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Bankrupting an Individual


When should I use bankruptcy action to collect a debt against a consumer?

In the debt collection process, bankruptcy is but one available debt collection tool that can be pursued in the recovery of a bad debt.

This article seeks to explore in what circumstances creditors should pursue this debt collection tool.

Firstly, a debt needs to be above the minimum statutory limit amount which is $5,000. This was raised from $2,000 with the introduction of the Bankruptcy Amendment Act (2010). However, just because your debt is over this amount, does not mean you should necessarily consider Bankruptcy action.

Commencing the Bankruptcy process is expensive, so before you start your action, you should have an understanding of;

  • If there is a more appropriate less costly means of collecting your debt.
  • Your debtors financial position.
  • The possible monetary return from a bankruptcy action.
  • Your debtors actual physical location.

Is there a more appropriate less costly means of collecting your debt?

There are some far less costly mean of collecting a debt that do not involve Bankruptcy. It is assumed that when you are considering this as an option other non-legal collection attempts have been exhausted. These options include:

  • If your debtor is employed a garnishee for wages.
  • If your debtor has known funds in a bank account, a garnishee for debts.
  • Should your debtor have known assets, a Writ (or Warrant for seizure and sale as it is also known in different states) where the Sheriff (or Bailiff) attends your debtors property, seizes assets and sells them at public auction to satisfy your debt.
  • Engaging LCollect to act as a 3rd party to attempt collection.

 These alternative avenues are not always available. We can provide examples of asset rich consumers that have been property owners but have had not assets to seize (cash or physical), nor earned over the garnishee threshold. Where these debtors refuse to negotiate for payment, Bankruptcy may indeed be your only option if you want to collect your debt.

Your debtors financial position / the possible monetary return from a bankruptcy action

There is no point in undertaking Bankruptcy action if your debtor has no means or assets that could satisfy your debt.

In order to establish if an action will yield a return, you should:

  • Perform a bankruptcy search. This is the most obvious starting point, and it is surprising how often you will find a debtor has already filed for bankruptcy.
  • Review your debtors credit application (where available).
  • Undertake property searches in the jurisdictions your debtor resides in and any other jurisdiction they have recently lived in.
  • Where property searches are positive in a debtors name, review the title to see if there are any registered dealings such as mortgages or caveats. You should order a copy of the relevant mortgages to see the date it was stamped. An online valuation can then be sought from RP Data (or similar) in attempt to establish if there is any equity in the property. It should be noted that this is not an exact science. We have come across numerous examples of properties that have been re-mortgaged but the new mortgage was not lodged with the LPI. The possible consequences and actions you may have in these circumstances will not be discussed here (please contact us if you would like to discuss this further).
  • A credit search through Veda or D&B (or any other Credit Reporting Authority) Indicators of a debtor being in genuine financial trouble include utility bills not being paid, loans being in arrears. This can also give you list of the amounts outstanding which can assist you in determining any likely return. However it must be noted that this is not foolproof, as there may be liabilities the debtor owes that are not disclosed on the credit report.
  • A Directors and Officers search through ASIC. Where this is positive and the companies they are associated with a still solvent and trading, this information may give you a good negotiating point with your debtor, as Bankruptcy will preclude them from holding this position in the future.

 

This is perhaps the most difficult aspect of making a decision to commence bankruptcy proceedings are not. Whilst there are scenarios that will make this an obvious choice, often it will be very grey and determining the true financial position of the debtor impossible. Instead, relying on your best guess after extensive searches and research has been undertaking. It only takes one large undisclosed debt to turn your action from being one that will generate a return, to one that will lose you money.

Your Debtors Physical Location

This is a simple yet important step. As this bankruptcy process requires personal service of documents, not knowing the location of your debtor can lead to expensive untimely delays in the process, and in extreme cases, your actions expiring due to time limitations.

There are debtors that will actively avoid personal service of documents, so it should be established before proceedings are commenced where your debtor is located and what their possible attitude to service may be. Previous contact logs are an excellent starting point for this.

A basic Veda address search and White Pages search will often assist you in confirming your debtors location.

Where your debtor has skipped, you may need to review previous credit applications or engage a specialist skip tracing agency to locate your debtor should the basic searches not yield a result.

 

In the next article outlining the bankruptcy process in debt collection we will explore when you should consider using bankruptcy for a commercial debtor.

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