What Happens if Your Debtor Files for Bankruptcy?

When a client defaults on a debt, it can be a stressful time for everyone involved, and that is doubly true of situations where a debtor has to file for bankruptcy.

Even reliable, long-term customers can fall on hard times or otherwise become unable to service their debts, and bankruptcy may be the best option available to them. In those cases, creditors are often left wondering what happens next and whether they will be able to recover any of the outstanding debt.

Below, we are going to examine bankruptcy in more detail, take a look at what creditors can expect and how they can protect themselves from the risk of debtors filing for bankruptcy.

What is Bankruptcy in Australia?

Under Australian law, filing for bankruptcy is the process of seeking relief from your debts with the help of the courts. For individuals, this is referred to as bankruptcy. For businesses, this same process is more commonly called liquidation.

A debtor who has become unable to repay their creditors may file for voluntary bankruptcy as a means to be released from debts and find a fresh start for themselves. Filing for voluntary bankruptcy will see all of the debtors’ eligible assets being liquidated, and the proceeds distributed among their creditors.

It is also possible for creditors to force a debtor to file for bankruptcy through the courts, which is known as obtaining a sequestration order.

Can You Still Recover Your Debt?

When an Australian debtor files for bankruptcy a trustee is appointed to their case. The trustee is in charge of managing the bankruptcy filing, including assessing any outstanding debts, creditors, assets and liabilities of the debtor. Once the trustee has established who the creditors are, they will be ranked from highest to lowest priority, and in that order, any monies recovered from the debtor’s assets will be distributed.

For creditors, that means the chances of recovering your debt decrease significantly where the debtor is an individual or small business, where there are a large number of creditors, or if the debts significantly exceed the debtor’s assets.

If your debtor files for bankruptcy then you will be notified by their trustee. If you receive that notification it’s important you cease all debt-collection activities against the debtor immediately. You are permitted to contact them for further information or questions on their situation.

Take Preventative Measures

Bankrupt debtors are a risk that all creditors must carry, and it means the best defence is to take preventative measures and get ahead of the possibility. We recommend taking the following precautions as part of your due diligence:

• Perform credit checks. A simple check of the client’s credit history can reveal how likely they are to service their debt on an ongoing basis and whether they have the necessary capacity to repay additional debts.
• Ask for references. Especially where your debtor is a business, seeking references is a good idea. A business reference can help you get a handle on their trading history as well as how they have handled past debts.
• Clearly communicate the agreement. Layout the terms of your deal as clearly as possible, including debt collection fees the debtor will be liable to pay. While these conditions won’t prevent a debtor from filing for bankruptcy, they may provide a deterrent for the intentional mishandling of debts.
• Use upfront deposits or retainers. Mitigate your risk with small measures like upfront deposits or retainers. Any amount of the debt you can avoid loans in the first place is money you are at no risk of loss should the worst happen. Especially in cases where you are unsure of a client’s ability to service the debt, retainers and deposits may be an appealing alternative for both parties.

Do You Need Debt Collection Services? Contact Dynamic Commercial Collections Today!

It’s an unfortunate fact of business that some debtors will encounter financial difficulty and need to file for bankruptcy. If your customer is failing to repay a debt or has declared bankruptcy, the team at Dynamic Commercial Collections are here to help recover your debt without damaging those important relationships. You can contact us today if you have any questions or want to know more about our services.