Introduction to bankruptcy
Bankruptcy is a legal status that a person has under the Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act’) where, once they are declared bankrupt:
- with some exceptions, creditors are prevented from further pursuing them for payment (s 58(3));
- certain restrictions are placed on them; and
- their property (with some exceptions) is made available, through a trustee, for distribution among creditors (ss 109, 116).
All references to legislation in this chapter are to the Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act‘) or the Bankruptcy Regulations 2021 (Cth) (‘Bankruptcy Regulations’) unless otherwise noted.
Purpose of bankruptcy
The two main purposes of bankruptcy are:
- to give the debtor a fresh start by wiping most of their debts; and
- to distribute the debtor’s assets fairly among creditors.
Types of bankruptcy proceedings
A person can become bankrupt under the Bankruptcy Act in the three following ways:
- voluntary bankruptcy: the debtor files a debtor’s petition;
- involuntary bankruptcy: the creditor(s) files a creditor’s petition; or
- deceased bankruptcy: the deceased’s lawyer or the creditor can petition for an order that treats the deceased person as a bankrupt.
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 website of the Australian Financial Security Authority (AFSA) at:
Advantages of bankruptcy
- After discharge from bankruptcy, the bankrupt is released from almost all debts (the exceptions are discussed in this chapter).
- Once a person is declared bankrupt, almost all unsecured creditors are unable to take any further legal action against the debtor in relation to almost all debts (in rare cases the court might grant the creditor a right to continue with court action).
- Once a person is declared bankrupt, unsecured creditors should stop making contact with and harassing the bankrupt, and should instead communicate with the trustee about the bankrupt’s debts.
- Bankrupts with no dependants who have an income of less than $59 559.50 net per annum (as at April 2021, indexed) cannot have any of that income taken to pay their debts. However in contrast, low-income wage earners who are not bankrupt may be forced by creditors to make payments from income under a court-ordered attachment of earnings order. (See Chapter 5.2: Are you in debt?, in relation to attachment of earnings orders and ‘What happens to a bankrupt’s income?’, below, for details about income contributions in bankruptcy.)
- The Bankruptcy Act gives significant protection to superannuation payments (though note the strict regulation of these, which is discussed below), life assurance payments and compensation payments for personal injuries. The Bankruptcy Act also gives some protection to assets bought with these payments. These payments and assets are not protected if a debtor is not bankrupt and the creditor gets an order for payment of a debt in the Magistrates’ Court or other court.
Disadvantages of bankruptcy
- It will probably be very difficult to obtain credit for some time after bankruptcy. A record of the bankruptcy is added to the debtor’s credit report and stays there for five years (see ‘Privacy and credit reporting’ in Chapter 12.4: Privacy and your rights) or two years starting on the day that you are no longer bankrupt, whichever is later.
- The record is kept on the National Personal Insolvency Index (NPII), which is an electronic index that can be searched by anyone for a nominal fee. However, information about debt agreements is not publicly available on the NPII indefinitely. The length of time a record is publicly available depends on factors such as whether the debt agreement is completed, terminated, declared void, withdrawn, etc. For more information, see AFSA’s website.
- Certain areas of employment are not open to bankrupts (because of the rules and legislation regulating that type of employment, not because of any provisions in the Bankruptcy Act). A person who is considering bankruptcy should make enquiries about the type of work they do or intend to do, especially if a licence is required. Bankruptcy might cause employment problems for company directors, people in managerial positions, lawyers, accountants, tax agents, police officers, estate agents, armed forces personnel, some public servants, licensed builders, and security workers. (This is not an exhaustive list.)
- A bankrupt cannot act as a director or promoter of a corporation, or be involved in the management of a corporation, without the court’s permission.
- A bankrupt cannot be a trustee of a superannuation fund.
- The bankrupt will lose property that is defined by the Bankruptcy Act as divisible. This includes property acquired after the commencement of the bankruptcy (but before the date of discharge) (s 116 Bankruptcy Act). (See ‘Divisible property’ in ‘What happens to a bankrupt’s property?’.)
- The bankrupt might have to pay regular contributions to the trustee if their net annual income is above a certain amount ($59 559.50 net per year (as at April 2021, indexed) if there are no dependants).
- Insurers can cancel insurance contracts if the insured person becomes bankrupt if there is a term in the contract that specifically says this. (See ‘Insurance policies’ in ‘What happens to a bankrupt’s property?’.)
- Some insurers refuse to insure bankrupts and refuse to renew insurance policies for bankrupts.
- The bankrupt might be required to surrender their passport to the trustee, and must obtain permission from their trustee to leave Australia (s 272 Bankruptcy Act).
- Depending on the bankrupt’s social circle, the bankruptcy might cause embarrassment. The stigma of bankruptcy is more likely to be felt by bankrupts whose creditors are business associates, who are unable to continue to operate a business, or who are barred from a position that they have held in the past, such as company director.
- The trustee can investigate past financial dealings of the bankrupt. The trustee in some cases has power to recover property that the debtor has transferred in the period beginning five years before the commencement of the bankruptcy (or longer if it was done for the purpose of defeating creditors).
- Obtaining credit (including hiring goods or writing cheques) of $5969 (as at April 2021, indexed) or more without disclosing the bankruptcy to the person extending the credit is a criminal offence (ss 269(1)(a), (ab), (ac), (ad), 304A(1), (j) Bankruptcy Act).
- If a debtor has had significant gambling debts and then bankrupts, they might be charged with a criminal offence under the Bankruptcy Act (s 271).
Considering all the options
It is strongly recommended that debtors who are considering bankruptcy seek advice from an independent and qualified source, such as a free financial counsellor (see Chapter 5.4: Financial counselling services).
A financial counsellor can assist a low-income debtor to weigh up all their options, including negotiating with creditors and seeking hardship arrangements.
If a creditor is threatening a debtor with bankruptcy, the debtor should seek legal advice, especially where there is a court judgment and where the debtor owns divisible property (e.g. a house).
For a list of free legal services, see Chapter 2.4: Legal services that can help.