Exposed: 8 Common Bankruptcy Myths

Bankruptcy can have serious negative consequences for some people. For many others, however, the relief of being released from the financial burden of debt far outweighs any minor issues they may encounter.

Unfortunately, though, bankruptcy myths abound. These often scare people off taking a course of action that might be the best option available.

It’s important to know the truth before you decide whether or not to file for bankruptcy. So we’ve busted eight of the most common bankruptcy myths below…

1. You can’t run a business while bankrupt

False.   A bankrupt cannot be a company director for the period of bankruptcy. However, you can still run a business as a sole trader, employ staff, and make money.

There are certain restrictions placed on running a business: for instance, you must trade in your own name and cannot incur debts to suppliers or other creditors over a certain statutory limit, currently $5,681.

2. Your employer will find out you are bankrupt

False (most of the time).  A bankruptcy trustee will generally have no need to contact your employer. However, they may do so if they have asked for information regarding your income and you have failed to provide it and not provided a reasonable excuse. In those circumstances, a trustee may seek the information from your employer.

3. You can’t travel overseas while bankrupt

False.   A bankruptcy trustee will generally consent to overseas travel, as long as you are complying with your duties to provide information and make any required payments, such as income contributions.

Prior to travel, you are required to obtain your trustee’s consent and you will likely be asked to provide certain information such as who is paying for the trip, your destinations and your return date.

4. You can’t earn over a certain level of income in bankruptcy

False.  There is no limit on the amount of money you can earn if you’re bankrupt.

However, if you earn above a certain level of after-tax income (an amo  unt set each six months by the government – currently $55,837 if you have no dependants) yo u are required to make contributions to your trustee.

The level of income you can earn before having to make contributions to your trustee increases with the number of dependents you have.

If you earn over the set level of after-tax income, you must pay fifty cents in every after-tax dollar earned over this amount to your trustee.

You may use our Income Contribution Calculator to estimate the income contributions you are liable for.

5. Obtaining advice about bankruptcy is expensive

False.  Unfortunately, there are a lot of less-than-reputable, unqualified, and unregulated people and businesses charging significant amounts for providing advice and assistance regarding bankruptcy.

However, registered bankruptcy trustees will often provide general pre-bankruptcy advice and assistance for a reasonable cost or, in some circumstances, free of charge. Also, you can obtain free information regarding bankruptcy from the Australian Financial Security Authority (AFSA), which is a government body.

6. Going bankrupt is expensive

False.  Filing for bankruptcy with AFSA is free.

However, you may wish to appoint a private registered trustee (such as those at Pearce & Heers) as your bankruptcy trustee. In these circumstances, you may be asked for a small amount of funds upfront – but only in circumstances where no funds are going to be realised in your bankrupt estate, such as funds recovered from the sale of assets or through income contributions.

7. You’ll lose everything in bankruptcy

False.  Declaring bankruptcy does not mean you will lose everything.

However, if you own significant assets, your trustee may be required to sell them to help pay off the debts.

That being said, in bankruptcy most people are entitled to keep certain assets that they own, including:

  • Normal household items such as furniture, appliances and sentimental items;
  • A reasonable amount of cash and bank account balances to cover living expenses;
  • Motor vehicles to the value of $7,800, or (if financed) up to this level of value above the loan debt;
  • Tools of trade to the value of $3,800; and
  • Superannuation, unless irregular contributions were made before bankruptcy to protect funds.

A bankruptcy trustee may be required to sell:

  • Your interest in property if the value of the interest is greater than the mortgage and selling costs. However, your interest in a property can be sold to your spouse or another associated party for fair value;
  • Shares or other investments;
  • Motor vehicles and tools of trade if valued over the above stated amounts.

8. A person who cannot pay their debts must go bankrupt

False.  There are various options other than bankruptcy available to a person who cannot pay their debts including:

Contact us for assistance

Is bankruptcy the best option for you – or could there be another solution to your financial problems?

Be sure to get professional advice if you are having difficulty paying your debts and don’t be confused by the above myths.  Please contact us and we will be happy to help you.


We’re happy to answer any questions you may have, so please don’t hesitate to call us and schedule a consultation.



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