, so we are yet to see the full impact of the global financial crisis and ensuing bankruptcy levels.

Debt Mediators receive a fee for each bankruptcy application they process, so they have a vested interest to promote the bankruptcy cause and advise that it is an acceptable solution to the public’s financial dilemmas. The public have been easy prey in this area, with an astounding 80% of all bankruptcies being personal and just 20% business related.

Statistically, half of bankruptees owe less than $20,000, with a large number of these for just a few thousand dollars. These are not significant amounts that would cause severe financial hardship and undoubtedly proves the point that bankruptcy is being promoted as the best option to solve debt problems, when in fact it is not always the case.

IS BANKRUPTCY THE ONLY SOLUTION?

When money is low and life gets too tough, do you throw in the towel or keep on persevering? This is the dilemma facing thousands of Australians at present. Bankruptcy is always a word on the tip of the tongue of a struggler, but of course there must be another way. So what are the options for an Australian who can no longer make ends meet?

Surprisingly, there are a number of reasonable alternatives before rushing into bankruptcy. Lenders are always willing to enter into debt agreements, rather than force the borrowers into bankruptcy. Quite often bankruptcy will mean that the lender receives nothing in return, as the borrower does not have any assets of reasonable value; hence their willingness to enter into arrangements, even for a small regular payment.

• 3 month no payment clause – Often unheard of and definitely unpromoted is the fact that under Australian law, loan contracts must contain a clause where the borrower can delay payments on their loan. The payments can be delayed, without interest, for a period of up to 3 months. Simply invoking this clause could save many Australians from financial heartache.

• Debt capping through Baycorp lodgement - If a borrower does not care about the state of their credit rating, they have another option up their sleeve to help reduce their payments. If they do not make any loan payments for 3 months, the debt will be lodged with Baycorp Advantage. After lodgement, the debt is set at a fixed value and can no longer increase from interest charges or late payment fees. This is a valuable option that is even promoted by the lenders in some instances.

• Debt agreement through Debt Mediators - Apart from the bankruptcy itself, there are other arrangements, such as debt agreement and personal insolvency agreements, which can be organised through debt mediators. Like the Baycorp lodgement option listed above, debt agreements have the benefit of fixing the debt value. Often the value will be set at a small percentage of the total debt, allowing a borrower to pay back just a portion of their debt whilst escaping bankruptcy.

• Loan Refinancing - For old loans, the borrower may be able to have them refinanced. For example, in the case of a five year car loan that has just two years worth of repayments remaining, it may be possible to refinance the loan over a five year period again. The benefit of this option is a substantial reduction in the minimum monthly payments, with two years of loan payments being spread over five years.

• Negotiating with the lenders for reduced payments - Under Australian law, the creditors have a duty of care obligation to ensure that they cater the debt repayments to the needs of borrowers experiencing financial hardship. A simple phone call or letter to the lender requesting that payments are reduced for a period of time until you get back on your feet, should be sufficient in the approval of a temporary payment reduction.

Australians have numerous alternatives to bankruptcy at their disposal, but for many people, a change of mindset is required to embrace these alternatives. The best option is to always discuss any financial difficulties with the lenders before considering other options such as bankruptcy.