Most credit managers have a general idea about the bankruptcy process but few use it consistently and effectively.

This is borne out by the relatively small number of bankruptcy actions initiated each year.

If used correctly, bankruptcy is by far the most powerful tool when collecting money from an individual.

Although there are many different grounds for initiating bankruptcy action, for practical purposes, there is only one, which is that you must have a judgment for over $5,000.

Thus, the starting point is that the original debt must be for approximately $4,000. By adding legal costs on the judgment and interest prior to the judgment, this will generally get you over the $5,000 mark (depending on the applicable state).

The very first step in the process should be to investigate assets held by the debtor. What you are looking for is equity in real estate. By carrying out searches, doing a specific title search and then a Google search on the property, it is not too difficult to, easily and quickly, ascertain the amount of equity the debtor has in a particular property.

Once this is established, that file should be ear-marked for preferential treatment. Under no circumstances, accept any installment offers, because this may make it difficult to bring bankruptcy action later. On those files, insist on payment in full only.

Bankruptcy action is carried out in two stages. Stage One, issue and service of the Notice, is relatively cheap. By way of example, Mendelsons Lawyers offers a Fixed Price Fully Inclusive cost for Stage One, including GST of just below $2,000.

Our success rate on Stage One is approximately 80% (success being defined as acceptance of a sum our client is satisfied with).

After service of the Notice, the debtor has 21 days within which to either pay the debt in full or to reach a settlement with the creditor. If he does neither, then after the 21 day period, he is deemed to have committed an act of bankruptcy.

Our policy is to make no contact with the debtor during the 21 day period. If he does pay the debt during that period, he is entitled to pay it without paying any additional costs for the Notice. However, after the 21 day period, it is possible to enter in to an installment arrangement and to provide that the debtor is also liable for legal costs.

For the 20% of so of cases where a Notice is not satisfied, a decision then needs to be taken on whether or not to proceed to Stage Two (Creditor's Petition). As long as your initial investigations have been carried out, this will not be a difficult decision, because you would not normally have reached this point, unless you are satisfied that the debtor has sufficient equity in real estate in order to meet all or most of the debt, together with costs.

Stage Two is costlier. By way of example, Mendelsons Lawyers charges $4,120 (if the creditor is an individual) and $5,755 (if the creditor is a company). These costs are fully inclusive of all disbursements and include GST.

Often the most difficult debtors will wait until they are served with a Petition. However, once they are served, if they have assets to lose, they will begin negotiations. It may be necessary to get to the first hearing date and to then negotiate an adjournment (with a cost order against the debtor). At this stage, the heat is really on, and in most cases, a satisfactory result will be negotiated, without making the debtor bankrupt.

In approximately 10% of the cases, which proceed to Stage Two, the debtor will prove impossible to negotiate with and an order for bankruptcy will be made. As long as there are sufficient assets available, the appointed trustee will usually be able to cover his costs, pay the petitioning creditors costs and there will be something left over for the creditors.

The first allocation of funds from the estate is to pay the petitioning creditor's legal costs. If bankruptcy is such a powerful and effective tool, why is it not used more often? My answer to that question is that law firms which do not actively practice in bankruptcy work are reluctant to promote it, because they lack the expertise to handle it. It is specialised work which should only be handled by a lawyer experienced in it. A secondary reason is that there is often a perception by creditors that their reputation will be harmed, if they are known to take bankruptcy action. This reason has simply no basis. It is not of interest to programs like A Current Affair that bankruptcy action is undertaken. It is an everyday, perfectly valid legal enforcement process. 

Roger Mendelson is the principal of Mendelsons National Debt Collection Lawyers Pty Ltd which is associated with. Prushka. The writer is also author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both published by New Holland Publishers.

For information about Mendelson's Fixed Price Fully Inclusive Bankruptcy service, contact Sue Stevens on (03) 9872 7289 or email or go to