Advantages of bankruptcy

Contributed by Ian Macdonald and current to 1 September 2005

FREEDOM FROM HARASSMENT

The main advantage of bankruptcy is that it frees the debtor from harassment by creditors for unsecured debts.

Under Western Australian debt collection law a much narrower range of debtor’s goods is protected from seizure, than is the case with bankruptcy. The following property is protected from a Sheriff with a seizure and sale order by section 76 of the Civil Judgements Enforcement Act 2004 (WA):

a) property the debtor holds in trust for someone else, and in which the debtor does not have any beneficial interest;

b) clothing and personal items of a kind and value prescribed by the regulations;

c) household property of a kind and value prescribed by the regulations; and

d) property used by the debtor to earn income by personal exertion of a value that does not exceed the amount prescribed by the regulations. At the time of writing (November 2004) there are no regulations made under the Civil Judgements Enforcement Act 2004.

It is important to note that this list of protected property does not include a vehicle, unless it is of a type and value which falls within (d) above.

FREEZING DEBTS

Bankruptcy freezes debts at the amount they are at the time the bankruptcy begins. A creditor can only put a claim into the bankrupt estate for the amount of the debt and interest owing at the beginning of bankruptcy. (If a bankruptcy is paid out by sale of the bankrupt’s property or from money received later on, a creditor can get interest owing up to when the estate is finally paid out in full).

DISCHARGE OF DEBT

When a person’s bankruptcy finishes, he or she is discharged from most of the debts that have been part of the bankruptcy. This means nothing at all needs to be paid on those debts. They have ceased to exist. A few debts are not discharged by the end of the bankruptcy (see below).

PROPERTY THAT IS KEPT BY THE BANKRUPT

Basic property is protected by bankruptcy. In contrast with the limited range of property protected under State debt collection law, in bankruptcy a person keeps a range of basic property such as:

• property the bankrupt holds in trust for another person;

• most of the household property found in the average home. The general principle is that household property, including recreation and sports equipment that is reasonably necessary for the domestic use of the bankrupt’s household, having regard to current social standards, is protected. The criteria to evaluate what is reasonably necessary include the make-up of the bankrupt’s household, (the number and ages of people, any special needs of any members of the household); any special climatic or geographical factors; and whether the seizure and sale of any property is likely to be uneconomical;

• a vehicle, such as a car or motor bike which is used by the bankrupt mainly as a means of transport to the value of $5,900. This is essentially a wholesale value, in that if the trustee takes a vehicle and sells it, $5,900 must be paid to the bankrupt. In practice, to cover the costs of sale and to make it worthwhile a vehicle would have to be worth $6,500 or $7,000 or more to justify seizure and sale;

• a bankrupt’s means of earning a living by personal exertion to the value of $3,000. This includes plant, professional instruments and reference books;

• some life assurance and endowment policies, and annuities;

• rights to damages and compensation for personal injury;

• payments to farmers under a rural adjustment scheme;

• a bankrupt’s rights in a genuine superannuation scheme are not affected by bankruptcy. Any lump sum received from a superannuation fund after bankruptcy is also protected. A payment received by a bankrupt from a superannuation fund before bankruptcy is not protected;

• a sporting, cultural, military or academic award made to the bankrupt in recognition of the bankrupt’s performance, which has sentimental value to the bankrupt, and which is identified by a special resolution passed by the creditors.