Go for broke – but only as a last resort
If you are on the cusp of bankruptcy, one of the most important things you can have is great advice. Yesterday I was featured in a Sydney Morning Herald article about going bankrupt. This was a lengthy article on the process of bankruptcy, the statistics in Australia, and some of the repercussions of bankruptcy – both financial and psychological. The article highlighted my story as someone who has been through the experience, and has come out the other side. We feature this article in its entirety. In addition, we include a little bit more about how the process of bankruptcy was instrumental in my credit repair business and also some more facts about the decision-making process around being in debt, and why going bankrupt, should really be the last resort for your credit file.
By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repair and www.fixmybadcredit.com.au.
Below is the Sydney Morning Herald article about bankruptcy:
Go for broke – insolvency can be the best solution
June 19, 2013 By Sylvia Pennington Sydney Morning Herald
What happens next for thousands of bankrupt Australians?
Snowballing debts and no means to repay them … going bankrupt is the last-ditch option for those in a financial hole too deep to climb out from.
But what happens next for the thousands of Australians who take this option each year? Some high-profile down-and-outs, such as former childcare mogul Eddy Groves, who was declared bankrupt in January, head overseas for a new start or are cushioned by their partner’s cash. For others, it can be a painful return to the starting blocks and a hard slog back to solvency. Graham Doessel, the founder of credit repair service MyCRA, is marking 10 years since his discharge from bankruptcy.
Doessel says he found out the business was in trouble when he arrived at his office to find the locks had been changed. He spent a year trying to return to the black before accepting that bankruptcy was the only way forward.
While in some senses a relief after a year of desperate ducking and weaving – ”weeks and months of robbing Peter to pay Paul” – Doessel says getting his head around what had happened took at least a year.
Rather than seek white-collar work, he bought a pressure washer and began cleaning driveways for $50 apiece in an effort to put food on the table.
”I was struggling to raise a family … I went through a period of depression – life really sucked,” Doessel says.
The repossession of his car compounded his woes. Before it was taken, ”that power pole looked so inviting”, he says.
”It’s not even in my personality to think like that – it’s very out of character.” Living without access to credit was an ongoing challenge, as was the embarrassment of being known as bankrupt in a small town, the latter so much so that Doessel moved his family to Brisbane for a fresh start.
Excessive use of credit
There were 22,163 bankruptcies in 2011-12, according to the Insolvency and Trustee Service Australia, the federal agency that administers the sector.
NSW topped the list with 7627 bankrupts, followed by Queensland with 6251, Victoria with 4249 and Western Australia with 1567. Men comprised 57 per cent of the total in 2011. Typically they were single with no dependants.
Forty-seven per cent of bankrupts were unemployed at the time of becoming insolvent and 78 per cent earned less than $50,000 in the previous 12 months. About one-third had between $20,000 and $50,000 of unsecured debts and most did not own property or other assets that could be sold to repay creditors.
Unemployment or loss of income was cited as the cause in 34 per cent of cases, followed by excessive use of credit facilities, including losses on repossessions, high interest payments and pressure selling, at 22 per cent.
Accountant and financial adviser Steve Enticott says fear of long-term consequences and stigma deters many Australians from going bankrupt, when, for some, it’s their best option.
”I see people locking down, thinking it’s a stain for the rest of their lives,” Enticott says.
Some struggle with the notion of having the financial equivalent of a scarlet letter against their name for seven years.
Bankruptcy generally lasts three years but details remain on credit reference databases for an additional four.
Employment prospects can also be affected. Bankrupts are allowed to work but are restricted from some industries and barred from operating licensed businesses.
Others fear it will affect their relationship prospects or be a dirty little secret to be outed when a new partner suggests buying a place together or applying for joint credit. But for many, concern about the repercussions is outweighed by relief.
Depression and anxiety
Debbie Hannaway, a manager with Moneycare, the Salvation Army’s financial counselling service, says clients considering bankruptcy have generally been down for months. Seventy-five per cent suffer from depression and anxiety, which is ameliorated once they eventually file the papers.
”The relief is instantaneous,” Hannaway says. For Michael McCarthy, 39, it’s meant respite from financial pressure that heightened the difficulty of coping with a personal tragedy.
Life for McCarthy, now a carer for his mother, began to fall apart in 2010 when his long-term partner died of a heart attack. He was left grief stricken, unable to return to the bottle shop where the pair had worked together and struggling to meet monthly repayments of $1200 on a car they had bought jointly under finance six months earlier.
The car was repossessed and auctioned, leaving McCarthy $40,000 in debt; a sum impossible to repay on his weekly income of about $450. He declared bankruptcy in mid-2011, shortly after attempting suicide.
”Nothing went my way,” McCarthy says.
”I’d given up on everyone and everything.” Bankruptcy felt like ”the cheat’s way out”.
”I didn’t want to do it but was just left with no other choice,” he says.
Enticott says focusing on rebuilding is the best way for bankrupts to move forward.
”You’ve got to be really positive about it,” he says.
”You need to have a vision and a plan, not go, ‘Woe is me, woe is me.’
”You’re bankrupt, it’s a First World problem … life can continue on.”
Going broke – how do you do it?
Individuals declaring bankruptcy must lodge a Debtor’s Petition and a Statement of Affairs with the Insolvency and Trustee Service Australia (ITSA). Applicants can choose a registered trustee to administer their affairs or use the Official Trustee. Trustees sell the bankrupt’s assets to repay creditors, collect contributions from their income, and investigate their affairs to recover assets transferred to others.
Most of the information provided to ITSA becomes publicly available. Some personal details — name, address, date of birth and occupation — along with details of the bankruptcy administration are recorded permanently on the National Personal Insolvency Index (NPII). Credit-rating organisations have access to the NPII and being listed can affect applications for credit. Bankruptcy applications can be rejected by ITSA if it thinks the debts can be repaid in a reasonable time and the applicant has been bankrupt previously or is generally unwilling to pay creditors.
What else I learnt about bankruptcy
My experience as both a broker and a consumer at the wrong end of credit reporting was the driving force behind MyCRA. My experience with bankruptcy meant I learnt a hell of a lot about the credit reporting system. One of the main things I discovered – was that help was hard to find.
Bankruptcy prompted a career change, and I retrained as a mortgage broker. In 2003 with the assistance of a close friend, the company called Mortgage Power was started, which then became Mortgage Now in 2004. Over the next five years, Mortgage Now grew to be known as the largest exclusively nonconforming mortgage brokerage in Australia.
Brokering gave me many opportunities to help everyday people avoid the mistakes I previously made myself.
It was whilst researching other non-bankruptcy options to develop plans to help other people in similar situations that I came across the concept of repairing bad credit. I learnt that many clients had negative listings appearing on their credit file that shouldn’t have been there – listings that were stopping them getting a home loan at normal interest rates.
These people had been victims of the fall out of incorrect credit reporting – and were paying dearly for it. I was happy to help them get a non-conforming loan, but remember feeling as if they had been dealt a very unfair blow – especially when considering how much more in interest they would end up paying for someone else’s mistake.
Broking was going very well, until the Global Financial Crisis. The non-conforming market was hit very hard. Sub-prime lenders were folding at a rate of knots – and this meant Mortgage Now was suddenly struggling to find lenders despite having more clients than ever before.
This led me to remember the thousands of clients who were faced with bad credit that shouldn’t have been there. So instead of giving up, I went back to basics, and found out how these clients could be helped.
After extensive studying of Australian credit reporting legislation I was able to come up with a framework for the solution to credit rating errors. I found it was possible to work on behalf of a client and conduct an audit-like investigation on their case – instructing their Credit Provider to remove negative listings where it was ascertained they were listed incorrectly, unfairly or in error.
And MyCRA Credit Rating Repair was born.
Facts about bankruptcy
If you become insolvent, there are two options as part of the Bankruptcy Act 1966 – A formal Debt Agreement, or Bankruptcy. But I must stress, if you are in deep with debt, you owe it to yourself to exhaust all other options before entering into either of these agreements.
Talk to your Creditors – most don’t want to have to commence legal action against you, and will try to help you with repayment variations if they can. If Creditors have not commenced legal action yet, you may be entitled to relief under financial hardship provisions.
The Consumer Credit Legislation Amendment (Enhancements) Bill 2012 took effect in March 2013, which allows for greater ease of request for financial hardship variation and will generally be encouraged as a deterrent to any kind of credit file blemish or prior to someone having a court Judgment or a last resort-Bankruptcy filed against them.
For some people, bankruptcy can be a welcome relief from compounding financial pressure.
For anyone going down this road, my advice is, to get advice, and even get a second opinion, before taking any steps to bankruptcy that could impact your financial future.
The ramifications of bankruptcy
When either Bankruptcy or a Formal Debt Agreement is proposed or implemented a Bankruptcy Notation is recorded on your credit file.
A formal Debt Agreement may be a nice form of Bankruptcy, but make no mistake – it is still part of the Bankruptcy Act 1966. Both options will impact a consumer’s credit file and ability to obtain credit for 7 years. But what’s more, you will be allocated a Bankruptcy number, which remains part of your credit history for life.
Your name and other details appear on the National Personal Insolvency Index (NPII), a public record, for the proposal and any debt agreement.
Other than difficulties obtaining credit, having a Bankruptcy recorded can also impact business situations, and in some cases may impact employment opportunities. You can’t get away from this notation, and answering the question ‘Have you ever been Bankrupt or entered into a Debt Agreement?’ incorrectly constitutes fraud.
Where to for more information?
Insolvency and Trustee Service Australia: https://www.itsa.gov.au/debtors
‘Dealing with debt: Your rights and responsibilities’ is a government publication which gives people information on dealing with debts, debt collectors and disputes. It is available through the ASIC (www.asic.gov.au ) or ACCC websites www.accc.gov.au.
Can MyCRA remove bankruptcies from credit files?
No. Unfortunately we cannot remove any forms of bankruptcy from your credit file at this time.
For more information on what we can remove from your credit file, contact a Credit Repair Advisor on 1300 667 218 or visit our website www.mycra.com.au.
Image: David Castillo Dominici/ www.FreeDigitalPhotos.net