General bankruptcy information
Tony had a very bad back and had to stop work. He thought that his back would get better but after several operations he realised that he would not be able to work again. He went on a Disability Support Pension with Centrelink after a doctor had certified that he was permanently disabled. During all the operations he had spent up to his limit on his credit cards just to keep up with his living expenses and rent on his home. Tony has now realised there is no chance he will ever be able to pay his credit card debts. A friend suggests he may wish to consider going bankrupt.
What is bankruptcy?
Bankruptcy involves an exchange. You hand over control of your property and finances to a Trustee (the person who takes control over your property) in exchange for protection from legal action by your creditors (the people/companies you owe money to). You do not have to have a minimum amount of debts or property to enter bankruptcy.
Most of your assets (property you own) may be sold to pay your debts (except those assets which are protected at law – see below). If your annual income is over a certain amount you must make payments to your Trustee (income contributions), which go towards paying your debts.
Bankruptcy usually lasts 3 years but can be extended in some circumstances. At the end of the bankruptcy you will be released from your debts (with a few exceptions).
The Insolvency and Trustee Service of Australia (ITSA) regulates bankruptcy, including processing the paper work and acting as the Trustee in Bankruptcy in some bankruptcies. You should also read the information ITSA provides at www.itsa.gov.au.
Advantages of bankruptcy
You will usually be released when you are discharged from bankruptcy. You will not be released from some debts, for example:
- Court fines
- HELP debts
- Child support
- Debts incurred by fraud
- Student Loans
Many of these debts will continue to be payable and enforceable while you are bankrupt as well as afterwards.
Once you become bankrupt your creditors and their debt collectors must cease collection of the debt(s) from you.
Important note: Some debts are not included in bankruptcy until they have been “liquidated” – liability admitted and the amount agreed upon. The most common example is a debt arising from a motor vehicle accident. If you are considering bankruptcy and some of your debts don’t arise from a contract (like a loan contract, for example), then you should get legal advice before going bankrupt.
Disadvantages of bankruptcy
All assets except those listed below will vest in your Trustee in Bankruptcy and may be taken and sold to pay your debts. If you have money over a modest amount to live on ($1,000-$2,000) it will be taken by Trustee in Bankruptcy. If you inherit or win money while you are bankrupt, it will also be taken by the Trustee in Bankruptcy (up to the amount required to pay all your debts, interest and the costs of administering your bankruptcy).
The following assets are protected and cannot be taken by the Trustee in Bankruptcy:
- A car worth no more than the prescribed amount ($7,200 as a June 2013 – go to www.itsa.gov.au and select indexed amount for the latest amount)
- Necessary household property and clothes
- Tools of trade up to the prescribed amount ($3550 as a June 2013 – go to www.itsa.gov.au and select indexed amount for the latest amount)
- Compensation received directly by you for personal injuries to yourself or your family (or property purchased almost entirely with compensation money)
- Payments from life insurance or superannuation received on or after the date of the bankruptcy. Payments received before the date of the bankruptcy at not protected!
WARNING: YOUR HOME MAY BE TAKEN AND SOLD BY THE TRUSTEE EVEN AFTER YOU HAVE BEEN DISCHARGED FROM BANKRUPTCY.
You will also face the following restrictions
- You cannot borrow more than the prescribed amount without informing the lender that you are an undischarged bankrupt ($5,176 as a June 2013 – go to www.itsa.gov.au and select indexed amount for the latest amount)
- Your bankruptcy will be recorded on your credit report for 7 years from the commencement of your bankruptcy. See Fact Sheet: Your Credit Report for more information. The listing may cause you problems with borrowing money, obtaining insurance and other contracts for services such as telecommunications.
- Your bankruptcy will be recorded permanently on the National Personal Insolvency Index which is a public record which can be searched for a fee.
- You will need the permission of the Trustee to travel overseas. You may have to surrender your passport to your Trustee. (Note: Travelling overseas without the Trustee’s permission is an offence under the Bankruptcy Act for which you can be prosecuted.)
- You may not be able to continue working in some professions and you cannot be a company director while you are bankrupt.
- You will not be able to take or continue legal proceedings without the permission of your trustee except for in relation to personal injury to you or your family.
You may continue paying secured debts in bankruptcy unless the Trustee in Bankruptcy decides to take and sell the asset (and repay the secured creditor). This will usually only happen when your equity in the asset (value of the asset less the amount owed to the secured creditor) is enough to cover the costs of the sale and provide a return for creditors. This can happen at any time both during bankruptcy and for a long time afterwards.
When you own property with someone else
You may own property with another person or other people (such as your spouse, de facto spouse or another family member, for example). In this case the other owner(s) will be given the option to buy your share of the property from the Trustee in Bankruptcy. If the other owner(s) cannot afford to do this the property may be sold and the other owner(s) will be refunded an amount reflecting their share.
Other things you need to know
Whilst currently there is no minimum amount of debt required for a debtor to present their petition for bankruptcy, the Official Receiver has the discretion to reject a debtor’s petition if the Official Receiver considers that the debtor:
- Would be able to pay the debts within a reasonable time based on the information provided; and either
- Is unwilling to pay one or all of his/her debts; or
- Has been previously bankrupt on a debtor’s petition at least 3 times before (ever), or at least once in the past 5 years.
You can be forced into bankruptcy if you owe a debt over $5000. For a creditor to force you into bankruptcy they must present a Creditor’s Petition to the Court showing that you have committed an “act of bankruptcy” in the last 6 months and that you still owe over $5,000. The most common way of doing this is to:
- Obtain a court judgment against you stating that you owe the creditor a debt over $5000;
- Arrange for a Bankruptcy Notice to be issued and served on you. If you do not pay the amount listed on the Bankruptcy Notice within the time specified in the notice (usually 21 days), you will have committed an “act of bankruptcy” that is easily proven.
- Present a Creditor’s Petition (an application to have you made bankrupt) and serve it on you;
- Have the Federal Court or Federal Magistrates Court make a sequestration order against you i.e. declare you bankrupt.
If you receive a Bankruptcy Notice and you do not want to be made bankrupt you must either pay the amount owing within the period given in the notice or seek urgent legal advice. If you cannot pay the whole amount, pay as much as you can and try to come to an arrangement with the creditor.
There are other ‘acts of bankruptcy’ such as proposing or terminating a Debt Agreement, having a Personal Insolvency Agreement terminated or filling a Declaration of Intention to file a Debtor’s Petition that can be used to make you bankrupt.
If you receive a Creditor’s Petition you must get URGENT legal advice. If you do not have time to do this before the Creditor’s Petition hearing, turn up to the Court (or arrange to attend by telephone if you live a long way away) and ask for an adjournment to get legal advice. There is an alternative to bankruptcy called a debt agreement. If you want know more about this see Fact Sheet: Debt Agreements. There are also Personal Insolvency Agreement but they are quite expensive to set up. For more information on Personal Insolvency Agreements refer to www.itsa.gov.au.
Warning: Always get legal advice if you receive a Statement of Claim, Bankruptcy Notice or a Creditor’s Petition. There are serious consequences if you do not take action after receiving one of these documents.
Applying for bankruptcy
Declaring yourself bankrupt is not difficult but it is a big step with potentially serious consequences.
Step 1: Read all the information available at the website of the Insolvency and Trustee Service of Australia (ITSA) – www.itsa.gov.au. It is strongly recommended you get free advice from a financial counsellor (you can find a financial counselling service near you by ringing 1800 007 007). If you are sure this is the right course of action for you, proceed to step 2.
Step 2: Obtain the relevant forms from ITSA. ITSA can be contacted on 1300 364 785 or all the forms you need are available at www.itsa.gov.au.
Step 3: Complete and lodge the forms with ITSA. Make an appointment to see a free financial counsellor if you are having difficulty completing the forms (see Step 1 above). REMEMBER: Make sure all of your debts & property are listed in the Statement of Affairs. You should list all your debts even though you may not be released from some of them. You should list all your assets even though you may believe the property is protected in bankruptcy. Include a note about why you think the property is protected.
When should I consider bankruptcy?
- You will not have sufficient money to live on if you make all the monthly repayments you are required to make to your creditors;
- You do not have assets that could be sold to repay the debts
- You understand and can live with the restrictions that bankruptcy will bring now and in the future..
Remember: If you earn over the prescribed amount ($50,332.10 as at June 2013 – see www.itsa.gov.au for latest amount) you will need to pay income contributions during bankruptcy. The prescribed amount increases with each dependent you support.
This is only a brief guide and it is recommended that you speak to a financial counsellor to discuss the best option for you in your circumstances.
Need some more help? See Getting Help for a list of additional resources.
Last Updated: 21/6/2013