Katherine Bowden
Welcome to Legal Aid Queensland’s webinar the Basic Laws of Bankruptcy. My name is Katherine
Bowden and I’m the Communication and Community Legal Education Officer here at Legal Aid
Queensland. I’m just going to go over a few logistics before we get into the presentation.
Could you please raise your hand if your technology is all working. Okay great thank you I can
see a few hands raised there. I’ll just show you where the handouts are for today so the
right hand toolbox you’ll see the handout section, we’ve got the LAQ, QPILCH the Basic
Law of Bankruptcy handout and below that we have the PowerPoint slide so if you’d like
to download those and take them away with you that could be helpful later.
Okay, now I’m just going to run a quick poll the question is �do you work in a rural
regional or remote area?� If you can take a minute to answer that, that’d be brilliant.
While we’re going over the poll I’ll just tell you about the set up today. So it’s going
to run a bit differently to normal it will be more conversational. We have two presenters –
we’ve got Paul Holmes our senior lawyer here in our Civil Justice Services Team at Legal
Aid and we also have a guest presenter Elizabeth Gallagher who’s a solicitor at the Queensland
Public Interest Law Clearing House, otherwise known as QPILCH.
We’ve got a few more people to vote. So the first half of our presentation today will
be the presentation time followed by about 20 minutes for questions. If you can just
hold your questions until the end that would be great once we call for them you’ll see
the questions box and if you type those in there we’ll try our best to get through them.
Any questions that we don’t get through you’ll be able to email us and the email address
is Webinars W-E-B-I-N-A-R-S @legalaid.qld.gov.au. Okay so we’ve had 47 percent of you have
said yes you do live or work in a rural, regional remote area. Sorry that’s just changed to
45 percent and 55 percent of you are in the metro area. Okay I’m now going to hand you
over to Elizabeth and Paul to start off the Basic Laws of Bankruptcy.
Paul Holmes All right welcome everybody to the Basic Laws
of Bankruptcy. So the plan today is to give you guys I guess the overview to what bankruptcy
is, how it operates so that we can have a conversation with the questions at the end
as to what the more difficult stuff, you guys probably see with clients with a view to then
maybe doing other bankruptcy seminars on sort of more intermediate and complex areas of
bankruptcy later in the year. So welcome and I’ll get us started. So for those of you who’ve
not seen bankruptcy before and not dealt with it much what we’re talking about is it’s the
legal process whereby people who are insolvent have their affairs controlled.
It’s not dealing with corporations, bankruptcy just deals with individuals who are unable
to pay their debts. As you see in the slides when we’re talking about corporations it’s
more about the corporation being wound up or placed into liquidation. The law we’re
dealing with is the Bankruptcy Act from 1966 and it’s got a number of what I think are
really important purposes. Primarily amongst those is about a fair and equitable distribution
of the debtor’s estate. So in the sense of if they’ve only got a little bit of money
how do we fairly divide that up between all the creditors.
It allows people whose finances are just so hopeless or unable to be controlled, the ability
to in a sense start again but without neglecting their obligations to their existing creditors.
To allow people to oversee the bankrupt estate and to provide a benefit to the community
by restricting the activities of people who have no money and are in an insolvent position
that they can’t recover from. So what we propose to do is to head through the various options
when it comes to bankruptcy from people going bankrupt themselves to creditors deciding
to make people bankrupt and then look at what other options people might have.
So let’s start with the idea of voluntary bankruptcy. So when we’re dealing with voluntary
bankruptcy what that means is the creditor decides this is all too much, sorry the debtor
decides this is all too much for me, I’m going to go bankrupt myself and so what they would
need to do in those circumstances is lodge what’s called a debtors petition in court
and at that point in time the official receiver or what’s now known as AFSA, the Australia
Financial Security Authority, try saying that fast three times, has the ability to look
at it and make a decision as to whether they think that’s a good idea or not for the person
to go bankrupt. And examples where people might have that
petition rejected is, I’ve seen for example, people try and go bankrupt on a $300 debt
when they’ve already got a $1,000 in the bank that they could be using to pay the debt.
So that’s not a good idea when it comes to going bankrupt. Other examples of that we
see where people might go bankrupt on a little bit of money or owing a little bit of money
try and get out of the bankruptcy but find themselves unable to pay the trustee’s fees
and that’s probably one of the things people least understand about bankruptcy, the fact
that when you go bankrupt the trustee actually gets paid and they often get paid a bit of
money don’t they Liz? Elizabeth Gallagher
They get priority. Paul Holmes
Priority, so priority in what sense Liz? Elizabeth Gallagher
In that they’ll get paid before creditors usually.
Paul Holmes And that makes it difficult when you see people
trying to get $10-15,000 to pay the trustee which is often what they can charge. You see
some trustees able to charge $5-600 an hour to manage a person’s estate.
Elizabeth Gallagher That’s because I think there’s private and
public trustees so there’s a lot of companies that that’s their business but there’s also
the official receiver acts as a trustee for a lot of people so the fees can differ.
Paul Holmes And it’s probably in the type of clients we
see interests in a lot of ways to have the official trustee, sorry the official receiver
as their trustee as opposed to anybody else. And then I guess the thing is if the bankruptcy
is accepted what happens then is there’s a statement of financial affairs that the person
has to fill out. But what’s worth exploring really quickly, and we’ll go into this in
a bit of depth later on, is this idea that there are often other options. One is a part
IX debt agreement, sometimes that’s a good idea and sometimes that’s not, and we’ll explore
why later. Negotiating hardship arrangements on debts are often really important. Hardship,
when it comes to creditors whether it be banks, debt collectors, finance companies, have come
a really, really long way in the last 10 or 15 years and they are certainly a lot more
willing to listen to arguments about people being in hardship and needing more time to
pay debts off then they were say in the 80s or 90s. So it’s worth at least exploring that
and then finally there is also the option of letting the creditor take you to court.
In some circumstances that can end up in the creditor wanting to bankrupt a client anyway
but it’s an avenue worth exploring. So Liz, let’s talk about involuntary bankruptcy.
Elizabeth Gallagher Yeah, so as Paul has mentioned that’s when
a debtor has not chosen the process but a creditor chooses to take that action. So an
involuntary bankruptcy will always be in either the Federal Court or the Federal Circuit Court
of Australia. They share jurisdiction. The Family Court also has some jurisdiction in
this area if one of the parties is involved in family law proceedings so there can be
some crossover there. So there’s threshold requirements that a creditor must be able
to meet, to be able to take this action there has to be things in place. So firstly the
debt has to be currently due and payable, it can’t be stayed. And that might sound like
an easy thing to say but there’s some things out there that often stay debts without people
realising. So that’s things like instalment plans they might have applied for on a judgment
debt, some court rules say that you can’t enforce cost orders until a certain point
in the proceedings. So it’s always worth exploring that just a little bit more if it’s a judgment
debt of some type I think. Paul Holmes
And does the debt often have to be $5,000 owing to one person or can creditors combine
the debts? Elizabeth Gallagher
Creditors can combine, so they can bring a joint petition it’s called and in addition
if one creditor brings what’s called a creditor’s petition in a court, another creditor can
actually say ‘hey I’m interested in that as well’ and join as what’s called a supporting
creditor. And that makes it much harder to oppose the petition even if there’s a problem
with that first debt, with the first creditor so that supporting creditor can step in at
any time and say well that’s not going to work for them but we’re still wanting to bring
this. Paul Holmes
So that makes it really important that you deal with all of your creditors rather than
just some of them. Elizabeth Gallagher
All together yeah, exactly. That’s important because anyone bringing the creditor’s petition
needs to show that the person that owes the money has committed what’s called an act of
bankruptcy. So that’s defined very clearly in the Act as being a certain number of things.
For example, if you get a warrant of possession for the possession of some property of a debtor
and they can’t action that for … so it’s called getting returned unsatisfied. That
basically a bailiff shows up tries to take possession of the property and the debtor
says it’s gone now, that’s an Act of Bankruptcy. So there’s a certain set of things but what
that means in terms of supporting creditors, if that one creditor can prove an act of bankruptcy…
Paul Holmes The others don’t have to?
Elizabeth Gallagher No, they can rely on that same act of bankruptcy.
The main act of bankruptcy that I see in the courts anyway is what’s called the failure
to comply with the bankruptcy notice. So a bankruptcy notice isn’t a court document although
all of our clients often mistake it as being a court document. It’s actually something
that’s issued by the official receiver, or AFSA. But the bankruptcy notice has to be
based on the final judgment or order of a court which can include a costs order, it
doesn’t have to be last judgment in a proceeding and it basically says ‘you have to pay me
my debt within 21 days’ and if you don’t there’s a presumption then that that person
is insolvent and the creditor has the power then to come to the Federal Circuit Court.
Paul Holmes And so what’s the consequence if they haven’t
done that notice properly? Elizabeth Gallagher
Then there’s no Act of Bankruptcy. So it’s a really technical area of law, bankruptcy.
We’ve listed on the slides the four main areas which are the court rules about this. There’s
many, many kind of requirements in all of those different Acts. I’ve got two checklists
which are both A4 page with about 15 questions, a bankruptcy notice and a creditor’s petition.
So it’s always worth going and getting a bankruptcy notice or a creditor’s petition checked by
a legal advisor because even if your client doesn’t think that they want to dispute the
debt there might be a problem with the bankruptcy process that’s been followed by the creditor.
Paul Holmes Okay. So what options have we got?
Elizabeth Gallagher Well you can agree, or you can do nothing
basically that’s always an option, as I said though always get everything checked because
it might be something wrong, something the debtor, the creditor hasn’t done.
Paul Holmes Because we’ve all encountered clients who
do the ostrich and hope it will go away and these things don’t ever go away do they?
Elizabeth Gallagher No they don’t. Even at a late stage like bankruptcy
we can go back and get a default judgment set aside or do other things that can get
the debt removed effectively. So it’s always worth getting some legal advice I think if
it’s in a court proceeding. But basically you’ve got sort of two stages where you can
respond if there’s a bankruptcy notice you can ‘set that aside’ it’s called, which
means you won’t have committed an act of bankruptcy… You can also oppose the court application,
which is called a creditor’s petition, and ask for the sequestration order, which is
the order making someone bankrupt, not to be made. And you can bring in arguments about
a bankruptcy notice at that later stage as well so even if a person didn’t get advice
when they were served with the bankruptcy notice if there was still a deficiency there’s
still a chance to sort of bring that up in response to a creditor’s petition.
Paul Holmes All right now we’ll move to part IX debt agreements
and I’m sure most of you out there have seen the ads saying effectively we can make your
debt go away and often it’s companies advertising the ability to put people into part IX debt
agreements. So let’s just explore what they are. They’re what is effectively … you’re
admitting you’re insolvent but you are attempting to come to an agreement with your creditors
outside being made bankrupt. And it’s where – it’s really only available to debtors who
are earning a lower level of income and have a lower level of debt. For example if you’re
earning over, the current threshold is, I think it’s a tick over $81,500, you can’t
even consider entering a part IX debt agreement. If creditors agree to accept the sum of money
you propose they then can’t take you to court. And if you successfully meet your part IX
debt agreement then any further obligations you would have had to pay debt at the end
no longer apply because the debt’s effectively discharged.
The problem is the agreement will come to an end if a debtor defaults. Now before I
go into how it’s made for a little bit, just explore the idea of well why would a debtor
default and the problem is the whole idea of a part IX debt agreement is you’re agreeing
as a debtor to pay let’s say $60 a fortnight for the next four years in order to discharge
your debts. That $60 a fortnight will get shared in a specific percentage between each
of the creditors. The problem I see quite regularly with part IX debt agreements is
for people who are on fixed incomes. So people who are on a pension or on a very low income
that doesn’t increase because it’s a lower skilled job. The problem with that is people’s
expenses when it comes to food, rent, electricity, water…
Elizabeth Gallagher Pretty much everything…
Paul Holmes Everything, yeah, I could go on for a while,
continue to increase over time because that’s, as we all experience that. The problem is
people’s income doesn’t also increase to make account of that. So what we often see is people
when they enter into the debt agreement are quite able to pay the $60 a fortnight say
for the first year, if they get that far, but in year two with expenses going up and
up and up they can no longer afford to pay the debt agreement and there are serious consequences
to that. The serious consequence to that is by the mere fact of even putting in a debt
agreement… Elizabeth Gallagher
Or a proposal for one… Paul Holmes
A proposal for one… Elizabeth Gallagher
Even if it’s not accepted… Paul Holmes
That’s already an act of bankruptcy… Elizabeth Gallagher
It is, yeah… Paul Holmes
And the problem you’ve got there is that people in that scenario if the creditors say hang
on and we’re looking at the site here as how it’s made, the creditors look at your proposal
and say ‘hang on I don’t want to accept this and vote no’ what would they do instead?
And the answer to what they would do instead is they can proceed to file a creditor’s petition,
and the creditor’s petition is what Liz covered earlier, that ends up with the client being
made bankrupt anyway. Elizabeth Gallagher
So it’s not an easy fix it will have to – it’s not a way to delay bankruptcy proceedings
basically if you do it and it’s not a genuine proposal or it’s not one that’s going to be
accepted then you’re really just speeding up the process for your creditors in the end.
Paul Holmes Particularly when and I think we’ve both seen
clients who want to put forward Part IX Debt proposals where they pay $5 a fortnight to
all their creditors – wouldn’t even bother. Elizabeth Gallagher
So it really has to be a commercial offer I guess is something to think about what would
the creditors even accept? Paul Holmes
Because if it’s not going to see them get any more than say five percent of what’s owed
to them across the four years it’s not in their commercial interest to accept and they’re
more likely to get money out of the client by making them bankrupt. So it’s really key
that people realise and people don’t necessarily believe some of the advertising that portrays
part IXs as an easy fix. It’s in reality probably as serious as bankruptcy and ends up with
a lot of the same consequences and it’s really important that people are aware of that.
Elizabeth Gallagher Do you see many clients, Paul, who get confused
about the difference between a consolidated loan and the debt agreement.
Paul Holmes And the part IX, yeah.
Elizabeth Gallagher To do with a private company?
Paul Holmes Yeah and this is one of the really difficult
things to untangle sometimes because some of the advertising you see talks about consolidating
loans and that’s where the company will try and re-finance say people’s credit cards,
their mortgage, their car loan all into one loan.
Elizabeth Gallagher With that company or friend of theirs.
Paul Holmes With that company or often a company that’s
closely connected to them. Or what they’re actually proposing is a part nine and we see
plenty of clients that confuse the two and think what they’ve actually got is a consolidated
loan when what actually has happened is they’re a hair’s breath away from being bankrupt
at particularly when clients in that financial position often are lurching from crisis to
crisis and it’s only a matter of time before they’re wanting to seek hardship on the loan
and you can’t see hardship very easily on a part IX debt agreement. Now consequences
of bankruptcy. Elizabeth Gallagher
Many. Paul Holmes
Are many. We talked about the trustee earlier. People forget that there’s a trustee.
Elizabeth Gallagher And that the trustee’s job is to act in
the best interests of creditors, they’re not someone that’s on the debtors side as it is.
Paul Holmes Despite managing their financial affairs.
Your credit ratings history for five years. The other thing people don’t understand is
there’s actually a register I think started, it started 1 January 1901 I think when Australia
became a separate country from England, that lists everybody that ever been bankrupt since
1901 in Australia and occasionally companies check that so even if your credit rating comes
good again after the five years people will often still look at that register. Trustee
makes major financial decisions however, if you’ve chosen to go bankrupt you do some have
control in the sense that not all debts have to be included in the bankruptcy.
Elizabeth Gallagher Yep if you go, if a creditor makes someone
bankrupt the creditor gets to choose the trustee generally as well.
Paul Holmes Which is really important because you often
end up I guess with private trustees in that circumstance.
Elizabeth Gallagher With higher fees.
Paul Holmes Which makes it difficult as well.
Elizabeth Gallagher It is often, well the complaint I hear a lot
is that then that private trustee is too close to the creditors in a way. There’s a big perception
of bias which might not be… Paul Holmes
Necessarily true… Elizabeth Gallagher
No, but it makes it much harder for the debtor I think, to get through the process.
Paul Holmes Because they feel like there’s nobody supporting
them and the reality is when you’ve gone bankrupt you have lost control and that’s a hard thing
for people to understand. Now on terms of the obligations, they’re fairly standard
in the sense that if the trustee asks you for something.
Elizabeth Gallagher You’ve got to do it basically.
Paul Holmes Pretty much. Because like we said before in
the earlier slide, they now have control of the financial affairs. If you’re making a
major financial decision it’s pretty much them that make it.
Elizabeth Gallagher Yep and the obligations are ongoing in terms
of disclosure, as in telling the trustee everything about your financial position when you want
to change jobs, when you want to go overseas, lots of things.
Paul Holmes And that can become really hard in a relationship
sense can’t it because sometimes one person to the relationship might have gone bankrupt
the other one hasn’t and you might have joint properties like a house and people who aren’t
bankrupt in that situation can often find that really difficult.
Elizabeth Gallagher Yes.
Paul Holmes Because let’s say what happens with the trustee
decides they want to sell the bankrupt’s half interest in the house.
Elizabeth Gallagher Well the trustee automatically becomes an
owner as a tenant in common so… Paul Holmes
And does that get changed on the title. Elizabeth Gallagher
Once they register their interest. Paul Holmes
Yeah. Elizabeth Gallagher
And so they can force the sale even if the other person doesn’t agree and there’s really
very little defences that can be raised to an application of that type. So a partner
that jointly owns property adds very little control unless they’re in a financial position
to buy out the trustee’s interest. Paul Holmes
And the reality is that that very rarely happens… Elizabeth Gallagher
There’s not a lot of families that have that money hanging around.
Paul Holmes No.
Elizabeth Gallagher Or that would get a loan off a sole income
really. Paul Holmes
Really to be able to buy that half interest. So is it often in the interests of the non-bankrupt
in that scenario to ensure the whole of the property is getting sold rather than just
the interest of the bankrupt. Elizabeth Gallagher
Well the whole property will be sold because you can’t sell a half share in a house unless.
Paul Holmes Well sometimes you can depending but…
Elizabeth Gallagher It would be an odd situation I think if someone
else moved in to the other half of your house so it wouldn’t be the…
Paul Holmes It’s not the norm but unfortunately I have
seen it happen to people. Elizabeth Gallagher
I think what the trust usually tries to do is force the sale of the whole property and
so everyone has to move out effectively and because one partner is bankrupt that can make
rentals difficult all sorts of things in terms of getting bonds together and bond loans so
it can have a roll on effect in terms of someone’s living arrangements.
Paul Holmes And that’s a really important point I think
too and that people don’t explore very often and that’s that rental issue. There’s nothing
actually in the law that says it should be more difficult for people to rent when they
go bankrupt but… Elizabeth Gallagher
But in practicality. Paul Holmes
In practicality it’s much more difficult. Elizabeth Gallagher
Real estate agents are more readily doing credit checks and things like that nowadays
so the bankruptcy will be flagged and could become a real issue.
Paul Holmes Yeah. And then the final thing that’s also
worth exploring is this idea that you’re going to be required to tell people that you’re
bankrupt in pretty much every circumstance. There is a small threshold below which you
don’t have to tell people if you’re seeking credit that you’re a bankrupt and it’s in
the region of about $5,000. Elizabeth Gallagher
It is. So things like those furniture rentals might be okay but they’re not good deals generally
anyway. So that sort of pushes bankrupt into that scope of credit where there’s not good
lending options and things like that. Paul Holmes
Or more expensive lending options because let’s face it if you’ve just been kicked
out of your house you might not have all the essentials you need to move into a rental
accommodation and that makes it difficult as well. So in terms of the broad brush type
stuff about bankruptcy, hopefully that gives you a starting point idea. What we also wanted
to highlight with you is they’re our contact details up on that last slide and I think
we’re both happy for people if you’ve got questions or you think somebody would benefit
from getting legal advice from either of us drop us an email and we’re generally pretty
good at replying unless we’re in court or out of the office and we can. Even if it’s
just that we look at it and go look there’s nothing you can do probably no point or yes
there is. We welcome those queries, we welcome those phone calls because that’s the best
way of clients getting the best advice possible. Elizabeth Gallagher
Yeah definitely. Paul Holmes
And we think that’s really important because often people think about bankruptcy, hang
on there’s nothing I can do, there’s no other options or in some cases they say, hang on
I just don’t want to deal with the debt collectors anymore or I just don’t want to deal with
my creditors anymore and they just go that way. I think if nothing else gets taken away
from this it’s worth at least looking at it and it’s worth at least looking at the other
options that people have. Elizabeth Gallagher
I think Paul’s expertise is very broad but he’s be better placed to do things about debtors
petitions whereas I have a bit more expertise in the court sort of based things that can
go on. Paul Holmes
Yep and I think that’s right and so please seek us out if you need that sort of help.
Now that leads us to what I suspect some of you have been waiting for which is the opportunity
to answer questions, ask questions and get us to answer them. So Katherine explained
getting access to the question box, we would welcome any questions that you guys have got.
And an early one we’ve got is to do with rental arrears. The question was around what happens
to rental arrears if somebody goes bankrupt and what happens to the TICA database which
I guess is really important to that rental question which we’re talking about before.
So I guess the first question is can you go bankrupt on rental arrears?
Elizabeth Gallagher If it’s over $5,000, yes.
Paul Holmes Or if you’re doing it yourself you could go
bankrupt on that. Does that stop you being listed on the TICA database though?
Elizabeth Gallagher I don’t think it does.
Paul Holmes No. Well because it’s still an ability or
a debt that people are owing and it’s something that they can list on the database and that
makes it difficult I acknowledge for people to rent but unfortunately that’s not something
that stops them listing. However it’s worth noting that there are procedures if you feel
a client has been improperly listed on the TICA database that involves bringing a QCAT
application. Elizabeth Gallagher
And it’s worth knowing there’s a six month time limit on that application from when the
person becomes aware of the improper listing as it’s alleged. So Tenants Queensland has
a pretty good fact sheet on TICA listings like when someone can be listed but basically
our answer is that the debt meets those requirements on its face. The only thing that the creditor
might have to do in that circumstance is make sure the listing is accurate so the legal
effect of the bankruptcy is that that debt is satisfied. So the TICA listing should be
updated to show that the debt has been satisfied. Paul Holmes
Yeah. Elizabeth Gallagher
So it’s worth making sure that the listing says that because that can make it a bit more
attractive. It’s not good the person ended up there but it shows in some ways that the
debt has been taken care of. Paul Holmes
All right, so we’ve got some other questions coming through. So one of them is around this
idea of what happens if there’s joint owners and negative equity and what happens to the
person in that scenario who’s not bankrupt. And that’s probably more a practical question
then anything. Elizabeth Gallagher
Yeah so my understanding is that if the loan is higher than the amount of the value of
the property I should say, probably unlikely the trustee will sell that asset. That’s called
realising an asset. So if the trustee’s not going to get any benefit or the estate’s not
going to get any benefit from an asset being realised the trustee’s unlikely to sell the
property as long as the mortgagee or mortgagor… Paul Holmes
Yeah the mortgagor. Elizabeth Gallagher
…is happy to maintain that loan. Paul Holmes
And that’s probably the more pertinent question there because it’s often not the trustee that
sells people up in those circumstances it’s often the bank or the finance provider who
hasn’t had their mortgage paid, that’s more likely to look at selling it to try and realise
some money out of that property rather than little or none at all. And of course the risk
there is that if they sell the property and there’s still a shortfall owing…
Elizabeth Gallagher And that happens after the date of bankruptcy
that debt probably is not going to be included in the bankruptcy.
Paul Holmes Which means they can come after not only the
person who’s not bankrupt for it. Elizabeth Gallagher
But the bankrupt becomes a new debt. Paul Holmes
And that’s something people don’t readily understand in my experience.
Elizabeth Gallagher So once you enter bankruptcy it’s from anything
owed on that date backwards that’s kind of taking care of aside from the excluded types
of things which are things like fines and debts owed to the government as a very general
kind of group of things but any debts the person accrued going forward from the date
of bankruptcy do not get encompassed in that bankruptcy.
Paul Holmes Yes. All right, now there’s another question
and this is one of those more difficult questions that we sometimes get. So the question relates
to what happens if you want to go bankrupt on a secured debt when you no longer have
the asset in your possession. The example being it might be in a storage lot or it could
be say in a mechanics repair shop somewhere like that. Now there’s nothing stopping you
going bankrupt on secured debts is there. Elizabeth Gallagher
With involuntary bankruptcy there’s a little technicality.
Paul Holmes There’s a little wrinkle, I thought there
was. Elizabeth Gallagher
So with the $5,000 threshold in involuntary bankruptcies if a creditor is a secured creditor
they have to show that the value of their security leaves a $5,000 gap in what they’re
owed. So say the debt is $10,000 and they have a $5,000 security then they can make
the person bankrupt because the difference between what they’re owed and their security
meets the minimum threshold. But if the property was worth $7,000 they’d only have a gap of
$3,000 so that would not meet the threshold requirements to make someone or to bring a
creditor’s petition. However a creditor can forfeit their security so they can come to
the Federal Circuit Court and say I forfeit my security for the benefit of all creditors
and I’m now bringing this petition. Paul Holmes
And how often does that happen? Elizabeth Gallagher
I’ve seen it happen a fair bit. Particularly if it’s known that their security is probably
worthless anyway. Paul Holmes
An example of that’s probably say for example the client’s had their car involved in a car
accident, has no insurance and can’t afford to fix it.
Elizabeth Gallagher Exactly.
Paul Holmes Is that the sort of thing you’re talking about.
Elizabeth Gallagher Basically.
Paul Holmes Okay.
Elizabeth Gallagher Or if there’s a property that has no equity.
Paul Holmes Okay and then they’re thinking that they might
get some money out of it that way. Elizabeth Gallagher
Yeah. Paul Holmes
Okay. Elizabeth Gallagher
So I mean it’s a pretty serious step for a creditor to take but they do do it. What’s
their impact on voluntary bankruptcy. Paul Holmes
Well I guess the thing with voluntary bankruptcy is while there’s not a crystallisation of
the loss you’d probably question whether it’s worth doing in the sense of, fair enough you
can’t afford to pay it, that’s what hardships there for and you’d be making a hardship application
to the company involved to say ‘hang on I’ve been unemployed I haven’t been able to
pay it but I’m about to get a job and I should be able to pay it’ and that’s a better option
than going bankrupt on it because you’re not then in a position where you’re taking that
decision out of your hands in a sense. Elizabeth Gallagher
And it ties in a little bit with the last question but I’ll also say that you, sorry
I’ve lost my train of thought. Paul Holmes
No that’s all right we’ll go back to the secured debt idea and this idea that…
Elizabeth Gallagher Oh sorry I’ve got it.
Paul Holmes You’ve got it.
Elizabeth Gallagher Going into bankruptcy can be a breach of a
lot of loans so even if a mortgage or a secured loan is up-to-date it can be a breach in your
contract by entering bankruptcy so often a secured creditor will be given an election
about whether they want to be involved as a creditor in the bankruptcy or if they want
their contract to continue because they feel confident that the debtor will kind of meet
their obligations. Paul Holmes
And the reality I think from what I see is most creditors in that circumstance will take
the secured asset, sell it, work out whether they’ve then got money still owing on the
debt and will often maybe try and include the shortfall debt in the bankruptcy rather
than including the secured debt. Which I guess has a lot, a little bit more uncertainty in
it in terms of what it is they think the debtor will ultimately owe them, which is really
important to consider. Now there’s another question please keep the questions coming
through. I suspect there are questions too complicated but you’re welcome to try them
and see just what trips us up. Another question that’s come through is it worth both a husband
and wife going bankrupt and I assume the implied part of that question is at the same time
or having a wife going bankrupt or a husband going bankrupt after the other partner has
gone bankrupt. So there’s probably a few considerations in this about that.
Elizabeth Gallagher I guess the first answer is there’s no need
for a partner to go bankrupt just because the other person is, it’s about everyone’s
financial position as a whole. It’s worth noting that a trustee has powers to go back
about five years at least to look at transactions that have passed from the bankrupt to anybody
else and if they feel that those are being divested in the bankrupt of any assets they’ll
try and recover that money. Paul Holmes
So hypothetically say if the wife came into four or five properties the husband used to
owe you’d think the trustee would be unhappy with that.
Elizabeth Gallagher Yeah. So there’s no way to protect a person
by getting rid of their money and giving it to the husband or the wife but if the financial
position as a whole makes bankruptcy a good idea then the one benefit I know of those
two people going bankrupt at the same time is that they often administer the estates
together. So the whole process will run… Paul Holmes
Maybe a bit more smoothly. Elizabeth Gallagher
You know, one meeting instead of two meetings and all of those sorts of things are a bit
more straightforward. Paul Holmes
Okay. I guess the other consideration there too though when you’re considering bankruptcy
for both people involved in a relationship is how many of the debts are actually joint
debts? Because often what you see is sometimes people might have brought existing debts to
the relationship, which are just in their name. And the question there is if they’re
just in their name and the other person might only have one or two debts they could afford
to pay then it’s probably not a good idea. Where that goes a little bit wrong though
is let’s say people have brought debts to the relationship and there’s a joint property
that’s been brought it’s not within, it’s not out of the realms of possibility for a
creditor who has a debt in one person’s name only to go to court get a judgment and then
seek an order to have the jointly owned property say their house or a car or a caravan is another
big one, sold, in order to get that money that they’re owed from one of the partnership
out that way. And that often comes as a shock to people that a house or a car can be sold
effectively to pay what was originally maybe a 1,000 dollar credit card debt or a 2,000
dollar personal loan. Elizabeth Gallagher
Interest counts like it accrues towards the… Paul Holmes
The amount as well. Elizabeth Gallagher
Yeah. Paul Holmes
So that’s also another important consideration so I guess the ultimate answer to that question
is it’s going to depend on the circumstances and it’s probably yet another reason for a
conversation with lawyers before those sort of decisions are made. Because it’s really
going to be an individual circumstances as to what that best option is.
Elizabeth Gallagher It could help the family if there’s no need
for both to be bankrupt to have one non-bankrupt party.
Paul Holmes Then they can be the name on the rental as
an example. Elizabeth Gallagher
Exactly. Can make practicalities a lot more easier obviously.
Paul Holmes Rental they might have…
Elizabeth Gallagher Electricity, not having to pay bond or gas
and all those sorts of accounts. Paul Holmes
Which are all expenses when you’re bankrupt that people can’t usually afford to pay. Okay
and so feel free to keep those questions coming through, another one that’s come is a question
along the lines of okay I’ve got a creditor’s petition I think I can pay the money but I
need more time. Elizabeth Gallagher
Don’t tell the court that. Paul Holmes
Don’t tell the court. Elizabeth Gallagher
Is my tip. Paul Holmes
What happens when you tell the court that? Elizabeth Gallagher
They go oh you mean you’re insolvent? Okay I’m going to grant the petition.
Paul Holmes So that’s a slight problem so rather than
telling the court that… Elizabeth Gallagher
You can engage in what’s called without prejudice or confidential discussions with the other
side where you’re making an offer out of court. But as far as the court’s aware you need to
put in something that looks like a legal ground to a post-petition. There’s very set grounds
on legally what you can do to stop a creditor’s petition happening in the handout we’ve given
I’ve linked some of the resources, some fact sheets I’ve got which set out those grounds
but effectively you need to put something into the court to try and get more time without
telling them that’s your purpose. Paul Holmes
Okay. Elizabeth Gallagher
Because, the court, it’s power or it’s a job under the Bankruptcy Act is to do those things
that Paul said at the beginning and one of those big things is to protect the public.
It’s not a debt collection proceeding, it’s a proceeding about the solvency of that person
and once the petition is filed, the court, there’s a rule that says even if the creditor
wants to withdraw it the court has to approve that. So the court’s on the lookout for the
wider financial circumstances of the debtor. They’re not going to accept the fact that
the creditor’s gotten paid by a loan because that will make the court question well what
about this person’s other creditors, why should I let you go into more debt to pay another
debt? So they’re pretty active in deciding when they’re going to let someone off the
hook as it were. Paul Holmes
Okay. Can you maybe in effect take that decision away from them say by, let’s say you owe $5,500
on the creditor’s petition and you’ve got a spare $600 cash, is that done often where
you reduce the debt to below the involuntary threshold.
Elizabeth Gallagher Yeah a lot of people do that. It is technically
relevant so the creditor has to prove one at that the time the Act of Bankruptcy was
committed $5,000 was owed, at the time they filed $5,000 was owed and at the time of the
hearing that $5,000 is owed. So there’s a bunch of steps where you can, if you can break
that chain I suppose. Paul Holmes
And reduce your debt below $5,000, okay. Practically, though is that likely to work because in a
sense interest is included. Let’s say you reduce it below to $4,900.
Elizabeth Gallagher Yeah interest is included pre-judgment. So
post-judgment interest is not included in the threshold amount.
Paul Holmes Yes.
Elizabeth Gallagher Yeah. The things to look out for there are
often supporting creditors might jump in. Paul Holmes
Will jump in. Elizabeth Gallagher
Yep but you know if you can bring the debt below $5,000 and there’s no else around the
creditor can’t prove what they need to prove. Paul Holmes
And that opens up possibilities for hardship negotiations if the creditor’s not playing
with you and they’re a financial institution it might offer opportunities to go into financial
ombudsman service or the credit ombudsman service.
Elizabeth Gallagher And if the petition’s dismissed because they
haven’t met the requirements there might not be an order for costs, I say might because
if the creditor gives evidence to say I brought this petition and then they paid me $600 the
court might be persuaded that the creditor’s entitled to the legal costs they expended
and then that might make a debt that then again is more than $5,000. So it could just
be a delaying tactic in the end but it is sometimes just by getting a petition dismissed
and putting the creditors some costs you do prompt them to enter into negotiations because
they think… Paul Holmes
It’s too much trouble to start it again. Elizabeth Gallagher
Yeah. They only have six months from, there’s a lot of sort of little time limits but you
have six months from bankruptcy notice being issued to give it to the debtor and you have
six months from the Act of Bankruptcy to file a petition. And the court has to make a decision
within 12 months so if you can make sure that’s it’s been more than six months since your
Act of Bankruptcy they have to get a new Act of Bankruptcy to happen.
Paul Holmes Okay all right. Well and then keep those questions
coming in guys. Another one that I get a lot of questions about is can I get rid of my
tax debt, can I get rid of my child support debt.
Elizabeth Gallagher SPER.
Paul Holmes Yeah took the words right out of my mouth.
And can I get rid of my SPER debt and that’s question’s come through as well so let’s explore
that. Let’s start with SPER because that’s probably the most common, does SPER disappear
on bankruptcy? Elizabeth Gallagher
I’ve always thought no. Paul Holmes
Mm that’s my understanding too. Elizabeth Gallagher
What about those, so I’ve seen a few SPER orders where it’s a restitution order that
was made against say Cash Converters for theft or where it’s a court ordered debt against
a private company that then goes to SPER. Am I making it too complicated?
Paul Holmes That’s a question that, my answer to that
is while it’s with SPER, SPER I liken to a bit of an all-powerful being, whilst something’s
with SPER it generally doesn’t disappear in a hurry so I would err on the side there of
assuming SPER debts are always likely to still exist at the end of the bankruptcy. Tax office
… a little different but same sort of idea, is that your understanding?
Elizabeth Gallagher Well the ATO takes a lot of people to court…
Paul Holmes They do.
Elizabeth Gallagher …and makes them bankrupt so I always assumed
that their debts were provable in a bankruptcy. Paul Holmes
Yes and so that means you can get rid of them at the end of the bankruptcy.
Elizabeth Gallagher Yeah.
Paul Holmes And that includes, because they often charge
a lot of penalties as well. Elizabeth Gallagher
They do. Paul Holmes
That’s the killer. Elizabeth Gallagher
Yeah. Paul Holmes
And that’s likely to mean the penalties disappear as well. Child Support yeah good luck is the
short answer. They’re still going to be alive at the end of the bankruptcy and look I think
that’s fair enough if we’re honest because let’s remember what child support debts are
about. They’re about orders that have been made to assist families with their kids. So
I think it’s fair enough that they’re still alive. And it’s a separate question at the
end of the bankruptcy whether somebody’s earning enough money to pay them. Entirely separate
question but in terms of the I think the public policy type idea I think that’s a really important
thing for people to still be understanding, and still be engaging with. Now another question
that’s come through and that’s around again the voluntary bankruptcy and we’ve covered
this a little bit earlier. We’re seeing a little bit up north people who are having
difficulty paying their mortgage, have tried a year to sell it and in plenty of parts in
North Queensland properties just aren’t selling. Somebody said to me that I spoke to in a small
town probably about three weeks ago said to me yeah we’ve had one property sold since
August. People can’t afford the mortgage and to pay rent.
Elizabeth Gallagher But even if the house was sold it wouldn’t
pay off the mortgage because of property prices. Paul Holmes
Anyway so they’re feeling like they’re in a bit of limbo because the banks also realise
they can’t sell the house if they take it and so nothing’s happening and people are
going bankrupt there. Elizabeth Gallagher
And people on fairly good incomes I find, yeah.
Paul Holmes And is that a good idea? Well does it solve
the problem I guess is the first question. The answer is probably not.
Elizabeth Gallagher Well the debt’s not crystallised at that point.
Paul Holmes So it might not lead to the trustee selling
it either might it? Elizabeth Gallagher
Yeah. Paul Holmes
So you might be going bankrupt because you can’t pay the mortgage but the trustee can’t
actually further that anyway. Elizabeth Gallagher
And it’s important to know that even though a property automatically becomes the trustee’s
property as it where upon bankruptcy. When a bankruptcy ends which is generally after
three years the opposite isn’t an automatic thing, as in the property doesn’t automatically
go back to the debtor. A trustee really can retain ownership forever under the Act.
Paul Holmes So once you’ve gone and put that property
in a sense out of your hands there’s no guarantee of it coming back again and there’s also no
guarantee of the problem being solved. Elizabeth Gallagher
Yeah. Paul Holmes
And it’s a problem and look I’ll be honest it’s a problem I know we’re aware of, the
banks are aware of, I know the financial counsellors listening in are aware of it too because I’ve
been chatting to you guys about it and it’s probably going to have to confront. And I’m
not certain there’s a nice clean answer to it because the problem we’ve got in that scenario
is ultimately people owe the bank the money. And the only way they have of realising it
is to sell the asset but if we can’t sell the asset nobody can sell the asset you’re
in a bit of a limbo problem. Elizabeth Gallagher
Might be better to wait for the bank to take the action.
Paul Holmes To take the action because of those really
serious consequences to bankruptcy that we discussed earlier because let’s be honest
even once you’re out of the bankruptcy those consequences arguably still follow you around
so I think it’s a really big thing to make that decision to go bankrupt and it’s a really
big thing where particularly where you’ve got an asset that at some stage might be realisable
outside of the bankruptcy. Elizabeth Gallagher
Another question is about court proceedings and what powers a bankrupt has while they’re
bankrupt to action or take court proceedings. I think this is fairly often and it may be
because of my line of work in the self rep service. But we often have clients who are
being forced into bankruptcy while they’ve got other proceedings on foot in another court
and that’s a tactical thing that creditors do because one of the effects of bankruptcy
is that any proceedings on foot either against or by the bankrupt are automatically put on
hold, or stayed it’s called, until the trustee makes a decision about whether they, as the
person there to make financial decisions decide whether they want to continue it.
And often a trustee will say no because it’s too expensive to run litigation effectively
there’s not benefit for the creditors unless it’s a really strong case so you might have
clients who approach you and they might have proceedings on foot and they’re really keen
to continue those with the creditors taking and making the bankrupt to really try to put
that on hold, that in itself can be a defence to a creditor’s petition because it’s what’s
called an abuse of process so there are options. There’s also some exclusions to that so personal
injury proceedings or something, the way I like to think of it something about the person
you know their private body as it were as opposed to their financial situation those
types of decisions and court proceedings stay with the bankrupt to decide whether to pursue
or not. Paul Holmes
Okay all right and if there’s any just final quick last questions we’re probably got time
for maybe one or two more so we’ll just give people a minute to ask any further questions
that they might have. What would I say though is if there’s stuff we haven’t covered in
this webinar that you’ve really got a burning desire to know about at the survey at the
end which Katherine’s going to tell you about in a couple of minutes please put those in
the comments. Please also let us know about what you think has worked well in the seminar
and what hasn’t because we’re always keen to deliver stuff that’s going to be of benefit
to everybody out there. Likewise if you’ve got any other ideas that
you want to talk to us about we’re all ears, you have our direct contact numbers so we
would both welcome any enquiries you’ve got because our interest is in getting the knowledge
about this sort of area more widely spread then it is because it is a difficult area
but as it’s looking like there’s no further questions I think I’ll hand over to Katherine
to do the tidy up. Thank you very much for your attendance today
and we’ll welcome any feedback you’ve got. Elizabeth Gallagher
Thank you everybody. Katherine Bowden
I’d just like to quickly thank Paul and Elizabeth for doing this webinar today it’s been great
to have QPILCH on board to be a part of this and have QPILCH and Legal Aid together to
present more information to you about the Basic Laws of Bankruptcy and as Paul was saying
we are running a survey at the end so if you could please fill that out. If you have any
suggestions for future topics we will be running more webinars so we would really love to hear
your thoughts on that and for anyone who missed it at the beginning there are two handouts
that you can download so in the toolbar on the right hand side if you expand that out
you’ll see the PowerPoint slides are there and you’ll also see the handout at the top
there. Thank you very much everyone and we’ll see
you next time.