Does Bankruptcy Ruin Your Credit Rating Forever?

What would you do if you incurred a business debt of half a million or more? Some people will get a job and slave away paying it off for 5-15 years because they refuse to “go bankrupt”, whereas others will choose what seems an easier route - they will declare bankruptcy - they will have limits placed on overseas travel and their ability to be the director of any new business, but they will accept this fate with relief knowing a weight has been lifted from their soul. Which person are you? Well it helps to have all the facts before you, before you decide.

Does bankruptcy ruin your credit rating forever? It can feel like that but the facts tell a different story. Despite the awful pall that seems to hang over bankrupts it is restricted to 5 years from the date you become bankrupt or 2 years from the date your bankruptcy ends, whichever is longer. The average bankruptcy lasts around 3 years.?

Bankruptcy Ruined Far More Than A Credit Rating Historically

Debt and property crimes used to be treated far more severely back in history. In the ancient world bankrupts were sold into slavery and tattooed to identify them as slaves in Greece and Rome.?In Elizabethan times bankruptcy was “punishable by public shaming, imprisonment, and, in some cases, death.” (Ali, O’Brien, Ramsay, 2015) The British justice system used to hang people for these crimes or transport them to Australia – which is where we got our original non-indigenous population from here Down Under. Bankruptcy served an important economic purpose in that it provided a release valve for entrepreneurial risk and a chance for rehabilitation for failed investors. Economies cannot grow without capital investment and those willing to risk it. These days debt and bankruptcy whilst not trivialised by any stretch of the imagination are not hanging offences here in the Antipodes. Bankruptcy became a stain on someone’s character after the criminal element was removed from it. For many decades those who were unlucky with money or unwise with their investments were seen as social pariahs and classified as high risk borrowers.?

Bankruptcy Culture & Credit Ratings

Today, however, we live in a throwaway society, where things are not made to last forever. Therefore, fluctuating fortunes are seen in a more benevolent light and there are many success stories built on the back of earlier financial missteps. Abraham Lincoln, the greatest President the United States of America has known, came a cropper in the financial stakes prior to ascending to the highest office in the land. It took Lincoln 17 years to repay his creditors, as bankruptcy (as we know it) didn’t exist back in the 1830s in Missouri. Abraham Lincoln became a lawyer after his failure at business and learning the law probably stemmed from dealing with debt. Walt Disney and PT Barnum were both bankrupts before they made it big in the entertainment realm. Australians Alan Bond, and George Herscu at LJ Hooker, went into bankruptcy and emerged later like Phoenixes rising from the ashes. Their credit ratings did not stop them from getting back on the horse and getting back into the race. Bankruptcy is not a life sentence and 5 years is not forever. Bankruptcy was designed to give people second and third chances at the financial side of their lives. In the same way that unmarried mothers are no longer seen as stigmatised by their status in society there has been an easing up on the public condemnation of bankrupts.?

What Is Bankruptcy?

Does bankruptcy ruin your credit rating forever? Bankruptcy is in actual fact a legal process, which identifies and declares you unable to pay your debts. The Australian Financial Security Authority (AFSA) defines bankruptcy as one of multiple formal options available under the Bankruptcy Act in the management of your debts. Another is gaining a 21 day reprieve from creditors enforcing judgements against you.?

Understanding the law around debts and personal insolvency with the help of a specialist credit reporting lawyer can make a world of difference when you cannot pay your debts for whatever reason. On the 1st January 2021, the personal bankruptcy threshold changed to $10, 000, this was done, in part, to address concerns about the use of bankruptcy proceedings to chase small debts by aggressive creditors. It was previously $5, 000, raised temporarily to $20, 000 during the COVID-19 pandemic.

Too many people go into a spin when faced with overwhelming debt, whereas it is at this time you want someone around you who can keep their wits sharp and who knows the lie of the land in legal terms. Many lenders exploit the ignorance of their troubled customers at this time to make hay whilst the sun shines. Why do you think that so many companies go into the business of lending money to Australians. Financial ignorance is a veritable gold mine in this day and age for those companies lending the money.

Bankruptcy can release you from some of the outstanding debts and pave the way for you to make a fresh start. There are, of course, consequences attached to going bankrupt. These will impact upon your ability to access credit in the immediate to medium term future. It will, also, affect your ability to travel overseas. In addition, it can impact upon your income, business, and employment. Bankruptcy can have consequences for any assets you possess, like your home if you own it. A trustee will be appointed to manage the process and they may liquidate your assets to repay moneys you owe. A vehicle or vehicles up to the value of $8, 150 may be kept by the bankrupt as defined as their personal transport. This value rate is of ‘auction’ value and not that offered by motor dealers.

Bankruptcy & Your Credit Rating

Does bankruptcy ruin your credit rating forever? Your credit score is worked out by credit reporting agencies to give a figure to represent your worthiness as a borrower. It provides an easy to see number to justify the decisions made by lenders in regard to your applications for credit. Your credit rating is all about reputation and trustworthiness when it comes to money and doing business with you in the financial world. Bankruptcy does not have a definitively calculated points impact upon your credit score but it is almost certainly in the negative. Zero scores are not unknown and it is widely thought that these usually involve a bankruptcy or a court judgement on your credit file. The credit bureaus retain bankruptcies on file for 5 years from the date you become bankrupt or 2 years from the date your bankruptcy ends, whichever is longer. It is reported that the average bankruptcy lasts around 3 years. In some circumstances, however, a bankruptcy trustee can apply to extend the period to either 5 or 8 years.?

The stain of bankruptcy on your credit file can and will prevent you from accessing credit. You will more often than not fail in your application for credit. Many lenders make it a matter of course to deny loans to bankrupts. In some cases it is a criminal offence for a bankrupt to even apply for credit. It is wise to do some research and get some legal advice from a credit reporting lawyer to ensure that you are on the right side of the law. Then, even, after it falls off your credit file a prospective lender may consult the National Personal Insolvency Index (NPII) to see if you are a discharged bankrupt and give you the thumbs down on this basis. Bankruptcy is not a lifestyle choice and not something to be entered into lightly. It is not an easy way to shirk your debts but a necessary legal step for some people to take when there is no other. I cannot stress just how important it is to have adequate legal counsel on your side when entering into arrangements of this nature.

Bankruptcy Facts

There were around 12, 450 declared bankruptcies in Australia in the 2019/20 financial year, according to data provided by the AFSA. If you apply for a loan to the value of more than $5, 881 you are legally bound to disclose your status as a bankrupt to the lender or vendor. This includes goods and services on credit to that value or above, or by hire purchase, or by cheque. Similarly, the leasing, hiring, or promising to pay for such goods or services. It can, also, include seeking to obtain credit to that value or above in return for promised goods or services rendered. (Belesky, 2021)

Most unsecured debts, those not tied to an asset or other person, will be released following bankruptcy. These usually include:

? Overdrawn bank accounts

? Unpaid rent

? Credit cards

? Store card

? Power bills

? Phone bills

? Internet bills

? Medical bills

? Legal fees

? Accounting fees

? Pay day loans

Bankruptcy does not release you from all debts:

? Australian Tax Office debts

? Centrelink debts

? Toll fines

? Victims of crime debts

These may not be released in certain instances and confirmation with the creditor is advised on this basis:

? Unliquidated debts

? Court imposed fines and penalties

? Child support payments

? HECS and HELP debts

? Post-bankruptcy debts

These debts are not covered by bankruptcy and must be addressed individually with these creditors.

Secured debts are, of course, secured against property and the creditor is legally entitled to take possession of the property if payments are not fulfilled accordingly. Mortgages, car loans, and hire purchase contracts are examples of these kinds of secured debts. In the case of surrendered goods, where you return items like cars, furniture, and electrical goods the vendor may sell them to recover the debt. A shortfall usually results and you can list this shortfall amount in your bankruptcy.

Joint debts are debts you share with another individual. In the case of one person entering bankruptcy, the remaining person becomes liable for all of the debt. Guarantors on loans, like parents, become liable for the loan if the loanee declares bankruptcy or cannot pay the owed payments.

Overseas debts are, also, included via your Australian bankruptcy. Therefore, you cannot be pursued for that debt in Australia. However, if you travel to the country where that debt was sourced you can still be liable there.

Beware of Sharks

Sharks are a danger and not just in Australian coastal waters. There are financial sharks circling those in debt distress and claiming to be their saviours. Promises of quick credit repair after bankruptcy by debt management companies are pie in the sky lies. There are, according to the Consumer Action Law Centre, more than 1.5 million Australians paying for these kinds of “credit repair services in the 12 months to December 2020.”(Belesky, 2021) These companies are unregulated and often the same lenders involved in credit schemes in the first place. Uninformed Aussies are soft targets for these sharks and getting good legal advice is the only way to protect yourself from further financial exploitation. There is, also, a free National Debt Helpline to call on 1800 007 007 to speak with a financial counsellor about your situation.

Bankruptcy & Employment

Employment can be affected by bankruptcy and you must inform your trustee when changing jobs or your income changes. There is no limit to how much you can earn and save whilst a bankrupt. However if your after tax earnings exceed a certain set amount you may have to make compulsory payments toward your debts. Certain positions cannot be fulfilled by bankrupts like being a company director and managing a company (unless permission is granted by the court). Sole traders can continue to run their businesses but their bankrupt status must be made clear wherever possible. Their full name should be listed on their business name so that prospective clients can search the National Personal Insolvency Index. Licensing bodies in Australian states will not usually allow a bankrupt to hold liquor and gaming licences. Accountants, tax agents, superfund trustees, and lawyers cannot manage trusts if they are bankrupts. Builders and licensed tradesmen can be affected by bankruptcy. Second hand dealers, pawnbrokers, real estate agents, security people, police,?MPs, JPs, investigators, finance brokers, and members of the defence force are all affected by bankruptcy.?

Does bankruptcy ruin your credit rating forever? No, but it does significantly impact your ability to easily access credit at the going rate. Bankrupts are often offered loans at much higher interest rates to offset the perceived higher risk in lending them money. It pays to get good legal advice from a well regarded credit repair lawyer to assist you in making smart decisions about your financial life going forward. Don’t keep making the same mistakes throughout your life. Get the right advice and find the inside running where the footing is firm and fast.

References?

Ali, O’Brien, Ramsay, “Short a Few Quid: Bankruptcy Stigma in Contemporary Australia”, UNSW Law Journal 59, 2015.

Australian Financial Security Authority, afsa.gov.au Viewed 12th April 2022.

Australian Attorney General’s Department, ag.gov.au Viewed 14th April 2022.

Belesky J, “Bankruptcy: How long does it stay on your credit report?”, https://www.canstar.com.au/credit-score/how-bankruptcy-affect-credit-score/#1/ Viewed 12th April 20222.

Office of the Australian Information Commissioner, oaic.gov.au, Viewed 14th April 2022.