There is sometimes confusion over the use of the term ‘Bankruptcy’. In the US system both a person and a corporation (business) can be bankrupt. Whereas, in the Australian system only people can become bankrupt; businesses become insolvent and are then put into administration or liquidated.

Business Failure

If you think that your business is insolvent (can’t pay its debts when they fall due) or just simply isn’t going to make it then you must speak to your accountant. They may then refer you to an Insolvency Practitioner and you may choose to put your business into Voluntary Administration or appoint them as Liquidators.

In theory, insolvency processes are there to:

• provide the best return to creditors &
• protection for the debtor from excessive harassment from creditors

These are a formal means by which creditors can get repaid, with someone independent overseeing the process, but they can also be a welcome relief to many people who can not find their way out of the financial position/ debt they are in. Sometimes entering a formal insolvency arrangement may be the only avenue out of a financial dead-end and relieve the burden of debt on their lives. 

Marianne’s story

After her husband’s death, Marianne was left as the sole director of a complex business that she had little idea of how to operate. As time went on, the stress and anxiety of ‘not being in control’ of the situation weighed more and more heavily on her and her own fragile health was deteriorating as a result. Finally, after some failed attempts to sell the business as a going concern she felt she had reached the end of her rope and her accountant advised her to put the business into Voluntary Administration.

Once she had signed the papers handing control over to the Insolvency Practitioner, she felt a mixture of relief and deep regret as she knew that the company’s employees and creditors would never understand the desperation that had driven her to that decision.

Ken’s story

“Out of the frying pan into the fire” was the way Ken described his experience with Insolvency Practitioners after he wrestled his business out of the hands of the Receivers and into what he thought were the “helping hands” of a Voluntary Administrator. After assurances that they would work “hand in hand” with him to salvage his beloved business he found instead that their hands were “helping” themselves to his business assets as their exorbitant insolvency fees bled the business dry.

How to handle insolvency

If you are in the hands of an Insolvency Practitioner your best course of action is to cooperate with them. As they have probably told you a few times already “We can do this with OR without you”. If you cooperate, then you may be making the best of a bad situation. If you don’t cooperate, then you may only make matters worse for yourself, your creditors and the other stakeholders in the business.

What’s it like, when your business is in Administration/Liquidation?

You know how much fun it is when you go to a funeral? Well, being in the hands of an insolvency practitioner is like going to a funeral – everyday! In theory the system is meant for the protection of all stakeholders in the business. It is intended to be a blessing, but it often doesn’t feel like one.

Some days you feel like hugging your Insolvency Practitioner for providing a way out of a dead-end street and other days you feel like hitting them for treating you like a mushroom – keeping you in the dark and feeding you manure.

Don’t expect them to be a shoulder to cry on or to show much sympathy to the emotional pain and trauma that you are experiencing. Business collapse is their stock and trade and they must shield themselves emotionally just as a nurse or doctor would, who is daily facing death situations. Their exterior coldness is further compounded by the fact that they are frequently seeing the worst side of good people in bad situations. It’s a job I wouldn’t like to do and in part I understand the tough veneers they must exhibit.

The government body that deals with corporate insolvency or business failure is (ASIC), the Australian Securities and Investments Commission. www.asic.gov.au Click on the tab “for companies” and then on the sub-heading “insolvency”.

Is Personal Bankruptcy an option?

So if you are considering personal bankruptcy or a debt agreement with your creditors, then the Insolvency and Trustees Services Australia (ITSA)  are the people to talk to and they have a wealth of information on their website that will help you know what decision to make: www.itsa.gov.au

They will likely refer you to a financial counsellor before making the decision to declare yourself bankrupt or apply for some form of debt agreement.

What is a financial counsellor?

This information is taken from the website of the Australian Financial Counsellors and Credit Reform Association. On this site you can find financial counsellors who can help you understand the options available to you: www.afccra.org.

“Financial counsellors provide information to consumers in financial difficulty. A thorough assessment of an individual or family's situation is followed by identifying what can be done to address the financial problems, and the possible advantages and disadvantages of those choices.  Financial Counsellors are based in community agencies and are funded largely by State or the Federal Governments.

Counsellors are required to act in the paramount interests of consumers, free of any conflict of interest and free of any commercial benefit.  They provide a FREE, independent & confidential service”.

Some of the trusted organisations that provide financial counselling are:

• Salvation Army Moneycare
• Lifeline
• CAP - Christians Against Poverty

Warning: there are many businesses that advertise FREE debt advise, but they are most likely to steer you down a path that will involve a fee for their services. The initial phone call might be free, but the next steps will involve a fee that they will recoup from you or your creditors.  This doesn't mean that their services aren't worthwhile, it just means they're looking to make a profit somewhere in the process and entice people with the word "FREE". Keep you eyes open!!

What is a Debt Agreement Administrator?

These administrators work on behalf of a debtor (for a fee) to strike a deal with their creditors to make weekly repayments that are sometimes around 50 to 80% of the amount owed. It is an option for people with an annual after-tax income of less than $60,200 and unsecured debt of less than $80,200. They often trade under names such as Debt Assist, Debt Relief, Debt Busters and Fox Symes.

They negotiate agreements with creditors that typically see repayments of between 40¢ and 80¢ for each dollar of debt over three to five years. In these agreements they try to ensure that there are sufficient funds for a debtor to cover their living expenses like rent or mortgage, utilities, food and essentials.

Debt agreement differs to bankruptcy, in that people do not have to surrender their assets, like home or cars.

Another excellent source of information about bankruptcy can be found on Fred Appleton’s website: http://fredappleton.com.au/. He is a retired accountant who has personally experienced bankruptcy and has advised countless others on how it works. This website is a “must see” and is packed full of relevant and easy to read information.

The next page on this site discusses "HOW to be a support to your spouse/partner"

Life After Liquidation

ReBound

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