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Pete and Jill are happily married and they have been for the past 15 years.
They have two school aged children, Ross and Rosie.
Pete is a self employed contractor in the construction industry and last year he was off work for three months as he had to have some surgery on his shoulder.
Jill works part time at the local school so she can be home in time to do all the running around with the kids.
Work was slower than normal for Pete last year as there was a lot of rain and the three month break from shoulder surgery hurt financially.
Pete was in a payment arrangement with the ATO which he had to default on during the three month layoff. He also had to rely on credit cards to stay on top of normal household bills like electricity, insurances and phone accounts during the three month layoff.
Despite Pete’s Accountants best efforts the ATO have taken a tough approach and are demanding that Pete pay $25k immediately and a further $25k in installments over the next 18 months (Pete owes the ATO approximately $50k in GST and personal income tax).
The ATO’s tough stance has taken Pete and Jill by surprise. There are threats of legal action and understandably they feel that their livelihood and household are being threatened.
Pete has four credit cards in his name with balances totaling about $45k and he is keeping up to date with the minimum payments on the cards (just).
Jill has a single credit card in her name that she has had since she was 18. The balance on Jill’s card is about $3k and she can comfortably keep up to date with payments on her card from her income.
Pete and Jill jointly own a house and they have done for about 10 years. The house is financed by a mortgage provided by one of the Australian banks.
The mortgage payments are up to date and with Pete and Jill working there is sufficient income in the household for the mortgage payments to be kept up to date and to meet normal living expenses. Council rates, water rates and utilities are all up to date.
Pete and Jill’s mortgage has an outstanding balance of about $360k and after checking with two Estate Agents they have been told their house would sell for approximately $400k.
Their Accountant has suggested Pete consider going into voluntary bankruptcy to resolve his debt crisis.
At first Pete and Jill are horrified, ‘bankruptcy’ ?
Both Pete and Jill had always thought that bankruptcy was for people nothing like them, a normal hardworking family in the Aussie suburbs.
Fortunately their Accountant calmed them down and explained that the bankruptcy system is actually for normal people who find themselves in a situation where debt levels have become unmanageable.
Which in Pete’s case is what has actually happened.
Pete situation certainly meets the bankruptcy criteria as he has (unsecured) debts of approximately $95k that he can’t pay and his main unsecured creditor, being the ATO cannot be paid and are threatening legal action.
Jill won’t need to consider bankruptcy as her unsecured debt of $3k is manageable and Jill expects to be able to make payments on time on her debt both now and in the future.
Pete and Jill are concerned that if Pete goes into bankruptcy then he will lose his ability to earn an income to support the family and that they will lose the family home.
Fortunately when they looked at how bankruptcy actually worked they found out it was nothing like what they had initially imagined.
First and foremost the bankruptcy deals with the main problem head on, as it properly recognises that Pete’s unsecured debts are, when taken together, unpayable.
The relief that bankruptcy provides Pete with is all his unsecured debts, including his tax debt, are fully and finally cancelled.
Pete’s interest or equity in the house is effected by him being bankrupt but this does not need to be an unmanageable situation, quite the opposite, this situation needs to be carefully managed.
Pete’s interest or equity in the house is dealt with by Pete’s Bankruptcy Trustee.
So how does that work ?
When a person goes into voluntary bankruptcy then they have the opportunity to approach a Bankruptcy Trustee to discuss their situation.
In Pete and Jill’s situation it is Pete’s $20k of equity in the house that is effected by him being bankrupt. Jill’s share of the equity, her $20k is not effected as Jill does not need go into bankruptcy herself.
Pete’s trustee has a legal duty to deal with the bankrupt estate’s claim of $20k and in normal circumstances the trustee would want get this done during the three years that Pete is bankrupt.
So does this mean that the trustee must sell Pete and Jill’s house so that $20k from the proceeds of the sale of the house can be brought into the bankrupt estate?
The answer is ‘not necessarily’.
A bankruptcy trustee who administers Pete’s file in a practical and sensible manner would most times want to reach a financial settlement for the $20k with Jill as she is the other owner of the house.
If a settlement with Jill can be reached then the house can be saved?
The answer is ‘yes’.
Jill might have access to $20k through her parents or other family members. If this was the case then Jill would use the $20k to settle with Pete’s trustee, usually in the first few months of Pete’s bankruptcy.
What would happen if Jill does not have access to $20k?
Some people have access to $20k from family members or friends and some don’t.
In this situation it is at the trustee’s discretion as to how the equity in the house is dealt with.
It is for this reason that it is very important that a practical and sensible trustee is in charge of Pete’s bankruptcy.
An alternative way to settle the bankrupt estate’s claim might be that the trustee agrees to accept monthly payments across the three years of Pete’s bankruptcy of somewhere in the $600 – $700 per month range which would adequately cover the trustee’s $20,000 claim, (as well as any additional monitoring and administrative expenses).
From Pete and Jill’s perspective this could be just the solution they are looking for.
And it is not at all what they were expecting when they first began talking about the possibility of Pete going into bankruptcy just a few weeks beforehand.