When a debtor who cannot pay their debts has their money and property taken over and managed by a trustee who uses it to pay back creditors. The debtor is then called a bankrupt. is a legal status that a person has under the Bankruptcy A written law made by parliament. Also called an ‘Act of parliament’, ‘statute’ or legislation. 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).
Statutory rules made by parliament or by bodies the parliament delegates power to, for example a local council or a registration authority. See delegated legislation; statute.
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 A person who owes a debt. 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:
- Done by your own free will. See also community treatment order (CTO). 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 The person or organisation to whom a debtor owes a debt. 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 Under the Australian Consumer Law, a person who buys goods or services for less than $40 000 or for personal or home use. Price Index or the base pension rate. Check the current indexed amounts on website of the Australian Financial Money or property promised to be handed over as a guarantee for repayment of a loan, or as a guarantee that a defendant will meet their bail conditions. Authority (AFSA) at:
- https://www.afsa.gov.au/sites/default/files/indexed_amounts.pdf; or
Advantages of bankruptcy
- After (1) To fulfil an obligation or be released from an obligation. For example, a debtor can discharge a debt by paying it; a prisoner can be discharged (released) from jail. 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 An independent body that hears legal claims brought by parties and decides between them. Serious cases are heard by a judge and jury, or just a judge. Less-serious cases are heard by a magistrate. 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 A court order that tells an employer to hold money back from an employee’s wages and pay it to a creditor. A share of the debtor’s wages go to the creditor every payday until the debt is paid off. order. (See Chapter 5.2: Are you in Money that is owed by one person or business to another.?, in relation to attachment of earnings orders and ‘What happens to the 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 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 A document that sets out what a person wants to happen to their money and other property after they die. probably be very difficult to obtain A debt that does not have to be paid until some future time. Being allowed to pay later, in the future, for something you are getting now. 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 ‘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 An arrangement between a debtor and a creditor for the repayment of an unpaid debt, often by instalments. Generally negotiated because the debtor has been unable to pay the debt as originally agreed. is completed, terminated, declared Having no legal effect. A void agreement has something wrong with it, so it cannot be a legally binding contract. For example, a verbal agreement to buy land would be void, because the law says those contracts have to be in writing., withdrawn, etc. For more information, see AFSA’s website (www.afsa.gov.au/insolvency/i-cant-pay-my-debts/what-are-consequences-debt-agreement).
- 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, All the property a person has, including real property and personal property. It is often used to describe property belonging to someone who has died, or the property of a bankrupt. 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). (See ‘Divisible property’, below.)
- 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 An agreement that the law will enforce. that specifically says this. (See ‘Insurance policies’, below.)
- 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).
- 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 A criminal act prohibited by state or commonwealth criminal law. An offence is either a summary offence (minor) or an indictable offence (serious). (ss 269(1)(a), (ab), (ac), (ad), 304A(1), (j)).
- 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 Property belonging to a bankrupt that can be used to pay off debts. Some property such as tools or trade, ordinary household furniture and a low-value car are excluded from the property that can be taken and sold. See also bankruptcy. (e.g. a house).
For a list of free legal services, see Chapter 2.4: Legal services that can help.