Assets, Debts and Income in Bankruptcy
Many people do not know what will happen to their income, debts and assets once they become bankrupt. To assist in advising those on the brink of personal insolvency, here is a broad overview of the bankrupt’s entitlement to hold on to certain assets and income during the period of bankruptcy.
When an individual is declared bankrupt, certain assets are protected from being accessed by the trustee. The trustee can realize the value of those assets which are over the threshold specified in the Bankruptcy Act 1966 (Cth) (Act).
A bankrupt will generally be allowed to keep hold of the following (based on current thresholds, which are reviewed from time to time):
- motor vehicle/s up to a value of $7,600 (indexed amount) used primarily as means of transport (excluding any finance owing on the vehicle/s) (s 116 of the Act)
- tools of trade up to an amount of $3,700 (indexed amount) used to earn an income (s 116 of the Act)
- most personal household items such as furniture
- assets held on trust (eg family trust or child’s bank account)
- life insurance policies
- compensation received from a personal injury claim (whether received before or after bankruptcy) and assets bought with that compensation
- life insurance policies for the bankrupt (or their spouse), and the proceeds from these policies received after the bankruptcy
- awards with sentimental value such as sporting and cultural medals or trophies
- most balances in and payments from regulated superannuation funds received on or after the date of bankruptcy
A bankrupt will likely lose the following:
- Any house or land that they own (unless a joint owner buys their interest, for example). For further details click here.
- Stocks and shares
- Valuable furniture and jewellery
- Gifts and inheritances received under a will
- Motor vehicles and tools of trade over the threshold limit
If a bankrupt tries to dispose of property to defeat creditor claims or at less than market value, the transaction may be deemed to be an undervalued transaction or illegal transfer. If so, the trustee may be able to recover items given away or sold for less than market value in the 5 years preceding bankruptcy.
In many cases a bankrupt is concerned about the impact bankruptcy will have on the family home. We have covered this topic in detail in a separate article title Bankruptcy and House (Click to read more).
Bankrupts are required to pay to the trustee 50% of the amount which exceeds the income threshold pursuant to the Act. The threshold depends on how many dependants the bankrupt has (namely, those who reside with the bankrupt, wholly or partly rely on them for economic support and if the dependant’s income is below a certain amount).
The current threshold amounts (as at 28 October 2015, updated bi-annually) are:
|Number of Dependants||Income Limit|
The following simple example shows how income contributions for a bankrupt with 2 dependents is calculated:
Bankrupt’s Income after tax $70,000.00
Excess over threshold $2,333.76
Contribution due (50%) $1,166.88
Based on the above scenario the bankrupt would be required to contribute $$1,166.88 per year to their trustee. This amount will generally payable via instalments.
All of the bankrupt’s unpaid unsecured debts are written off at the conclusion of the bankruptcy. Unsecured debts are those debts where there is no security or charge securing the debt such as a mortgage. Written off debts can include those debts relating to credit cards, personal loans, utilities, unpaid employee entitlements, trade creditors and unpaid rent and medical fees. Secured debtors will have the right to take possession of their security.
Some debts will not be extinguished meaning they will not be written off and will survive bankruptcy such as:
- debts incurred after bankruptcy
- court impose penalties and fines such as speeding fines
- debts incurred by fraud
- maintenance debts, including child support
- accumulated HECS and HELP debts
The ATO can use a bankrupt’s tax refund or credits to offset Commonwealth debts such as debts owed to the ATO.
For more information on bankruptcy or specific insolvency services, contact the team at Rapsey Griffiths on (02) 4929 3019 for a confidential consultation.