Bankruptcy
Bankruptcy is a formal legal process for dealing with the financial affairs of an individual who cannot pay their debts.
I am a registered trustee in bankruptcy and Principal at Worrells with more than 27 years’ experience in personal and corporate insolvency. I assist individuals, creditors and professional advisers to understand how bankruptcy begins, what happens to assets and income, which debts may remain and what alternatives may be available.
What is bankruptcy?
Bankruptcy is a formal legal process for dealing with the financial affairs of an individual who cannot pay their debts.
A person may become bankrupt voluntarily by presenting a debtor’s petition, or through a Court order following action by a creditor.
Once bankruptcy begins, a bankruptcy trustee is appointed to administer the estate. Property that is available to creditors generally vests in the trustee, who investigates the bankrupt’s financial affairs, deals with creditor claims, realises available assets and assesses whether income contributions are payable.
Most unsecured debts that are provable in the bankruptcy are dealt with through the bankruptcy and are generally released when the person is discharged, although some debts are not released.
Bankruptcy applies to individuals, including sole traders and partners. Companies are dealt with under the corporate insolvency provisions rather than bankruptcy.
When bankruptcy may arise or need to be considered
Bankruptcy may become relevant where there is no realistic way to repay or compromise personal debts and the available alternatives do not provide a workable outcome.
- There is no realistic capacity to repay or compromise the person’s unsecured debts.
- Business failure has left substantial tax debts, personal guarantees, partnership liabilities or other personal claims.
- A creditor has obtained judgment, served a bankruptcy notice or commenced creditor-petition proceedings.
- The person owns assets but cannot sell or refinance them in time to meet debts that are presently due.
- An informal settlement, Part IX debt agreement or Part X proposal is unavailable, unaffordable or unlikely to be accepted.
- A formal collective process is needed to prevent most unsecured creditors from continuing individual recovery action.
The bankruptcy process
Bankruptcy begins
The Official Receiver accepts a debtor’s petition or the Court makes a sequestration order. A trustee is appointed and the bankruptcy is recorded on the National Personal Insolvency Index.
Property and information pass to the trustee
Divisible property generally vests in the trustee by operation of law. The bankrupt must provide a Statement of Affairs, books and records and ongoing assistance.
The trustee investigates and administers
The trustee identifies and realises property, assesses income contributions, examines companies, trusts and pre-bankruptcy transactions, admits creditor claims and pursues recoveries where appropriate.
Discharge and completion
The bankrupt is ordinarily discharged after three years and one day unless the period is extended. The estate may continue after discharge while property, claims, income contributions and distributions are finalised.
What does bankruptcy mean in practice?
The consequences depend on the person’s assets, income, home, business interests, debts and financial history. My detailed guide explains the major issues that commonly arise, including:
- voluntary bankruptcy and bankruptcy initiated by a creditor;
- property that vests in the trustee and property that is protected;
- after-acquired property, including inheritances received before discharge;
- the family home and jointly owned property;
- income contributions and the treatment of post-bankruptcy earnings;
- employment, sole-trader businesses and restrictions on managing companies;
- shares, companies, trusts and other business interests;
- transactions entered into before bankruptcy and potential recovery claims;
- secured and unsecured creditor claims and which debts may be released;
- travel, credit and other restrictions while undischarged;
- discharge, objections to discharge and why the estate may continue afterwards; and
- annulment, the public NPII record and credit history.
Asset transfers can create additional claims
A bankruptcy trustee does not only look at what a person owns on the date of bankruptcy. Transfers for less than market value, transactions intended to defeat creditors, preference payments and certain superannuation contributions may be investigated and recovered under the Bankruptcy Act.
Other options that may be available
Bankruptcy is one formal personal insolvency option. The appropriate course depends on the person’s debts, income, assets, creditors and capacity to fund an alternative proposal.
Part X Personal Insolvency Agreements
A formal proposal to creditors that may provide more flexibility than bankruptcy where the debtor can offer creditors a commercially better outcome.
Part X Personal Insolvency Agreements →Other alternatives
An informal settlement or a Part IX debt agreement may also be relevant depending on the amount and type of debt, income, available assets and capacity to make payments.
Bankruptcy FAQs
How can a person become bankrupt?
A person may apply for their own bankruptcy by lodging a debtor’s petition and Statement of Affairs. A registered bankruptcy trustee may consent to administer the estate, otherwise the Official Trustee generally administers the bankruptcy initially.
A creditor may also apply to the Court for a sequestration order. The usual process involves a judgment, bankruptcy notice and act of bankruptcy. The expiry of a bankruptcy notice does not itself make the debtor bankrupt; bankruptcy begins when the Court makes the sequestration order.
What happens to the family home?
The family home is not automatically protected. The bankrupt’s interest in the property generally vests in the trustee, even if it is the family’s principal place of residence.
Where the property is jointly owned, the non-bankrupt co-owner retains their own interest. The trustee will ordinarily consider whether the co-owner can purchase the estate’s interest or participate in an agreed sale. If no satisfactory agreement can be reached, the trustee may seek Court orders that result in the whole property being sold.
Does bankruptcy mean every asset is sold?
No. The Bankruptcy Act protects specified categories of property. These commonly include ordinary household effects, necessary clothing, tools used to earn income and vehicles up to indexed limits, certain compensation and insurance interests and interests remaining in regulated superannuation funds, subject to the recovery provisions.
Other property owned at the start of bankruptcy, and some property acquired before discharge, may vest in the trustee.
Can I keep working and what happens to my income?
A bankrupt can continue working and may continue operating as a sole trader, subject to the bankruptcy disclosure requirements and any separate licensing rules.
Where assessed income exceeds the statutory threshold, income contributions are payable to the estate. The threshold depends on the number of dependants and is indexed. An undischarged bankrupt cannot manage a corporation without Court leave.
What happens to debts, guarantees and secured creditors?
Most unsecured debts incurred before bankruptcy are provable and are released on discharge, but there are important exceptions. Some liabilities, including certain fraud debts and child support or maintenance obligations, are not released. Other liabilities such as specified student loan debts and Court-imposed fines generally remain outside the provable-debt regime.
Secured creditors retain rights against valid security. Bankruptcy releases the bankrupt from relevant debts; it does not release a guarantor, joint borrower, partner or another person who is separately liable.
How long does bankruptcy last, and does discharge finish the estate?
Bankruptcy ordinarily ends automatically three years and one day after acceptance of the debtor’s petition, or after acceptance of the Statement of Affairs in a court-ordered bankruptcy. A trustee may lodge an objection to discharge on statutory grounds, which can extend the period.
Discharge ends the person’s status as an undischarged bankrupt. It does not necessarily complete the administration. The trustee may continue dealing with vested property, recovery claims, income contributions, creditor claims and dividends after discharge.
Need to discuss a matter with me?
If you would like to discuss bankruptcy, a creditor process or another personal insolvency matter, use the Contact page to provide a short summary.
If there is a bankruptcy notice, creditor petition, court date, proposed asset transfer or other urgent enforcement deadline, include that information when you contact me.