Ask LH: How Do I Get My Money When Someone Goes Bankrupt?

Dear Lifehacker, My father started a family-owned business from the ground up in 1999. We had a customer that owes us a lot of money but has gone bankrupt. My father spent years building this business and I'd hate to see him lose the money he has earned. It broke my heart when he told me there was nothing that can be done. Surely there is something we can do to get what we're owed? I do not want to believe there is nothing that can be done. Thanks, Antonio

Dear Antonio,

That's a bummer. Obviously, your dad's best bet is to speak to a solicitor who specialises in these matters. But here's a quick overview of the rules as we understand them.

When someone declares bankruptcy, they aren't automatically absolved from paying off their debts. Those who are owed money become creditors and must liaise with the trustee in charge of the bankrupt's assets. Your dad will need to send proof of debt to the trustee, who will calculate and consider his claim along with the claims of any other creditors.

The size of the payment you receive depends on a number of factors, including the total number of creditors who lodged a claim, the amount of money in the bankrupt’s bank account and the income they currently earn.

Sadly, creditors are usually only paid a percentage of what they're owed -- if they get anything at all. Banks get their share of owed money first, followed by “unsecured” creditors which is the basket your dad falls into. More often than not, there simply isn't enough money to go around.

Here's a table from the Australian Financial Security Authority explaining your options as an unsecured creditor:

Type of debt Class What are my rights?
Credit card, store card, etc Provable and extinguished You have the right to lodge a claim in the bankrupt estate
Personal loan, business loan Provable and extinguished You have the right to lodge a claim in the bankrupt estate
Trade creditor (no retention of title) Provable and extinguished You have the right to lodge a claim in the bankrupt estate
Utilities (gas, electricity, phone (including mobile), internet, pay-TV) Provable and extinguished You have the right to lodge a claim in the bankrupt estate. The Bankruptcy Act does not force you to continue supplying the bankrupt
Unpaid employee entitlements (wages, leave) Provable and extinguished You have the right to lodge a claim in the bankrupt estate. You may also wish to lodge a General Employee Entitlements and Redundancy Scheme (GEERS) claim (where the employer went bankrupt before 5 December 2012) or a Fair Entitlements Guarantee (FEG) claim (where the employer went bankrupt on or after 5 December 2012)
Legal fees / accounting fees Provable and extinguished You have the right to lodge a claim in the bankrupt estate or, if you have a lien over work you did, to exercise that security interest
Medical fees Provable and extinguished You have the right to lodge a claim in the bankrupt estate
Court-imposed fines Not provable and not extinguished Fines are still payable during and after bankruptcy
Court-ordered restitution amounts Provable and extinguished if the amount was fixed before the date of bankruptcy You have the right to lodge a claim in the bankrupt estate
Pawn shop / pay day lender Provable and not extinguished You have the right to lodge a claim in the bankrupt estate
Child support / maintenance Provable and extinguished These debts are still payable during and after bankruptcy
Unpaid rent Provable and extinguished You have the right to lodge a claim in the bankrupt estate
Debts relating to property damaged when the bankrupt was a tenant Provable and extinguished You have the right to lodge a claim in the bankrupt estate
Overdrawn accounts Not provable and not extinguished You have the right to lodge a claim in the bankrupt estate
Debts incurred after the date of bankruptcy Not provable and not extinguished These debts are not provable in bankruptcy and can be pursued
Debts incurred by fraud If provable, are not extinguished These debts, if provable in bankruptcy, are not extinguished and can still be pursued

You can find more information on lodging a claim here. Good luck!

Cheers Lifehacker

Have a question you want to put to Ask Lifehacker? Send it using our contact form.


Comments

    And in reality the Administrator or Liquidator takes all the money in fees. I just heard about one Administrator where the lowest charge out rate was for a Secretary and was over $200 PER HOUR! $500 per for a mid range accountant. $800 per for a principal and you can bet that they were looking over the secretary's shoulder to "check her work" at least half the time. Proof that you don't need a gun to rob ppl.

    If your business involves supply goods to a customer (i.e. inventory), then its a good idea to have a "Romalpa" or title retention clause in the contract.

    If it involves supplying services, then get some $$ up-front. I used to work for a professional services business which asked for 1/3 up-front, which I initially baulked at, as this was not usual in the industry. I eventually increased it to half.

    To get an idea of what is meant by not getting everything that's owed, consider Alan Bond paid back 0.5 of $0.01 per dollar owed to his creditors. Half a cent on the dollar. And no sooner had he got out of jail he was back in the top ten richest Australians list...

    Depending on how you do your accounting, there are also potential tax considerations as well. If/when you reach a point that you're just not going to get the money back, talk to your accountant.

    If you've accounted for it as income already, you might be able to write the debt off and get any tax you've paid back. Its better than nothing.

    That's just one of the most egregious flaws of our capitalist system: it encourages and rewards those willing to be recklessly entrepreneurial, and willing to cheat the system, even at the expense of others aiming to make an honest living. Governments could easily rectify the system with strong and enforceable legal protections but they are beholden to the system, as if it were divine law, and the economic stimulus provided by rough and tumble entrepreneurs.

Join the discussion!