The Law Handbook 2024

365 NOTE The law in this chapter is current as at 1 September 2023. What is bankruptcy? Introduction A person or company unable to pay their debts is insolvent. An insolvent person who cannot pay their debts may become bankrupt following a legal process which starts with a creditor's petition or a debtor's petition. An insolvent company goes into winding up under the Corporations Act. Bankruptcy is a legal status that a person has under the Bankruptcy Act 1966 (Cth) where, once they are declared bankrupt: 1 creditors are prevented from further pursuing them for payment (s 58(3)); 2 certain financial restrictions are placed on them; and 3 their property is made available, through the trustee who manages their bankrupt estate, for distribution among their creditors (ss 109, 116). NOTE: LEGISLATION AND ADMINISTRATION All references to legislation in this chapter are to the Bankruptcy Act 1966 (Cth) ( ‘ Bankruptcy Act ’ ) or the Bankruptcy Regulations 2021 (Cth) ( ‘ Bankruptcy Regulations ’ ). The bankruptcy legislation is administered by the Australian Financial Security Authority (AFSA). Purpose of bankruptcy The two main purposes of bankruptcy are: 1 to give the bankrupt debtor a fresh start by wiping most of their debts; and 2 to distribute the bankrupt debtor’s assets fairly among creditors. Types of insolvency proceedings There are three insolvency options under the Bankruptcy Act: 1 voluntary bankruptcy: the debtor files a debtor’s petition; 2 involuntary bankruptcy: the creditor(s) files a creditor’s petition; or 3 a debt agreement under Part IX of the Bankruptcy Act and a personal insolvency agreement under Par X of the Bankruptcy Act, both discussed below. NOTE: INDEXED AMOUNTS The dollar amounts in bankruptcy law are regularly updated to keep up with the Consumer Price Index or the base pension rate. Check the current indexed amounts on the website of the Australian Financial Security Authority ( AFSA ) at www.afsa.gov.au/insolvency/how-we-can-help/ indexed-amounts-0#contributions. Advantages of bankruptcy 1 Bankruptcy is a circuit breaker because the bankrupt is released from almost all debts after discharge from bankruptcy. 2 Once a person is declared bankrupt, most unsecured creditors cannot take any further legal action against the debtor in relation to the debts. 3 Once a person is declared bankrupt, unsecured creditors should stop making contact with and harassing the bankrupt, and should communicate with the trustee about the bankrupt’s debts. 4 Bankrupts with no dependants who have an income of less than $68 769 net per annum (as at October 2023, indexed), the actual income threshold amount (AITA), cannot have any of that income taken to pay their debts (s 139K Bankruptcy Act). In contrast, debtors who are not bankrupt may be forced by creditors to make payments from income under a court-ordered 5.3 Understanding bankruptcy Contributor: Paul Latimer, Adjunct Professor, Swinburne Law School; Volunteer Lawyer, Fitzroy Legal Service