The word “bankruptcy” has many negative connotations, yet most people are unable to tell you exactly what it is. Australian Bankruptcy Services explains the basics of bankruptcy in this blog post.

Bankruptcy is the official declaration of a person who is unable to repay their debts to their creditors. In some cases, bankruptcy is brought about by an order of the court and not by the person themselves, but a court order is not the only way. The most popular way is if a person suspects that they cannot repay their debts, then they can choose to voluntarily declare themselves bankrupt.

Bankruptcy absolves a person of their liability to pay their unsecured debts. In exchange, their affairs are closely monitored by a Trustee in bankruptcy for a period of three years. If there are any funds available to be realised during the three year period, either through income, the sale of assets, or any inheritances or winnings that the bankrupt person receives, the Trustee will distribute these funds to the unsecured creditors. The bankrupt person is usually discharged after three years and when they are discharged, they are no longer subject to investigation.

If you are thinking about bankruptcy, you should be absolutely sure it is the only option available to you. There are many negative consequences about associated with bankruptcy, such as the inability to gain more credit, the probable sale of one’s substantial assets and a default on one’s credit file.