Going Broke? The Bankrupt’s Story
When you go bankrupt your affairs are taken over by a trustee in bankruptcy (“T in B”), a sort of life coach with a sombre bent.
If you are ever faced with bankruptcy you will have two choices:
- Honourably accept your fate; or
- Try to wheedle your way out of it.
People tend to do option 1 only after they have given 2 a good shot. At least, that is my plan should the need arise.
But, the problem for “wheedlers” is that over the centuries every stunt has been tried with mixed results. Therefore, you are unlikely to come up with anything new. Worse still, the lawyers drafting bankruptcy legislation have closed the loop holes or at least given it a good try.
Most people arrive at bankruptcy with liabilities that cancel out any assets that they still have. It is the job of the T in B to “claw back” any assets sold at an undervalue or sold or transferred to defeat creditors.
In Australia for example, there are basically four main ways that a T in B can “claw back” assets transferred by the bankrupt:
1. Assets transferred by you to defeat your creditors: - There is no time limit on your T in B making this claw back. The test is, should the recipient (often your brother) have reasonably known that the bankrupt was insolvent?
2. Assets transferred by you at an undervalue. Here the T in B can only claw back assets transferred within the previous five and a half years- This is reduced to four years where a family member is involved.
3. Assets transferred by you to a “related entity” (e.g. family or companies controlled by you) so that in reality you continued to control the asset. The asset must be transferred within the previous one year unless the recipient can prove that you the bankrupt were not insolvent.
4. Assets transferred by you to an unrelated entity within the previous three years unless the recipient can prove that the bankrupt was not insolvent.
Often bankrupts have a very good relationship with their T in B, like hostages often do with their captors. For others, it is as if their old headmaster is back in their life. Depressing, I know.