News

10 Aug 2016

Going for broke. Guide to Bankruptcy

By Julius Grafton

Somehow I found myself talking to a couple of friends who are recently bankrupt. One just filed, the other was recently discharged. I thought their experiences were worth sharing.

“I went home and told my wife my business was collapsing”, Andrew* said. “Her first reaction was ‘oh my God, we’ll lose the house’. I was very particular with her: we would NOT, because I had a plan. But she wasn’t listening.”

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Bob’s* slide took a long time, from wealthy to zero. He didn’t do anything wrong, he had a business that took a big whack in the GFC and then a climate event led to a big pause in the building trade. Eventually he had a perfect storm of events and long story short, just filed for bankruptcy.

“The tax office served me with a notice and I had 21 days to pay them an enormous amount. I couldn’t. I owe banks and credit card firms. Essentially I lost everything and filed to get peace of mind”. Bob’s wife works independently, he has her love and support.

Andrew on the other hand lost his marriage. “She just couldn’t get over the situation”, he said. “Despite my lawyer holding her hand all the way through the negotiations with my trustee.” Andrew had a white knight who put funds forward so that his wife could ‘buy’ his equity in their joint home from his trustee.

“My lawyer specialised in insolvency and he assessed that we could get out of trouble (with the house) for about $25 grand. The way it works is that the trustee eventually writes to the spouse (who is not involved in the bankruptcy) and says ‘hello, you need to buy your husband’s equity or talk to me about selling the house’. It took four months before she got the letter”.

“The lawyer handled the correspondence with the trustee. He said ‘Hey, we will get a valuation’, because now the game was to get the equity value of the house sorted out.” They had a pretty big mortgage, which was being paid by a third party.

Andrew’s wife called in a valuer and – following instructions from the lawyer – just acted normally. “She cried, and told the guy honestly all about what was happening. That was just perfect, as his valuation was low. The trustee didn’t like the valuation, and arranged a real estate agent to come over. The trustee didn’t want to pay for a valuation. She repeated the scene – it wasn’t hard, she was just acting like she normally did.”

That valuation was rather high. “The lawyer objected on the grounds you can’t trust a real estate agent, and said the trustee should appoint and pay a real valuer. He came, got the wife in tears routine, and filed a valuation fairly close to the first one. They all agreed to meet in the middle”.

The lawyer negotiated hard with the trustee, they took the middle amount of the two valuations, took off selling costs like agency fees, marketing, and house preparation costs. Then they halved the remaining equity, and she agreed (through the lawyer) to pay the trustee $25,000.

At that point the trustee left her alone, took the caveat off the title, and happily banked the money. Any trustee (an accountant appointed by the Australian Financial Security Authority – the Government agency that runs a bankruptcy) is always looking for a neat sum to cover off their charges. This guy promptly billed himself $14,000, and that left $11,000 to distribute to Andrew’s creditors. He owed them $350,000 so it didn’t go far.

Lawyer and Andrew’s wife were left with some complications, like the mortgage continued in both names. The bank could foreclose because Andrew (one of the two people on the mortgage) had defaulted on the mortgage contract by going bankrupt. But the lawyer pointed out, so long as the payments came on time, the bank did not care.

Bob just needed to get on with life. bankruptcy involves filling out a form and the day you sign it, is the day you become a bankrupt. He mailed it off, and wrote to his creditors to advise them they would hear from his trustee in due course, and that if they hassled him again they would be in breech of the law.

“A debt collector from American Express actually came down the drive almost yelling my name, yelling he was from Amex and he need to ‘go over my account’. It was harassment, pure and simple”.

Andrew was pursued while bankrupt by a voracious mob called Panthera Finance. This slop house buys bad debt – they had some of Andrew’s from the Commonwealth Bank – and hounds people beyond comprehension. Despite him telling them he was bankrupt, they kept going. It took a media campaign to stop them.

“You find out who your friends are”, said Bob. “Bankruptcy has a terrible stigma, I don’t tell anyone”, Andrew added. “It was hard to rent a house. I still get knocked back by some mobile phone firms and utilities, event though I am discharged”.

Your credit history is wiped four years after discharge – and the term of an uncontested bankruptcy is 3 years. In theory seven years after entering bankruptcy, Bob and Andrew will have a clean slate. But not with any of the banks they owed money – they will never do business with them again.

Andrew had to pay a percentage of his income once he earned over $60,000 to his trustee. Bob had a higher threshold of around $80,000 as he has three dependent children at home. This goes on for three years and one day, at which time the bankruptcy automatically ended.

During bankruptcy the trustee holds your passport to avoid you fleeing the jurisdiction. Andrew needed to travel for work, so needed to get a letter from his employer stating where and when he would travel. The trustee would mail the passport to him, and expect it be returned. “It bothered me because I had a brother overseas who was prone to sickness and I worried how long it could take to get the passport back to go help him if needed”, he said. Fortunately the situation didn’t arise.

The trustee held one ‘investigation’ meeting with Andrew, which lasted about an hour. “They were just fishing about, I had nothing to hide so they had nothing to find”, he concluded.

If a trustee has evidence or a solid suspicion a bankrupt is hiding assets, they can apply to the court to extend the period of bankruptcy. “They never do this unless they have an angry or aggrieved creditor prepared to pay the costs of the court case to gain the extension”, an insolvency lawyer told CX. “A trustee exists to be paid, and they won’t work for nothing”.

One theme emerged – despite Andrew’s wife bailing out, friends and families are essential for survival. And not everyone would help out. “I found out who my REAL friends are”, concluded Andrew.

* Names changed due to the stigma.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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