Debt Help - Is Bankruptcy the Right Option for Me?
By Charles Bosse
The little boy felt he'd been safe all this time and the snake had kept his word, so he would take it home as asked. He carefully picked up the snake, took it close to his chest, and carried him back to the woods, to his home to die. Just before he laid the rattlesnake down, the rattlesnake turned and bit him in the chest.
The little boy cried out and threw the snake upon the ground. 'Mr. Snake, why did you do that? Now I will surely die.' The rattlesnake looked up at him and grinned: 'You knew what I was when you picked me up.'
Getting the right financial advice is a whole lot like that little boy's experience, fraught with risk and danger, and usually skewed for the benefit of the person giving the advice. In many cases you'll get bitten unless you know what you've picked up before you move forward. I learned the problem with getting financial advice as a teenager. I'd been working hard for a few years saved up a little bit of money I wanted to invest. It was the early 1980s so interest rates were quite high and investing your money was very profitable.
I spent some time researching different investment options, and I went to visit a few financial advisors. It was clear that they had more money than I did: they had nice suits and plush offices they all seemed to exude confidence and have all the answers. What struck me was that they all had a very different idea of what I should do. This confused me so much that it put me off the whole idea of going with any of them.
I'm sure by now you have read enough on the internet to be totally confused about what to do. It would probably be easier for me to help you understand the nature of the financial snakes you might be picking up while you are trying to get to the bottom of your financial problems.
Should I talk to my accountant?
The answer seems obvious doesn't it: if anyone knows your financial situation well, It's your accountant. However, the short answer is a resounding No! It's not that your accountant doesn't have your best interests at heart, it's that his expertise lies in helping you save you money at tax time, minimising your tax liability and lodging your BAS.
Most accounting degrees will spend very little to no time on insolvency, it's generally done as a post graduate speciality course for those who want to work in the field. Unless your accountant is an insolvency specialist, he won't know that a lot about the implications of going bankrupt, I can assure you insolvency specialists know much about tax returns or BAS in. If you do happen to find an insolvency accounting firm, they tend to be large firms with very nice offices who charge accordingly.
Should I talk to my Solicitor?
No! You can talk to your solicitor but more than likely it won't do you much good. Solicitors are really good at doing things lawyers do, like helping you do your will and buying your house and keeping you out of court if you're lucky. Insolvency specialists in Australia tend to have either a legal or accounting background, and the reason for that is simply that you can't enroll in the post graduate study to become a qualified insolvency practitioner unless you have a law or accounting degree.
Just as there are few insolvency accounting firms, there are very few insolvency legal practices in Australia, and yes if you find one you will pay a hefty price for their expertise.
Should I consolidate my debts?
As I said above, most of the advice you'll receive on this subject will reflect the interests of the advice giver. Therefore, if you call a debt consolidation company, I can assure you they will tell you to consolidate your debts. The debt consolidation business is a multi-billion dollar industry making money in one very simple way: charging you a fee for helping you wrap all of your credit card and personal loans into one neat and tidy package.
I hate to tell you this but they aren't doing it for free. Please don't misunderstand me: if you believe your financial problems can be solved by paying less interest, then go ahead and look into the options. Even a small amount of interest saved over years quickly adds up.
Generally I find if you are reading this book you've probably tried to consolidate your debts already and come to the following realisations like these:
• Your credit rating is no good, and your credit file already has defaults on it so no one will give you a loan, consolidated or otherwise
• By the time you work it all out, you're so far down a hole that saving a little bit of interest just won't make a lot of difference.
• You've probably reached the point where you've had enough, you're emotionally exhausted, you can't go on another day ignoring blocked calls on your phone, ignoring the demands in the mail and so on.
Should I talk to a financial counselor?
Yes! There are plenty of financial counselling services to help you with this, they have no hidden agendas and they're a wonderful option for helping you think through your situation. If you find yourself stressing out constantly, not sleeping, not eating or over-eating and thinking about money pressures all the time, then get some help.
There are also charities like Lifeline that offer a wonderful service. They will be a sounding board if you just need someone to discuss with you what your options are. Don't let your financial problem destroy your life - ultimately it's just money.
What are the advantages of a Debt Agreement?
Debt agreements sometimes referred to as Part X (ten) debt agreements are essentially a binding agreement between you and the people you owe money to.
Most likely, you'll run into similar problems as we found in the debt consolidation option, that is: your poor credit rating will see creditors lose interest very fast. This process is essentially a negotiation process, where the people you owe money to work through your bills, your income and so on in order to come up with an agreed repayment plan.
There are plenty of companies around that offer this service, there is a reason you see ads on TV for these companies: it's because it's a big and profitable industry. Not only do they charge an upfront fee anywhere between $800 - $4,000, they also charge for giving you information along the way, and every time you pay them they take a fee for the trouble as well.
You don't have to use a private company for this process - you can choose ITSA, the government body set up to administer to these debt agreements, but they take 20% of whatever is agreed upon with the people you owe money to. So if you thought debt agreements were the answer to your prayers because they freeze interest payments and simply replace them with fees, then you're in for a shock.
The only reason you'd consider a debt agreement over bankruptcy would be a very specific set of circumstances that we'll discuss later on in this book.
Personal Insolvency Agreements
What's the difference between a Debt Agreement and a Personal Insolvency Agreement?
Flexibility is the main thing Personal Insolvency Agreements (PIA) have in their favour. They're also administered by a registered and - might I add - regulated trustee including the government trustee ITSA, not a private company that advertises on TV. Essentially this process is similar to Debt Agreements (DA): The trustee holds a meeting with the people you owe money to and they negotiate a deal on your behalf. You can offer a lump sum settlement figure or enter into a payment plan, or you can offer them assets instead of cash. This may sound alright until you realize that one of the challenges with PIA's is that 75% of the people you owe money have to agree on the deal. If they don't, your proposal is rejected or has to be renegotiated.
Generally the people you owe money want all their money back plus interest. Sometimes they'll settle for less than the amount you owe them - it's generally a percentage of the debt - but let me stress this aspect: because of all the variables involved in the negotiation process to put together a PIA its difficult to put a figure on what the people you owe money to will settle for.
In most cases you'll have to pay back 100% of the debt owed. This is not because your creditors are greedy or have a mean streak, it's because the administrators take 20% of whatever is agreed upon with the people you owe money to. That applies whether you use a private company for this process or ITSA, the government body setup to administer to these PIAs.
I've heard of creditors settling for less 80% on rare occasions, but that usually only occurs with a public company going into receivership owing huge sums of money (the kind that makes the news). If you are were owed $10million and you know the people who owe you the money have a team of smart lawyers and some very clever structures in place and they offer 5% of the debt, you might take it and be grateful. Sadly, ordinary punters like you and me aren't going to get that lucky!
What happens if someone makes me Bankrupt?
Involuntary bankruptcy occurs when someone you owe money to applies to the court to declare you bankrupt. Generally when you get one of these notices, you have 21 days to pay all the debt. If you don't, then the creditor goes back to the court and asks the court to issue a sequestration order that declares you bankrupt. A trustee is appointed, and then you have 14 days to get the paperwork in and then you are bankrupt.
You can object to a bankruptcy notice by going to court after the 21 days have expired and put your case forward, to prevent it going to the next level. Other than the way you became bankrupt there is in reality no difference between Involuntary Bankruptcy and or Voluntary Bankruptcy - once you are declared bankrupt, they're administered to in the same way.
However, the stress, torment and fear that accompanies this process is incredible. If you think you are likely to be made bankrupt by someone, get some advice and act on that advice. Generally I've found it's always better to know what you can and can't do before you have someone bankrupt you. Once you are bankrupt, it's usually too late.
When should I consider Voluntary Bankruptcy?
This question is not the same for everyone of course, but generally I find one way you could work it out is figure out how long it will take you to pay all of your debts - if its longer than 3 years (the period you are declared bankrupt), then this may help you make that decision.
I had an 80 year old pensioner tell me once that her credit card statement calculated how long her debt would take to pay at the rate she was paying her account, and it was 35 years! Imagine 35 years for one credit card bill.
Credit rating damage can help you think this through. If you move house and forget to pay your $30 phone bill for 6 months more, it's very likely the phone company will default your credit file. That default will sit on your file for 5 years, so for $30 you can have your credit filed seriously damaged for that period of time.
In many ways, the ease with which companies/credit providers can default your credit file is unfair. The punishment doesn't seem to equal the crime in my book. So if you already have defaults on your credit report for 5 years, remember that bankruptcy is on your credit file for a total 7 years then its wiped off completely.
So if your credit rating is a big factor in trying to decide whether to enter into a Debt Agreement or Personal Insolvency Agreement or Bankruptcy remember they will all sit on your credit file for a total of 7 years. The biggest difference is that with a DA or PIA you pay back the money and still have it on your file for 7 years.
The other side of crime and punishment equation is bankruptcy, and in this country the provisions are very generous: you can go bankrupt owing millions of dollars and after 3 years it's all over with no strings attached. Compared to countries like the United States, our bankruptcy laws are very generous.
I don't pretend to know why that is but a couple of hundred years ago debtors went to prison. These days I suppose the government thinks the sooner it can get you back on your feet working and paying tax, the better. It makes more sense than locking you up which costs the taxpayer anyway.
Bankruptcy wipes all of your debts including ATO debts except for a few things:
• Centrelink Debts, Court Fines like parking and speeding fines • HECS or Fee Help loans • Money to pay for a car accident if the car was not insured.
There is much more that can be said about Bankruptcy but the purpose of this chapter was to help you decide between a few available options. When getting some advice, remember what snake you are picking up. Good luck!
Charles Bosse is the director of fresh start solutions and specialises in helping people free themselves from overwhelming debt. Whether is re-structuring finances, business turnaround, bankrupt, company liquidation.