Personal Bankruptcy - Understanding Your Personal Options

Anthony Perl: 00:00:03

Introduction to Insolvency, understanding the basics.

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Welcome to our first episode of IO

Insolvency Options with Darren Vadi,

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the Managing Director of Insolvency

Options and a registered liquidator.

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With over 30 years of experience

helping businesses and individuals

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navigate financial challenges.

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In today's episode, Darren shares

his journey into insolvency, explains

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what insolvency actually means,

and reveals the warning signs every

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business owner needs to recognize.

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We'll explore when to seek

help and the difference between

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corporate and personal insolvency.

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You'll understand the

fundamentals of insolvency.

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Know when to seek professional advice.

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And learn why acting early

gives you the most options.

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I'm your co-host, Anthony Perl.

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Let's dive into unlocking

more about insolvency options.

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Darren, I want to talk to you about.

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What I imagine is one of the most

uncomfortable topics that you cover,

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which is around personal bankruptcy.

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I mean, is that the hardest space to be

in because of the emotionalness of it?

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Because you can dissociate from

corporates and businesses, but when

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it becomes personal, that is hard.

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Darren Vardy: Personal bankruptcy is hard.

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Whilst I, I'm not a trusting

bankruptcy per se, so I don't

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take the trustee appointment and.

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The reason why I think I'm not a

trustee, the personal nature of it,

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although I do advise individuals on

the various alternatives available,

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and I do hold their hand through the

process, which is where, I guess I

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find myself in the helping of people

through the process as opposed to

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the doing process in that instance.

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Anthony Perl: Mm-hmm.

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I wanna come some of the

alternatives in walking through

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that in a little bit, but just.

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Talk to me.

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Gimme the lay of the land for when

someone gets into this space where

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personal bankruptcy is on the table.

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How do you find yourself there?

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What does it actually mean?

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Darren Vardy: Look, generally

people will find themselves in a

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situation of personal bankruptcy

where you know, their liabilities

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far outweigh their, their assets.

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You know, their liabilities

may result from some personal

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guarantees from business debt.

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It may result from them operating as a

sole trader and not being able to pay

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their bills and not being run their

little sole trading business profitably.

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It could come from an adverse

legal finding and some damages.

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There are many ways and reasons for

individuals finding themself in a position

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where their only option is bankruptcy.

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And in my view, it comes down to,

you know, what is the alternatives?

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Can you.

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Value yourself of the alternatives

for bankruptcy being a debt agreement,

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a personal insolvency agreement.

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And if those alternatives aren't

available, well then really bankruptcy

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is the last cause of action.

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Anthony Perl: So what does it look

like for someone if they're in

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that situation where Right personal

bankruptcy is the only option?

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What does it mean?

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Are they out on the street?

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Darren Vardy: Is

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Anthony Perl: there

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Darren Vardy: No.

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No, no.

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As I indicated, everyone is different.

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It will all depend on the financial

position, whether the individual

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owns property, whether they do own

any assets, whether they're renting.

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But generally what it means is that any

assets that need to be taken into account

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by a trustee will look at realizing those

assets for the benefit of the creditors.

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You know, if there is a house

involved, quite often we find that.

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A house is owned by a husband and wife.

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You know, in circumstances where a house

is owned by a husband and wife, we might

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find that there's a mortgage on it.

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So when looking at the house, for

instance, it may well be that there

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is very little equity in the house,

that another family member or the

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co-owner may be able to contribute the

necessary funds to the trustee for the s.

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Interest in that property resulting

in the bankrupt and the co-owner

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not having to sell the property?

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Yes, in bankruptcy, there are some

limitations when it comes to gaining

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credit and the like, but majority of

the time, whilst they have to disclose.

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People who are bankrupt,

they're still able to rent.

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At worst cake scenario, they are able

to have a motor vehicle up to the value

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of up to the prescribed value, which I

think is around sort of nine to $10,000.

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They are able to earn income and

quite often people say to me, what's

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the limit of the income I can earn?

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And my response is, there is no limit.

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You can earn as much income as

you can possibly obtain, however.

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There are some income contributions

thresholds where if you go over the

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after tax threshold, you have an

obligation to pay an income contribution

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to your trustee in bankruptcy for

the benefit of your creditors.

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And sometimes that is a bit of a misnomer

where people think that their income

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is actually limited, where it's not,

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Anthony Perl: and isn't that a finite

period that they've got that obligation

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that immediately they might get.

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Job and that job's paying a certain

amount and over a period of time they

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go up, move up the ladder again, and,

and whatever happens and they end up

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in another job that, that ultimately

is paying over that threshold.

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Is there a period of time before

that obligation to pay something

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back is passed, or is that just

there until it's paid back?

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Darren Vardy: So generally

bankruptcy generally lasts for

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a period of three years only.

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Anthony Perl: Mm-hmm.

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Darren Vardy: It can be extended.

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If the bankrupt has been noncompliant

with their trustee, or if there

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has been some serious wrongdoing

on the part of the bankrupt.

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However, generally the majority of

bankruptcy is last for a period of three

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years, for which a bankrupt will pay

income contributions to their trustee

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if they earn a wage over the threshold.

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Anthony Perl: I imagine that Desi said

that this is such a, an emotional.

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Situation to find yourself in.

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I gather that the other complexity that

happens in all of these is relationships

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would break up as well as a result

of some of this stress in times.

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And that's only gonna complicate

things even further, isn't it?

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Darren Vardy: It can do, and

particularly where, where

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there are kids involved, right.

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But at the end of the day, you know, the

idea is certainly my focus is to try and

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minimize that stress on the household and

make sure that everyone is fully aware

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of what's going on and what they're.

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Rights and obligations are to

get them through that three year

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period and out the other end.

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And what I quite often say to people

is, you know, as soon as you go

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bankruptcy, that's your time to reset

and actually start rebuilding your

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life, rebuilding your credit rating.

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So when you come out of bankruptcy,

you can show that you've ticked all the

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compliance boxes throughout the three

year period that you've managed to

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get ahead and that you're on the path.

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To rebuilding your credit,

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Anthony Perl: where are we in

terms of how common bankruptcy,

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personal bankruptcy is these days?

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You know, we've both

been around for a while.

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We've seen interest rates at,

you know, ridiculous levels

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going back a couple of decades.

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You know, people have talked

about interest rates being high

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in more recent times, but relative

to where it was, it's nothing.

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But have you seen waves of this or

has it remained kind of a constant.

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Darren Vardy: Look, it does come in

waves and certainly through the COVID

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period and through the period of very

low interest rates, it was not as common.

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We're now finding ourself in a position

where the interest rates, fingers

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crossed, have topped out for the moment.

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You know, in May of 25, and we're

starting to come back a little, but

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the impact of those high interest

rates and more importantly, the.

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Individuals coming off the

very low honeymoon rates into

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those high interest rates.

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We're only really seeing that

impact on individuals now.

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And what we are finding is that a

lot of people have held out, held

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out, not dissimilar to business.

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They've managed to to get

through until now, but they've

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exhausted all their resources

available and all their reserves.

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And once the reserves are gone,

that's when you find that.

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Things get tough within the household.

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The cashflow isn't there.

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We're certainly seeing when

you look@realestate.com,

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there's more properties on the market.

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It would not surprise me if in certain

areas a lot of properties are on

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the market, given the high value of

mortgages relative to the value in

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certain areas, and that's how we see.

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So I think yes, bankruptcies

have gone up a little bit of

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lates, but I think that if.

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The period of time goes on and the

issues aren't addressful, we'll

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be seeing some more unfortunately.

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Anthony Perl: Yeah, I mean we certainly

went through with, you know, particularly

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with COVID, that artificial topping up

of a lot of businesses through various

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government funding, you know, lower

interest rates at a certain point, and

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people were locked into that scenario.

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And I should point out as well to

people, we are in a different situation

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in Australia to a lot of the rest

of the world, aren't we, when it

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comes to, to interest rates that.

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There are a certain amount of people

that lock it in for a period of time,

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and there's a certain amount of people

that just go with the rates at the time

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there, whereas in there are other parts

of the world where you're pretty much

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locked in for the length of the loan.

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So it's a different scenario

and in many cases can make it

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a bit more volatile for us.

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Darren Vardy: And that's where we

had the, the very low rates and

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the honeymoon rates around the 2%.

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And then by the time that

the term of that loan at that

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rate came off, its fixed term.

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Households were then going

into the variable rate at the

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time, which could have been 6%.

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So all of a sudden the monthly

mortgage payment had more than

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tripled, which can take a big,

a big hit to a household budget.

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Anthony Perl: Yeah, and particularly

at a time when everything else is

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going up as well, because it's not that

one thing that just goes up because

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you can sense deal with it if it was

only that one element that goes up.

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But you know, food is going

up, electricity is going up,

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everything else along the way

is going up at the same time.

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So the pressure only increases

the essential services.

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Darren Vardy: Yes,

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Anthony Perl: that's exactly right.

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So let's talk a little bit about

the alternatives to bankruptcy,

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because that's the area that you're

obviously trying to guide people

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in when they're in that situation.

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So there's a couple of

avenues there to go down.

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Do you wanna talk to me a little bit

about what those are and how appropriate

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it is for people to go down those paths?

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Darren Vardy: Sure.

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The appropriateness of individuals to

utilize those paths really depends on

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the unique individual circumstances.

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The debt agreement or the part nine

of the bankruptcy Act, not dissimilar

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to a small business restructure.

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There is a threshold of liabilities,

assets, and income, so you have

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to be below the threshold to

avail yourself of that regime.

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But the debt agreement will look

at your income and household

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expenses, and it looks at the

surplus available after all expenses.

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Have been taken into account.

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And then depending on the level of

your liabilities, we'll look at the

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amount that can be paid from that

surplus income toward your liabilities

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over a, over a period of time.

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And the debt agreements do

run for a period of not more

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than three years generally.

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So it's not dissimilar timeframe

to a bankruptcy at that all

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based upon the amount repayable.

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To your creditors is based upon

the surplus income available after

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payment of all household expenditure.

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A personal insolvency agreement

doesn't have the thresholds mentioned.

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And generally, this is where a, an

individual will make an offer to

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their creditors to avoid bankruptcy,

and that offer will be either from

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the sale of assets or a contribution

from family members and the like.

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And with the view that that will

provide a greater return to creditors

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than what a bankruptcy would if a

trustee in bankruptcy was appointed.

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Realize the assets of the individual and

then after fees and costs that surplus

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is then may avail to the creditors.

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So what that actually involves is a

trustee de being appointed, investigating

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reporting to creditors on what

assets are available for realization.

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What the return would be like in a

bankruptcy, and then submitting the

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agreement for creditors to approve

if they think fit, if they think

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that, yes, that is a better return

through the personal insolvency

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agreement as opposed to a bankruptcy.

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Anthony Perl: What's the likelihood

people going through these paths?

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Is it generally this is the path

that is more acceptable and happens

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more likely, or is it just so

case by case that there's no real,

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Darren Vardy: unfortunately, there's

no rhyme or reason 'cause it is on

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such an individual case by case basis.

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But I'm certainly of the view that I

take, the approach that if we can avoid

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bankruptcy, that's the best approach.

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And the corollary to that is also there

is no use in steering an individual

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towards a debt agreement or a personal

insolvency agreement if we don't think

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that it would be acceptable by creditors.

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Anthony Perl: Yeah.

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Darren Vardy: Because if we put up

an alternative and creditors aren't

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accepting of that alternative, well

then the default position is bankruptcy.

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So why take an individuals through

that emotional rollercoaster?

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When we can, just, for want of

a better term, rip the bandaid

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off, get the bankruptcy started

sooner rather than later.

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'cause the sooner you start, the

sooner you're out and get them on

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the road to repairing their, their

financial position and credit us sooner.

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Anthony Perl: Because I can

imagine being in such a vulnerable

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position as facing bankruptcy.

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You don't want to pin your hopes

on something that fails, and that's

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would be such an important stance

to be guiding people on and have

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making them feel realistic about

whether this is gonna happen or not.

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And do you get a sense before, is there

pre talks with accreditors to say, this

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is the path we're trying to go down?

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What do you think?

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Before you even get going down it

properly, or is it you just have to

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put it up and there's nothing you

can do till they've looked at it?

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Darren Vardy: Look, there's nothing

you can do until creditors look at it.

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But looking at the mix of creditors,

generally, you can get a sense on

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how you think they're going to vote.

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So, you know, some creditors,

for instance, are backed by

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insurance policies, trading

indemnity policies where.

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If they have a debt or fail, they

can then make a claim on their

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policy for the payment of funds.

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Generally, where we have that type

of creditor, they will not vote for

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anything other than bankruptcy because

they will make want to make a claim

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on their insurance policy to get

paid, maybe not all, but certainly

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a large proportion of the debt.

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So you really need to have an

understanding of the dynamic.

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The creditor understanding of the

creditor and the dynamic for which

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they're going to be voting and then make

some calculated assessments from that.

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Anthony Perl: Uh, just to wrap up

this discussion on what is a very

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touchy subject, just on that note, I

mean, how much of a baggage does that

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me term bankruptcy carry with the

individual that is in that situation?

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And for what period of time?

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Is it the full three years?

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What do you see?

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Darren Vardy: Having not

experienced, I can't tell firsthand.

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It's pretty tough.

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However, my experience is that people

who we've put through the bankruptcy

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process have come back months later

saying how relieved they are that

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they've actually gone through the

process, and that it hasn't overly

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restricted them in their daily life.

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And based on that.

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Whilst we need to work hard to ensure

that they comply with the regulations

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and, and make sure that they don't

do anything untoward, which will

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extend their bankruptcy and make sure

that they fully disclose everything.

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Other than that, a lot of people generally

say to me, the phone call stopped.

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The people that were pursuing

the debts have ceased.

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Pursuing me because they're now dealing

with a trustee in bankruptcy and

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sometime that's all an individual will

need is that little bit of a reprieve.

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From the pursuing creditors to enable

them to refocus on their life, what

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they're going to do to move forward.

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Anthony Perl: Well, that's

it for this episode of the IO

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Insolvency Options Podcast.

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I hope you've got plenty of valuable

knowledge and practical steps for

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whatever your situation is from

Darren today, and if you need

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guidance on insolvency matters.

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Contact Darren Vadi

directly@insolvencyoptions.com

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au or call 1804 6 3 3 2 8.

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Or of course, you could connect

with Darren on LinkedIn details

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in the show notes below.

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With over 30 years of experience,

Darren and his team provide personalized

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solutions for both personal and

corporate insolvency challenges.

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This episode was produced by my

team at podcast done for you.com

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au helping professionals

share their expertise.

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Through powerful podcast content.

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If you found value in today's episode,

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Until next time, remember.

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There's always a way forward

when you know your options.