To be or not to be - bankrupt

To be or not to be - bankrupt
Penelope Hill Manager – MoneyHelp Consumer Action Law Centre Date 20 July 2016 Consumer Action Law Centre MoneyHelp: Think about order – sequential My name is PH, I am the manager of the FC team at Consumer Action I have been working in the role since July 2009 when the FC service first started within Consumer Action. Early on in my career I worked as a litigation lawyer in private practice in the city, I then moved on to the community legal centre sector and apart from a 5 year interval with the FOS, I have been happily working here since. I really like working in the community sector, & particularly when we focus on issues of social justice and we can see our work making a difference to individuals and to the wider community. I’m a lawyer, not a FC, however I have been working closely with FC’s and FC issues for around 15 years, and I’m very familiar with issues that come up for the FC’s on the phones at our service. My knowledge of bankruptcy was fairly basic up until about 1995 when I started working at Credit Helpline with a FC, Heather Neilson. , but it was rapidly sharpened up at that time due to Heather, who was my boss at the time. While we were working together advising FC’s and consumers, Heather saw a need for a clear written guide for FC’s on bankruptcy law & as I was the nearest lawyer to hand who also had lots of interaction with the FC world she wanted me to write the guide & set about applying for a grant to get the book up & running. So Heather got the grant & I wrote the book. Since then I have updated the Law Handbook and generally kept up my interest in the area of bankruptcy law. rtunity to test learning.

Learning Outcomes You will have:
Consolidated basic bankruptcy law knowledge Explored application of bankruptcy as a legal option to resolve debt Understand provable debts and acts of bankruptcy and their impacts on clients Explored impacts of bankruptcy on tenancy and employment and other areas 5 min – replace with the

Session overview The general concept of bankruptcy
How different debts are affected by bankruptcy Advantages & disadvantages of bankruptcy Helping a client to fill in the Statement of Affairs What happens after bankruptcy A brief overview of forced bankruptcy Marie: Delete the content of the slide - it should be how I am going to structure the session, eg first define bankruptcy, do this when presentation is final. Exercise: What do you think about bankruptcy? Ask for 2-3 responses before next slide

How we view bankruptcy What thoughts do you have if a person you meet says they are/were a bankrupt? Before you studied Fcing, what did you think about bankruptcy as an option for people who couldn’t pay their debts?

Negative views of bankrupts
Failures Criminals Cheats Reckless disregard of others Poor managers Irresponsible Lacking discipline 1 mins Negative views are changing but come from a long history of the way debt has been viewed Degrading public rituals – eg wearing particular clothes, sitting in a public space with a basket over their head, Negative views didn’t start to change until the 1960’s

Changing view of bankruptcy
Failed government safety nets Irresponsible & predatory lending Ill health, job loss etc Changing economic conditions Insufficient income Access to justice 1 mins Changes of views started not so long ago - in the 1960’s From a 2011 debtor survey by AFSA: Majority earn less than $30,000 Majority have $20 to $50K debt Only 6% have debts over $500K In 2011, the average bankrupt is male, aged between 35 and 54 years and single without dependants. This is his first bankruptcy. It is most likely that he is employed at the time of a non-business related bankruptcy, and he is most likely to nominate ‘unemployment or loss of income’ as the primary reason for bankruptcy He earned less than $ in the 12 month period immediately prior to bankruptcy, which is below the average taxable income of $ in He is most likely to owe more than $ and banks are likely to be the largest creditor both in terms of number and value of debt. It is unlikely that he was urchasing or owned real estate at the time of bankruptcy or that he has any assets that the trustee can sell (realise) to repay his creditors. AFSA is most likely to have been his primary source of information about bankruptcy.

What is bankruptcy? No money to pay debts Wipe slate clean
Activities: 15 min Discuss in groups of 3: what do clients generally understand about bankruptcy before they have discussed this with an FC. what are the 3 or 4 key ideas you would like clients to understand about bankruptcy after you have had your discussion with them. Report back to the main group. AFSA definition: Bankruptcy is a process where people, who cannot pay their debts, become bankrupt to receive the protection of the Bankruptcy Act 1966 and their estate is administered by a trustee. It allows for the fair distribution of property among creditors and the prosecution of dishonest debtors. My own 3 key ideas: Bankruptcy can be a good way of clearing unmanageable debt if you have no assets to sell There are some disadvantages to bankruptcy which will differ for each person which a client needs to understand before they bankrupt Client needs to understand how changes to their situation during bankruptcy may trigger further disadvantages

Discuss What do clients generally understand about bankruptcy before they have discussed this with a financial counsellor? What are the 3 or 4 key ideas you would like clients to understand about bankruptcy after you have had your discussion with them.

What is bankruptcy? Bankruptcy is a legal process where people who can’t pay their debts, have (most of) their debts* legally released. This release comes in exchange for forced sale of certain property, possibly some income contribution and an obligation to follow certain rules for the period of the bankruptcy. My own 3 key ideas: Bankruptcy can be a good way of clearing unmanageable debt if you have no assets to sell There are some disadvantages to bankruptcy which will differ for each person which a client needs to understand before they bankrupt Client needs to understand how changes to their situation during bankruptcy may trigger further disadvantages

Types of bankruptcy Voluntary: voluntarily lodging a debtor’s petition to become bankrupt Involuntary: a creditor takes action via a creditor’s petition in the Federal Court to have you declared bankrupt by order of the Court Explain focus is on v but will explain a bit about inv at end

First step: Are there any other options?
Challenging legality of some debts Applying for compassionate waiver Accessing super Selling property Informal arrangement with creditors Debt agreement Ignoring creditors Because other options might be available, bc being bankrupt comes with a whole set of obligations to live under for 3 years, & bc it has consequences that may not be appropriate for some people, a client always needs to consider other the options before making a decision to bankrupt. 2 mins Question to whole group: What other options do people explore? OR - Exercise: get into small groups & discuss what other options you can think of for clients Speak to these options so MB - Notes on each. Add slide if needed

Should I bankrupt? How do the good, bad & ugly impacts balance out?
Help your client to work out the balance of good & possible bad & ugly impacts for them. 2 mins

Impacts – the Good Discharge of (most) debts
Income – protected (up to $x) Sole trader ok (with some restrictions) Harassment – stop Legal action – stop Court Sheriff Garnishee (except ATO) Travel ok (with trustee permission) Household property (& some other)– protected We will go through these in more detail in the next slides. Any other good impacts? Sole trader: when a partner becomes bankrupt it dissolves an existing partnership if trading under a business or assumed name after the date of bankruptcy, a bankrupt must disclose their bankruptcy to people dealing with the business. This includes bankrupts trading alone or jointly.

Provable debts Definition: section 82 of the B Act
Yes - Unsecured debts No - fines No – HECS No – unliquidated damages Creditor can give proof of the debt to trustee for payment Section 153, discharge wipes (almost all) of the bankrupt’s provable debts 82 Debts provable in bankruptcy (1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy. Ask the question before putting up the slide: put definition on slide rather than the question 10 mins Activity: Get into groups of 3 & come up with: A definition of the term ‘provable debt’ Do you use this term when talking to clients? Why? Or Why not? Why do we use the term ‘provable debt’ when talking amongst ourselves? My notes: Act: section 5 definitions: provable debt means a debt or liability that is, under this Act, provable in bankruptcy. Act: section 153 Effect of discharge (1) Subject to this section, where a bankrupt is discharged from a bankruptcy, the discharge operates to release him or her from all debts (including secured debts) provable in the bankruptcy, whether or not, in the case of a secured debt, the secured creditor has surrendered his or her security for the benefit of creditors generally. Section 153 then goes on to say which debts do not get a release

Is the debt wiped? Wiped with no poor consequences for Client or 3rd party Unsecured debts taken out in the name of the bankrupt only (provable) Interest & penalties on child support Costs re fines Wiped but possible poor consequences for Client Large gambling debts Rent Utility debts Wiped but possible poor consequences for 3rd party Joint debts Debts that have been guaranteed by 3rd party Creditor’s enforcement only stopped during Bankruptcy term Centrelink (if fraud) Child support No stay and not wiped Car accident debts where no judgment &/or no settlement Secured debts, house, car, other –tax (if garnishee) Fines Use the table on the AFSA website,

Income 0 dependants $54,518.10 1 dependant $64,331.36
Bankrupts can retain all of their income if their net income is below: 0 dependants $54,518.10 1 dependant $64,331.36 2 dependants $69,237.99 3 dependants $71,963.89 4 dependants $73,054.25 over 4 dependants $74,144.62 Number of dependants, Income limit: 0 $54,518.10 1 $64,331.36 2 $69,237.99 3 $71,963.89 4 $73,054.25 over 4 $74,144.62

Sole traders Debtors are able to continue as a sole trader with disclosure obligations: If they are not trading in their own name When they obtain credit of more than $5485 Warning: If the bankrupt wants to continue to trade, seek help from an experienced FC Read carefully p of the Toolkit Distinguish partnerships & companies

Garnishee (attachment of earnings)
Court order up to 20% of net income paid directly to the creditor These orders have no effect once you are bankrupt **Exception: ATO but don’t give up, there are appeal avenues Other legal action is also stopped Case study: The client had not completed tax returns for 10 years when he was running his own carpentry business. The business failed and the client was left owing the (ATO) around $100,000 for uncollected GST. Someone at the ATO suggested to C that he bankrupt. He did this & one month later the ATO has used a procedure (available only to the ATO, and not to other creditors in a bankruptcy) to garnishee 20% of the client’s gross income. The client was struggling financially and emotionally as a result of the ATO garnishee. The client talked of suicide on a number of occasions as his only way of dealing with his problems. He was working, earning a reasonable amount with overtime, but still under payment limits. Got advice from barrister - who specialises in bankruptcy law asking him to advise on the legality of the ATO’s garnisheeing a bankrupt’s income. On the basis of this advice, the financial counsellor ed the ATO arguing that it had not had regard to ATO practice statement PS LA 2011/18 ie it had not given regard to the likely implications of issuing a notice on the tax payer’s ability to provide for a family when issuing the garnishee. During this time, the financial counsellor had several conversations with the client, obtaining a statement of financial position and providing him with support and reassurance, including strongly advising him to seek medical assistance from his GP.

Impacts – the Bad DUTCH WIP(E)OFF 5 mins Put the words on next slide
Exercise: Get into small groups & using the letters dutch wipoff, write down some other possible ugly consequences of bankruptcy D – director U – unliquidated debts – car accidents with no settlement or judgment T – travel overseas C – child support H – HELP/HECS debts W – wills I – income P – preference payments O – offences F – fines F - fraud

Impacts – the Bad DUTCH WIP(E)OFF D = Director
U = Unliquidated damages, eg car accidents with no settlement or judgment T = Travel overseas C = Child support H = HELP/HECS debts W = wills I = income P = preference payments O = offences F = fines F = fraud 5 mins Put the words on next slide Exercise: Get into small groups & using the letters dutch wipoff, write down some possible ugly consequences of bankruptcy D – director U – unliquidated debts – car accidents with no settlement or judgment T – travel overseas C – child support H – HELP/HECS debts W – wills I – income P – preference payments O – offences F – fines F - fraud

Unliquidated damages Accidental damage to property or person with no order or agreement as to $ amount of loss Most common eg is car accident debt What would people do if a client presented with a mva debt of $20K, no possible chance of repaying, no other debts, no court order? Are they liable? Are they insured? Has client’s acknowledgement of liability been accepted by creditor? See page 53 of Toolkit

Preference payments Payments made to another creditor 6 months before the bankruptcy Eg: paying school fees, paying a relative Eg school fees:

Impacts - the Ugly U = Utility connection N = Npii C = Credit report R = Rent I = Insurance P = Property E = Employment 5 mins Exercise: Spell it out on the next slide Using the letters u n c r i p e as a memory jogger, get into pairs and write down 7 possibly ugly consequences of bankruptcy for a client Utility connection Npii Credit report Rent Insurance Property Employment

Rent - tenancy Private Public
Tenancy database should not be affected simply by the B Is the client unable to pay rent & so including this as a B debt? Questions asked on applic forms Public Check the current DHS policies Current renters: Bankruptcy does not automatically lead to the eviction of an existing tenant. Where appropriate, the department will consider the involvement of other programs that are available to support the tenant, including: Financial counselling services Family violence services Mental health services Disability information and support, and/or Drug and alcohol services. However, the department reserves the right to review the tenant’s individual circumstances and determine appropriate actions. In circumstances such as recurring bankruptcy, the Director may decide to seek to terminate an existing tenancy or not to proceed with a new tenancy (where a tenancy was disclaimed by the trustee of the bankrupt person). A human rights impact assessment for the tenant and any other affected household members would be undertaken prior to the decision to evict. Applicants: Applicants with outstanding public housing debts/charges that are subject to bankruptcy may still be approved to the waiting list. Outstanding charges that are subject to bankruptcy will not be required to be paid prior to any offer of housing being made. Bankruptcy does not automatically lead to removal of the applicant from the public housing waiting list. However, in the event of bankruptcy, the department reserves the right to review an applicant’s circumstances to determine on-going access and eligibility to public housing. Vacated tenants with outstanding public housing debts/charges subject to bankruptcy who require further assistance from the department must provide evidence of their bankruptcy. A vacated public housing tenant who is no longer bankrupt must confirm that the bankruptcy has been discharged by providing a Certificate of Discharge.

Employment Professional associations or licensing bodies might impose restrictions See AFSA list for some of common professions & who to contact Electrician – licence Real estate – licence Accountant – membership eligibility Builder - licence Case eg: a person working in estate agency at low level who thought that she could not bankrupt.

Statement of affairs What is it? A legal declaration setting out:
ID Contact details Full details of assets Full details of liabilities Full details of business details (if applicable) Purpose? Checking income contribution Checking ID Statistics Keep in mind 44 questions – long & tiring for clients to complete See the Bankruptcy Toolkit 37 pagesat for detailed notes on every question in the SOA Use additional pages from AFSA website to list debts or other info if necessary Part A with personal, family & income details only avail to trustee Part B with asset & liability details avail to creditors & others - $45 search fee Define – what is it how does it work what’s it for etc e = client comes in, describe situation, you are filling out SOE with them Add in an exercise & story on SOA See the Bankruptcy Toolkit for detailed notes on every question in the SOA

Be particularly careful answering these questions
Q 18A what do you believe is the main cause of your B? Q18C When did you first have difficulty paying your debts? Note: study the Toolkit for hints on issues re other SOA questions Q18A – gambling prosecution Q18C voidable transfers of property – 5 years & obtaining credit with no financial capacity to repay Note: There are things to be aware of in other SOA

Debtor’s petition - process
Prepare, prepare, prepare! FC takes full notes of advice to C C Client completes 2 pages of Petition Client completes 20 pages of SOA Post or to AFSA 1 min Actual process far simpler than creditor’s petition, the complexity comes in the thought process that happens beforehand 2 pages of petition 20 pages of SOA Then post or Consider getting the bankrupt to fill in the forms themselves with black or blue pen – your agency might have a policy on this. Bankruptcy toolkit recommends this p 136 bc: It ensures that client is fully engaged & takes responsibility for the accuracy of info they have provided More difficult for client to come back later & allegethat FC didn’t follow instructions

What are your client’s responsibilities after bankruptcy?
Make a note that you have advised your client on their responsibilities during the B Respond promptly to any trustee requests for information Inform trustee of address changes Disclose to trustee any property acquired, eg inheritance Reasons for complying: Makes the process smoother for client An offence not to comply

Potential issues during bankruptcy
For most FC clients there are no problems Being chased for a provable debt Freezing accounts Requesting permission to travel Income contribution disputes or hardship Sale of unprotected assets Examples of what might happen and what C can do See p 198 for letter re being chased for a provable debt.

Failing to disclose Centrelink employee Karen English of Devonport was prosecuted in the Magistrates Court on 19 May 2016, for concealing property obtained during the period of her bankruptcy. Ms English became bankrupt on 22 March 2012. On 14 July 2014 and 3 September 2014, Ms English received $50,000 and $87, respectively into her bank account, paid from the estate of her late father. Ms English subsequently deposited the inheritance into two term deposit accounts. Question: what punishment did the court give to Ms English? Ms English pleaded guilty and was convicted on both counts. She was ordered to pay a fine of $1,000 and court costs of $78. Magistrate Jago found that Ms English had committed the offences during a time of emotional crisis and that there were strong personal mitigating factors to be taken into account. The Magistrate accepted that general deterrence was important and that the system relied on bankrupts’ honesty to protect creditor’s interests. She also noted that this type of offence was difficult to detect. However, the Magistrate found that the actions of Ms English were not sophisticated. Ms English had argued that while she was aware of her obligation to notify the Official Trustee, she was in a state of uncertainty about what she would eventually do with the inheritance money. She accepted that Ms English did not spend the money and that creditors were eventually paid out in full.

Voluntary bankruptcy review
Prepare Gather financial info Identify any other options Identify disadvantages Help complete SOA Can client start the process? Assist with Q’s Check completed forms Final bits Advise on responsibilities What happens if issues during B? Look back at slides & arrange slides under these 3 headings. Bc this is more sequential. Explain all the info above others in separate slides Use this slide as a review Then go into case study for this whole bit.

Case study: Sophie What debts, if any, will be wiped by Sophie’s bankruptcy? What debts, if any, will not be wiped by Sophie’s bankruptcy? What will be the financial effect on Jane if Sophie bankrupts? How will the trustee deal with the jointly owned house? What will happen to Sophie’s car? Will a bankruptcy affect Sophie’s employment as a handyperson? Is the learning material here to answer the Q’s, if not amend. Do a mini case study before the SOA - get them to work in groups to respond. Exercise: In small groups discuss the case study & answer the questions Come back in larger group to discuss

Forced bankruptcy - Creditor’s Petition
Think about What is the impact of bankruptcy like to be on your client; good, bad or ugly? Does your client need legal advice? Forced bankruptcy is complex – speak to a senior FC Questions to ask: Has anyone had a client who has been forced into bankruptcy? What was the experience like for the client? Has anyone had a client who has tried to stop a creditor’s petition? Involuntary bankruptcy – creditor’s petition process In Victoria bankruptcy list sits Tues & Thurs mornings in Federal Most people don’t turn up & so are automatically made bankrupt FCs in Federal Court Refer to Justice connect project

Creditors Petition – some legal terminology
Act of bankruptcy Bankruptcy Notice Creditor’s Petition Sequestration order

Acts of bankruptcy A creditor must prove that a debtor has committed an act of bankruptcy in order to get a court order for bankruptcy 99.99% of the time, this is failure to comply with a bankruptcy notice there are many other acts of bankruptcy & these are listed in section 40 of the B Act, see also p230 Toolkit Ask the question before putting up the slide: put definition on slide rather than the question 10 mins Activity: Get into groups of 3 & come up with: A definition of the term ‘provable debt’ Do you use this term when talking to clients? Why? Or Why not? Why do we use the term ‘provable debt’ when talking amongst ourselves? My notes: Act: section 5 definitions: provable debt means a debt or liability that is, under this Act, provable in bankruptcy. Act: section 153 Effect of discharge (1) Subject to this section, where a bankrupt is discharged from a bankruptcy, the discharge operates to release him or her from all debts (including secured debts) provable in the bankruptcy, whether or not, in the case of a secured debt, the secured creditor has surrendered his or her security for the benefit of creditors generally. Section 153 then goes on to say which debts do not get a release

Session review - Quiz Do a final quiz – 8-10 qs.
Your client works in a real estate agency and asks if she bankrupts, can she keep her job? What information do you give her? Where do you suggest she looks for further information? Your client runs his own building business, will bankruptcy affect his employment? Your client has $10,000 in toll fines and $60,000 in credit card debt. He is 62 years old, has no assets and is being harassed by debt collectors. Does he have options other than bankruptcy? Your client is worried that her mother will find out that she is bankrupt. Is this likely to happen? List 5 possible negative impacts of bankruptcy Your client comes to you after he has bankrupted and says he has won $50,000 in Tattlotto. He asks you if he can use part of the money to take his family on a holiday to the Gold Coast. What do you tell him? Your client is clearly a good candidate for bankruptcy given her assets, debts and income. She has only ever heard about the negative view of bankruptcy and says she believes she should pay her debts. You certainly don’t want to say anything that might be seen as pressuring her into bankruptcy, however you do want to provide an alternative view of bankruptcy so she can balance up the two views. What do you say to her? What notes do you keep on your file? Your client is $3,000 in arrears with her rent. She also has $70,000 in unsecured loans and wants to bankrupt. She wants to stay in her current rental, what should she do about the rent arrears? What should you do if your client comes to you saying he has just received a bankruptcy notice? Is a Centrelink overpayment amount provable in bankruptcy? Will your client have to pay the debt back at the end of the bankruptcy? Do a final quiz – 8-10 qs. Get as many Toolkit books as possible. Voluntary VS. Involuntary

Further information Bankruptcy Toolkit/ by Financial Rights & Lismore District Financial Counselling, 2014 AFSA website – forms, Inspector-General Practice Statements, Resources tab Subscribe to AFSA PIR - Personal Insolvency Regulator newsletter AFSA news blog:

Questions????

Call us! Consumer Action Law Centre Level 6, 179 Queen Street
Melbourne VIC 3000 Worker Advice Line: (03) Rural access: Mon – Fri 10am to 1pm and 2pm to 5pm

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