She's On The Money - Bankruptcy: Breaking The Stigma

Episode Date: August 17, 2021

We've all heard of bankruptcy, but I'm not sure any of us truly know what it means to go bankrupt, or who would even be eligible to do so! In this episode, V and Jess go through the ins and outs of Bankruptcy and share why it's actually an empowering choice you can make.If you need a bit of help getting your finances on track, you can contact the National Debt Helpline on 1800 007 007. If you're interested in learning more, you can visit the AFSA website.The advice shared on She’s on The Money is general in nature and does not consider your individual circumstances. She’s on The Money exists purely for educational purposes and should not be relied upon to make an investment or financial decision. Victoria Devine is an Authorised Representative of Australia Pacific Funds Management Proprietary Limited ABN 34 132 463 257 - AFSL 339151.See omnystudio.com/listener for privacy information.

She's on the money. She's on the money. Hello and welcome to She's on the money, the podcast for millennials who want financial freedom. Today, we're getting right into the nitty-gritty of bankruptcy. What is it? Who is it the right option for? And what potential consequences can it have on our future?

My name is Jessica Ricci, and today I'm joined by the light of my life, Victoria Devine. The light of your life. Yeah, sorry, James. It's now Victoria. Yeah, I was about to say, that's dramatic. I'll take it, though. I'm not going to ask any further questions. So just move on.

Keep talking, Jess, so that we don't take it back. Well, today when we were doing a little bit of research for the show, I realized that I didn't even know that an individual person can file for bankruptcy. I thought it was a business thing. So to kick it off, can you kind of just explain to me exactly what bankruptcy actually means? So yes, businesses, but also people can file for bankruptcy. And it's something that we'll get into the nitty gritty of it, as you said before, but it's something that I think has a really unnecessary stigma associated with it.

because for those people who it is the right option for, it can be really liberating. It can be really freeing and it can be actually something that gives them a brand new clean slate to start off. But to jump to the official description of bankruptcy, bankruptcy is a legal process and it is available to individuals or entities like businesses who are unable to pay their debts. So bankruptcy releases you from most of your debts, which as I said before, for most people comes as a huge relief and gives them a fresh start so there are a number of ways to do this in fact when i say a number of ways i mean only two you can either do it voluntarily or someone that you owe money to can actually force it on you via the courts which is called a sequestration

order if that's not enough of a mouthful jessica yeah that's tricky isn't it sequestration say it with me guys but that's what it's called and usually bankruptcy lasts for three years and one day. Although in some instances, it can actually be extended for up to eight years and it means a lot of different things to a lot of different people. So we're going to unpack that today. So when you go bankrupt, what actually happens to the debt? I'm assuming it doesn't just like poof into thin air. Kinda, it does, but it doesn't. It's one of those things where there are a lot of caveats, but you typically don't need to pay your debts back other than any secure debts, which we will go through shortly, but typically the debts don't end up being paid in

full. Although through your trustee, you can pay off as much of the debt as humanly possible by selling your assets. So they might actually force you to do this and sell assets. And that's why it's really important to know the difference between voluntary and forced bankruptcy, but they can essentially force you to sell your assets or you can sell your assets to pay off some of the debt or in certain situations where you earn over a certain amount of money, there are compulsory payments that come into play that you might need to meet. So it's important to understand that and what it actually means. Can anybody go bankrupt or is there certain criteria that you need to meet?

Look, there's criteria you need to meet and I'm going to give you the legal criteria now, but I think that there are so many other things that we need to take into consideration because there are some serious consequences of going bankrupt. But essentially to file for bankruptcy here in Australia, you need to meet two requirements. You need to not be able to pay your debts when they are due and you need to be in Australia and have a business or residential connection to Australia. So that seems pretty broad, but it's something that we really do need to understand the consequences of the decisions that we are making. So with that in mind, is it a good idea in your opinion to file for bankruptcy? Yes and no. So yes, it can be if it's

the right thing for you. And we'll go through this in a minute, but also no, it can be a bad decision if it is not the right decision for you. So it's one of those things that you really need to consider, but there's a lesser of two evils. So going through bankruptcy voluntarily is obviously a lot softer. You are in control and you understand it. Yes, you will still have to adhere to the process, but being forced into it leaves you a lot less choice. And I think that sometimes people end up being forced into bankruptcy because they've said no to voluntary bankruptcy so many times because they're like, no, I don't want to do that. I don't want to go bankrupt. I don't want the negative consequences, but they haven't thought far enough in advance to

go, okay, cool. If I don't choose this and actually deal with the process and choose the assets that I want to sell to pay back my debts, I'm actually going to end up in a situation where somebody else is making that decision for me and I have absolutely no control. So this is all about education and understanding when this might be right for you, but also what the process means and how to support people that you know are going through this process. Cause Jess, it is stressful. It sounds quite scary. I'm not going to lie to you. And as you said, obviously, I think with that big stigma, we really hope that this episode can make some people feel a little bit more comfortable with the concept. And if it is something you have to do, you know, V, you always

say that your financial situation isn't a negative reflection of you. You were doing the best you could with the tools that you had at the time. Oh my gosh, you could become me. I literally, am I your doppelganger? Who knows? But, you know, bankruptcy might just be a tool or a resource that you need to utilize currently, but we do need to consider those negative consequences. Can you kind of run us through what those may or may not look like? Yeah. So obviously if you are in a significant amount of debt, declaring bankruptcy could be a massive relief, but there are some things that we need to consider and I'm going to list them off. I have a total of seven dot points that I have written down that we are going to go through

together. So the first one is that it can impact your ability to access credit in the future. And while short-term you might go, I don't want credit. Like that's fine. Like just take that away from me. If you do apply for credit over a set amount, then you'll be legally obligated to let the credit provider know that you were bankrupt in the past. And then they might decide not to lend to you. So this is not just about getting another credit card. It could actually impact your ability to get a home loan in the future. And as we said before, yes, it's usually for three years and one day, but it could be up to eight years. And you don't know what you want to do in the next eight years. And from my perspective, I don't want that decision taken

away from me. But credit reporting agencies do keep a record of your bankruptcy for either two years from when it ends or five years from the starting date of the bankruptcy, whichever is later, just to be a little bit technical there. So that'll be around for a little while. It will stick around for a little while. But then number two on my list of dot points is a trustee will come on board to manage your bankruptcy. So don't, that sounds complicated. What is a trustee? It's essentially somebody who's been appointed to look after you and this process. And they're going to work with you and your creditors to make sure that absolutely everybody is happy and working towards an outcome that suits every single party. During the three years that you are

in bankruptcy, you'll actually need to keep the trustee in the loop with lots of things like specific life changes, and you need to provide them with certain documents when required. So they kind of become not the boss, but kind of the responsible entity for this situation. And they need to actually make decisions on your behalf. And as much as they are the ones that are there to make sure everybody is happy, it doesn't necessarily mean that you're going to get everything that you want out of this process. Their job is essentially to make sure it is the best path forward.

And sometimes that's not exactly what you want, but it is definitely for the better. dot point number three Jess is bankruptcy can actually impact your employment your income and your business if you have one so if you've declared bankruptcy and things are going well but you're earning over a set amount of money then you might actually need to make additional payments to your trustee during that period of time because they're like yeah cool Jess like you declared bankruptcy and you definitely couldn't afford it we get it but now you can so you probably should do the right thing. And look, I agree with it, but I think it's really important to understand that it's not just a get out of jail free card and you're wiping the slate

clean and then you can go make millions of dollars in a different business because you've been extinguished of all the debts that you had. That's absolutely not the case. And I think that so many people think that that's an option when it is not, my friends. Random question here. We mentioned earlier that it can impact your ability to get a loan. If you're a business owner, can you be required to sell business assets as well as your personal assets? Absolutely. Everything is fair game. It just depends how you've been structured, but it is a really big deal. Yeah. Okay. All right. Dot point number four is not that it's a massive deal, but bankruptcy can actually impact your ability to travel overseas. And I mean, right now that is not something that any of us even have

the option of. It's like we're all bankrupt right now. But in normal times, you would need to request permission from your trustee before you actually travel overseas. And it's actually an offense to travel without written permission. Who would have thought? It's like getting a signed slip from your mom to go on the school camp. All right, number five. Number five, our dot point is your assets may be sold by your trustee, including your property. So this is where we talk about voluntary versus involuntary bankruptcy. Sometimes if you go voluntarily bankrupt, you can have more of a say in this process. But at the end of the day, you need to pay those debts back. So it doesn't mean you get to keep your house and extinguish your personal debts. If you have an asset that

could potentially pay the debt that you've incurred off, they're absolutely going to want to leverage that and make sure that you get back to ground zero. It doesn't mean you personally staying in that position, no matter how long you saved for that house, they're going to go, okay, but I know Jess that you have this massive mortgage and you've got this beautiful home, but at the end of the day, your personal debts are way outweigh what that is. And if we sold your property, we could extinguish some of those debts. That's what they're going to do. So it's not as though it's a get out of jail free card and you get to keep your home. It's a really dramatic process. My dot point number six is bankruptcy does not mean all of your debts are

gone. So while most unsecured debts are sorted out by the bankruptcy, so we're talking credit cards and your gas bill, for example, they are going to be covered by the bankruptcy. But any secured debts that you have, like a car that might still be underfinanced that you still want to hold on to, they still need to be repaid. You don't just get a car for free because you declared bankruptcy. And then if you can't pay back that secured debt, then you'll need to hand that item back to the creditor you just again can't keep the car there's no good outcome here i've spoken to too many people historically that are of the opinion they're like oh well if i declare bankruptcy they'll get rid of my car loan like yep cool but like the car's going to my

friend like you don't get the best of both worlds it is definitely a compromise but at the end of the day as we're saying before for some people just an absolutely clean slate is exactly what they need because they're too far up that river if that makes sense yeah and then number seven which i think is really important because it impacts your ability to run businesses in australia and it's actually public record is that you will permanently be added to the national personal insolvency index which is a public register listing all insolvency proceeds in australia and anyone can access that so it's not a bad thing as i said before i don't think we should be ashamed of these things. I don't think that we should, you know, have such negative connotations

associated with them. But at the end of the day, for some people, it is really important that they know that because I know a few times I've spoken to people that were horrified that people could access that information and they just didn't know that that was a part of the process. But yes, it will be public knowledge. Wow. So there's definitely a lot to take into consideration when deciding if bankruptcy is maybe the route to go down. And we'll be back after a really a short break to discuss the shame that can be tied to it sometimes, whether that is warranted or not, and some other options for dealing with our debt if it does feel like we're spiraling out of control. All right, Evie, we said before that there is a bit of a sense of shame tied to

filing for bankruptcy. I've seen some discussions in the group previously, and someone named Carla mentioned that she was too stubborn to file for bankruptcy and just committed to paying off her debts, which more power to you. But she says that she regrets that decision and found it to be a really traumatic time for her. What are attitudes like when it comes to bankruptcy? And I mean, there may not be a right or a wrong, but can we do anything about it? Yes and no. I totally sympathize with Carla because sometimes you definitely have your head in the sand about debt and you don't want to get yourself out of it. I've been in situations where I've sat down with people and I've done full financial advice in this situation historically, where I've sat down

with someone who was actually in close to $200,000 worth of personal debt. We're not talking mortgages, we're not talking cars, like literal credit cards and personal loans that they then had nothing to show for it. And I did all the calculations and worked out that for them to pay back the debt that they had at the income that they had. And, you know, there are obviously a lot more factors, but I'm not going to go into their personal situation too deeply because that would not be appropriate. But essentially I calculated it out and if she'd actually stayed and tried to pay out the debt, it would have taken her a hundred years to pay that debt off at the credit ratings there were. Obviously people will turn around and say, okay, well you probably should be

consolidating that debt like we talked about on another podcast recently. But the thing with that is because she was so far down that river, nobody would consolidate that debt. So no bank was willing to refinance. No bank was actually willing to give her another credit card or another credit option. And it was just a very sticky situation. But in that situation, she didn't want to file for bankruptcy because she was just so stuck to the idea that there was so much shame associated with it and it was such a bad thing. But essentially, Jess, we said before that bankruptcy sticks around for three years and one day or eight years. It depends on the situation, but a hundred years of paying off debt, she would have had that for the rest of her life

or eight years of being under these rules and regulations, but being financially free from the debt that was weighing her down. To me, I could fully comprehend that the bankruptcy option was the better option for her. And I think that that's what Carla from our community has been talking about. She stuck to it and she was like, no, I'm going to pay off the debts myself. But what if those debts are so overwhelming that it's going to take you 30 years plus to get over them, plus their mental anguish and the compromise and the lifestyle changes that would be associated. Maybe it's actually better to go down the bankruptcy process, wipe your slate clean, and then be able to start building your wealth back up and being financially responsible from

there. So yes, Jess, there is a sense of shame tied to filing for bankruptcy, but I don't think it should be there, especially if you've done your research and you understand it. And I mean, I'm never going to judge a friend if they turned around and said, Hey V, like I've just been in such a sticky situation. I've, you know, racked up all this debt and now I'm going to file for bankruptcy, I think the most important thing is actually really understanding that you are making a change. So if you are going to be filing for bankruptcy, see it as the clean slate that it is, not some kind of punishment for getting in the debt, but rather a second chance. And I think that that's a really beautiful thing to be afforded in a world where we are now able to

educate ourselves on financial literacy to make sure that we never get into that sticky situation again. And if you are worried, I guess, about the reaction of people around you, I would say that you would hope that if you have people who love and care about you, they just want what's best for you. And if you're able to explain to them, you know, sharing as much or as little that you're comfortable sharing, that this is a choice that you're making and that you've thought it through and that it's going to put you in the best possible position, you would hope that those people will love and support you. And if they won't, that's what our community is for. We're here to tell you that there shouldn't be any shame. And I'm sure that there are people in

our community who have gone through the exact same thing, who are willing to back you up and let you know that that's totally okay. Absolutely. And I think that it actually goes a little bit deeper than that, Jess. If you're surrounded by people who aren't supporting you, why are you surrounded by them? Like, I think we deserve better and we don't actually have to tell anybody that we're going through this process because we actually don't owe anybody any kind of explanation. Like it's not their business. And as much as I'm very open about finances and, you know, talking about money, like it's still your story. You are absolutely in control of who you share that with and who you don't share that with. And I would hate to think that you think

you owe people an explanation for a decision that you are making for the best for you. So I think it's also important that, you know, if you want to explain it to people, absolutely all power to you. It is absolutely worth having that conversation. And I think you'll find that more people are supportive of you than less. But at the same time, I think that you need to also remember like this is your journey. It's not somebody else's decision to make and it's actually up to you. But that is my two cents. Yeah, absolutely. Now, if we are in a lot of debt and maybe bankruptcy is a little bit intimidating, are there other options that are available to potentially help us out. Yes, of course. And this is where we can actually take control. And instead

of putting our heads in the sand, I say that so often, but putting our heads in the sand and feeling like we aren't in control, there are a few things that we can do. There are three official ones, but to be honest, if you've got debts that can't be repaid, the first thing I would be doing is jumping on the phone and jumping on the phone. If it's a phone bill, if it is a personal loan, if it is a water bill or an electricity bill and talking to the people at that company and saying, hey, Jess, I'm really sorry. I'm actually in a really sticky situation. Like COVID's really affected me or I've lost my job or I'm going through this personal situation. And I'm just wondering what you can do for me to make this a bit easier. Like, can we change the terms of

the agreement? Can we, you know, discount it significantly or just negotiating with them potentially what you can do? I promise the people on the end of the phone are so understanding and really want to help you. But there are a few quote, official things that we could do. The first thing is a debt agreement. And this is where you and your creditors come to an agreement on the amount of money that you can realistically afford over a step period of time. So this is where I'll say, get on the phone, have a chat with them, ask if you can negotiate something a little bit different to what you currently owe, because what you currently owe isn't going to get paid. And I think that being really honest about that and calling and being like, hey V, yep, so that thing

I owe you? Not going to get paid. What would you compromise on? How can we make this work for both of us so that you get paid and we don't have to go to court? And they go, yeah, okay, no problems. Jess, I'd actually take 50 bucks from you instead of the full a hundred. And you go, okay, cool. Yep. That's more reasonable. Can I have three months? I think it's really important to know that as much as you might feel really out of control, you're still in power. Like you still actually have control and you still have a voice and you still have the respect of others. And you can actually ask for things. And I think that often when we owe money, there's a lot of shame associated with that because you go, oh my God, I don't want to call them. I owe them $10,000 and

it's just not going to happen. Have the conversation. I promise you it is not as overwhelming as you think it is. I've seen a few people talk about this in the group, particularly around when loans or money that they've owed have been passed along to debt collectors and people have been able to negotiate with debt collectors sometimes to knock thousands of dollars off of their debt. If it's at that point, absolutely try and negotiate and ask them what they'd take, even put a number on the table. I know people personally who have had, you know, example, debt collector coming for $11,000 and they say, okay, cool. I'm actually really unable to pay that right now. I know you're asking for it. There's $6,000 in my savings account right now.

if I give you that, can we call it even? And debt collectors have actually said yes to that historically. I'm not saying it'll work every single time, but if you don't ask, you're never going to get. Yeah, absolutely. What else can we do if we are in a pile of debt trying to dig our way out? So the next one is a personal insolvency agreement. And this is a legally binding agreement where some or all of your debts are paid in installments and it is agreed upon by both you and your creditors. So similar to a debt agreement, but it's a personal insolvency agreement. And the third one is a temporary debt protection for 21 days. That means that you're protected for three weeks and unsecured creditors can't take action against you. Now, I'm not saying that

that's the be all end all. It's just a step that you can take if everything is really overwhelming and you need a little bit of time and you actually need to sort your stuff out. That can be really powerful. Amazing. Now, I know it's a little bit personal, but there are probably quite a few people listening right now who might have, say, $5,000 of debt and are wondering if bankruptcy is a good idea because they're struggling to pay their bills, put food on the table, things like that. Can you give me a sense of what level of debt most people would need to be in or would find themselves in before they do actually look into filing for bankruptcy? Yeah. Again, this is different for absolutely everybody. For some people, $5,000 can be paid

off in a year or two years. And for others, that is going to be absolutely crippling. And it is not for me to say what is right or what is wrong. I think we need to think about the ramifications that we went through before. Because obviously, if it's five grand, can we find a way to pay that back? We are definitely not doing this podcast to promote bankruptcy, but more educate you around this. But if it's five grand, could you pick up an extra job or a few extra shifts at work? Could you do what Jess does and sell a whole heap of things on Depop or Facebook marketplace and start smashing down the debt that way? Could you, you know, do some side hustles? Could you jump on AirTasker and do a few jobs? I'm not here going, okay, cool. Like you're absolutely helpless. I

think that everybody has an ability to generate additional income, but just as an FYI, as of January, 2021. So this year, my friends, if you are listening today, the minimum debt amount that can trigger a bankruptcy is actually $10,000. So you do need to be in a little bit more significant debt. But again, if it was 10 grand, I'd really be trying to hustle my way out of that situation and working out the time on that. Because don't forget that bankruptcy sticks around for a minimum of three years and one day. So if you could get out of debt by creating an agreement or a plan or a way to get out of that in less time than that, I would argue that's a really great way

to avoid going bankrupt. Because as I said before, it sticks around and you do go on that register forever and it does impact your ability to get a mortgage and save for a home. And I think it's really important to understand that. But as I said before, I've met people in very deep debt before

where bankruptcy just makes sense because you do the numbers and you work it out and you're like, oh my gosh, I'm so sorry, my friend. but like if we did this and we started paying it back today at the amount that they're asking you to pay it back, it's going to take 30 plus years. And they go, oh, I can't, I can't do that. That's so overwhelming. And I get it. And that's when I think I would start considering something like this. Yes, you can absolutely consider it for less money. As I said before, the minimum amount is 10 grand, but I really would be trying to avoid it as a first step instead of burying our heads in

the sand. I promise you in 2021, it is so easy to find additional side hustles or ways to generate income that don't require any skill. Like it is sometimes about running errands. Like I actually have a girlfriend, I'm not going to name her, but she's a wizard. And I know she listens to this podcast and she actually started cleaning houses on the weekends because she was like, oh my gosh, I've gotten myself into so much personal debt that that was her way of getting out of it. And I was so proud of her because also every single time she cleaned a house, she was so proud of herself because she knew what that money was going towards. And she felt like she was really changing her life and changing her money story.

And I just, I love that as well. I don't think it's about shame in what the job is. I think it's about embracing it and being like, oh my gosh, what a hustler. I love that. Like it's something that we can all do, if that makes sense. Yeah. And more power to those people who are taking on jobs that are different from what maybe they do in their day job to make those ends meet or to make that change in their life I think you

should be taking a lot of pride in your commitment and your dedication and even if you're filing for bankruptcy if you've come to the end of the line and that's the choice that you have to make be proud of taking control and doing something that's the best for you and I guess before we head off I just wanted to ask you V you know with all of these kind of more heavy things that we've spoken about and you know with any large amount of debt or financial stress there's going to be a really significant mental toll. We know there's a direct link to mental health and financial distress. Is there anything you can pass along to our community, to anyone who might be struggling financially or might be considering bankruptcy? What would you say to them?

So first things first, do your research. Work out if it is the right decision for you. It is not a get out of jail free card from Monopoly, my friends. It is not as easy as that. But if you've come to the conclusion that you need to file for bankruptcy, I'm so bloody proud of you. I am so proud that you have made that decision and we have gotten this far and it is something that you are doing for future you, make sure that it doesn't happen again. Put yourself in a position where you go, yep, cool. This is the clean slate that I deserve. And I am going to take every opportunity to educate myself and put myself in a better financial position. But listening to episodes like this is a really great start doing your own research. The Australian Financial

Security Authority has lots of information. And similarly, talking to a counselor from our friends at the National Debt Helpline can be really useful if you need to talk to someone about your options. I genuinely think if you are seriously considering bankruptcy as a viable option for you, that it would be a no brainer to pick up the phone and talk to the National Debt Helpline. And they are free. We'll pop their information in the description. Yes. Talk to them. They are so kind. They are so knowledgeable. They are going to make sure that you are making the right decision for you and assist you in that process. I promise you, you do not have to do any of these things alone. Obviously we'll link them in the show notes as Jess said before,

but please don't feel like you need to be super broke or a certain type of person to be calling these places. Like if I was in that situation, those are the people I would personally reach out to. Like I have so much respect for them and what they do is so, so special. And then if you're all set and you've decided that that's what you're going to do, then all you need to do is head to the Australian Financial Security Authority or the AFSA website and submit a bankruptcy form online. And you just need to set up an account to get started. It's important to remember to detail every single little part of the debts and why you're applying for bankruptcy. And if you do forget, let your trustee know as soon as possible. And then if your application is accepted, the AFSA

will send both you and your creditors that approval in writing. If not, you will also receive written word from the AFSA detailing the reason why. So they'll absolutely let you know if you're approved or not approved, always in writing. Also really important, you can select a private trustee, or if you don't have that, they will select one for you. And as we've mentioned, they're going to work really closely with you and your creditors throughout this entire process. Like this is not a process that you have to go through alone. Please don't think it is at all. it is absolutely not something that anyone has to do alone okay amazing like we said check out the show notes we'll have as many resources as we can think of down there we will jam pack it

full my friends absolutely the national debt helpline we talk about them all the time they're really fantastic and they're a free resource and if you're in a lot of debt utilizing any of those free resources that you can get your hands on i think is a really fantastic thing to do thanks jess but as always just before we head off we'd like to acknowledge and pay respect to australia's aboriginal and torres strait islander peoples they're the traditional custodians of the lands the waterways and the skies all across australia we thank you for sharing and for caring for the land on which we are able to learn we pay our respects to elders past and present and we share our friendship and our kindness the advice shared on she's on the money is general in nature and

does not consider your individual circumstances she's on the money exists purely for educational purposes and should not be relied upon to make an investment or a financial decision and we promise victoria divine is an authorized representative of australia pacific funds management proprietary limited abm 34132463257 afsl 339151 we will see you next week guys bye