You might think that “bankruptcy” means the same around the world, and to some extent it does, but different countries have different laws, and names, for bankruptcy and the bankruptcy process. Below we outline how bankruptcy is handled around the world.
Bankruptcy Around the World
Bankruptcy in Australia
In Australia, there are two types of bankruptcy: voluntary and involuntary.
In voluntary bankruptcy, petitioners lodge a petition with the court to go bankrupt. This is called a debtor’s petition.
In involuntary bankruptcy, creditors (who have been unable to recover debts totaling $5,000) can take action against you to have a court declare you bankrupt. This is called a sequestration order.
To claim bankruptcy in Australia, a debtor must have at least $5,000 in debt to file a petition with the Australian Financial Security Authority (AFSA). In voluntarily bankruptcy, a trustee is appointed by the AFSA to oversee a debtor’s finances.
The appointment of a trustee happens within two weeks of the initial filing. A debtor is considered legally bankruptcy for 3 years from the day the bankruptcy is declared, but appears on a credit report for five years. During these three years, the debtor is under certain restrictions, including travel out of the country. A debtor will also need to provide details of assets and income to their trustee.
Just as in the US, debts are considered “secured” (like a mortgage) and some are “unsecured” (like a line of credit) and are treated differently in bankruptcy, just like the US.
When a bankruptcy is discharged, a debtor is released from nearly all debts with the exception of child support, court fines, Centrelink (a Government agency that assists low income residents), and higher education debts.
Bankruptcy in the UK
In the UK, bankruptcy only applies to individuals. Limited companies that are unable to pay their creditors are ‘insolvent’ and can face compulsory liquidation.
For an individual to meet the requirements of being able to petition for bankruptcy, he or she must owe more than £750 (roughly $1,100 USD).
When a person files for bankruptcy, they are subject to bankruptcy restrictions and are and then investigated by the Official Receiver unless it is deemed unnecessary. All assets that are not exempt from the bankruptcy estate come under the control of a trustee and may need to be sold to re-coup money to pay back creditors.
Debts are typically discharged after 12 months. At that point a debtor is released from bankruptcy restrictions and debts. Assets that were part of the estate during the bankruptcy period can still be used to pay back debts.
Types of Bankruptcy in the United States
Before you file for bankruptcy, it’s important to know what bankruptcy options exist for you.
Chapter 13 bankruptcy is designed to allow you to keep all of your property, but is also determined by your property. The amount of your nonexempt property affects how much unsecured creditors get paid during your bankruptcy process. And to avoid foreclosure or repossession, you still need to keep up with the payments you make for you secured debt, such as mortgages or car loans.
When you file a Chapter 7 bankruptcy, almost all of your assets and property are liquidated and thus become property of the bankruptcy estate that is sold to allow you to repay your debts. There are some exceptions to this though.
During your Chapter 7 bankruptcy, a bankruptcy trustee is appointed and given the authority to sell your assets so that you are able to pay your creditors. Just because your assets are being sold, that does not mean that all of your property needs to be sold.
Chapter 11 Bankruptcy
Under Chapter 11 bankruptcy, the business or individual undergoes a reorganization in order to pay down its debt and reorganize its income and expenses while regaining its profits. If your business is a corporation, limited liability company (LLC) or partnership, it can continue business operations during the bankruptcy process. While the business is making payments through the debt repayment plan, the business continues operating.
The Chapter 11 bankruptcy process can be a complex, and lengthy one. If you are facing a Chapter 11, you’ll want to work with a bankruptcy attorney to understand the process and what you will need to do to move through it. They will be able to explain the terminology in addition to what is legal, and what you will be required to do.
Typically consumers file under Chapter 7 or Chapter 13. There are a number of exceptions in each that allow you to protect your property so that you have something to start over with after you exit bankruptcy. Some common exemptions include: equity in your home and car, jewelry up to a certain dollar amount, household items, clothing, and most retirement funds.
In Chapter 7 your assets are liquidated to pay back creditors. The remainder of your assets that are not protected under exemptions are sold to pay creditors. And all creditors receive a proportional payment once those assets are sold. For example, if you owe your Mom 5% of your debts, she will receive 5% of the proceeds from the sale of your assets.
In Chapter 13, a court uses your disposable income to pay back creditors for 3 to 5 years. Disposable income is determined by taking your income and subtracting state-set and national-set standards for living expenses. You will provide the court with your disposable income and the court will distribute the amount proportionally among creditors.
Secured and Unsecured Debt
Secured and Unsecured debts play a role in your bankruptcy. Because of that, it is important to understand the difference between the two.
An Unsecured Debt does not have specific property that serves as collateral for payment of the debt. So, if you are unable to make payment on an unsecured debt, a creditor cannot take your property without first suing you and getting a court judgment. Examples include the following:
- department store and other credit card charges
- student loans
- telephone, electric, other utility bills
- medical bills
- personal loans that did not require a security agreement or mortgage to obtain
- court judgments that have not yet been enforced by remedies such as garnishment or attachment
- income taxes
- back rent (this is dependent on the state you live in).
Secured Debt has a piece of property that serves as collateral for the debt. If you fail to make payments, a creditor can take the property.
Timeline of US Bankruptcy
Chapter 7 bankruptcy case lasts an average of four months. A Chapter 13 bankruptcy plan lasts for three to five years. A Chapter 11 bankruptcy case may last for two years or longer.
Additional Considerations for Bankruptcy in US
Requires Great Attention
Because bankruptcy is based on forms many people perceive it is a simple and straightforward process. But the forms contain complex questions about your financial affairs and require sufficient time to understand the bankruptcy forms before filing for bankruptcy.
Bankruptcy Discharge is Personal
Discharge is the ultimate goal of bankruptcy. It bars your creditors from ever attempting to collect debts from you and you alone, and does not eliminate the debt itself. So, for example, if you are one of the co-signers on a home loan and you file for bankruptcy, the debt is not wiped out and the lender can still seek to collect the debt from your co-signer.
It’s Not Cheap
Filing for bankruptcy can cost you a significant amount of money, especially if you decide to hire an attorney which can cost anywhere from several hundred dollars to several thousand dollars. Even if you decide to prepare and file your own bankruptcy case it can be costly because the filing fees alone are substantial. Debtors may find relief from filing fees by petitioning for a fee waiver. The court bases its waiver decision on your income, which generally must not be greater than 150% of the federal poverty level.
Working with a Bankruptcy Attorney
Bankruptcy law can be hard to understand. Because of this, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have. There can be a lot of questions during this extremely stressful time. Let the lawyers at Resnik Hayes Moradi LLP walk you through the process so you can achieve the best outcome possible.