Australian Bankruptcy
Australian Bankruptcy is for individuals who are in a desperate financial situation (ie you are insolvent). Bankruptcy should not be considered if you are only suffering from a temporary lack of liquidity (ie you have recently lost your job, however, you expect to regain employment shortly).
Bankruptcy can allow you to start afresh, however, Australian Bankruptcy does not release you from all debts so we encourage that you read this site carefully before filing for bankruptcy.
Typically Australian Bankruptcy will last for 3 years, however, your bankruptcy term can be extended to 5 or 8 years in certain circumstances.
What assets can I keep?
As an Australian Bankrupt you can keep the following assets:
- Motor car up the value of $6,700
- Tools of trade $3,350
- Superannuation (up to the reasonable limit)
- Necessary household goods and personal effects
What assets will I lose?
As an Australian bankrupt, you lose the ability to sell or deal with most of your assets or items of value which are not protected under the Bankruptcy Act. Only the Trustee in Bankruptcy or a secured creditor is able to do deal with your unprotected assets. The trustee’s role is to dispose of your property for the benefit of all creditors generally.
Therefore you will lose these types of assets:
- Motor car worth more than $6,700 (although you will retain $6,700 from the sale proceeds)
- Tools of trade worth more than $3,350 (although you will retain $3,350 from the sale proceeds)
- Superannuation over the reasonable benefit limit
- Cash at Bank over the reasonable limit (around $2,000)
- Equity in a house or other secured asset
- Jewelry or antiques.
If you have equity in a home, this equity will vest in your Bankruptcy Trustee. For example if you own a home (ie real estate) jointly with your spouse which is worth say $400,000 and you have a mortgage of say $350,000 your equity would be $25,000 ($400,000-$350,000 / 2). This equity of $25,000 would vest in your trustee. Your trustee may agree to sell this equity to your non-bankrupt spouse. However, if your trustee is unable to reach agreement with your non-bankrupt spouse the trustee may force a sale of the house.
What assets can I accumulate as a bankrupt?
As a undischarge bankrupt you cannot accumulate any assets as they would vest in your trustee as after acquired property. For example if you won the lottery or received inheritance these monies would vest in your trustee for the benefit of your creditors generally. This even includes assets purchased with your income even after paying your compulsory income contributions (if applicable).
What debts will bankruptcy release me from?
Bankruptcy will release you from the most common type of debts, however bankruptcy, it will not release you from these types of debts:
- Child support
- Debts incurred by fraud
- Fines or penalties imposed by the court
- HECS debts
- Student loans
- Unliquidated damages (ie a claim which has not be proven or quantified by a court)
Therefore if you owe the above listed debts will you remain liable to pay for them even if you file for bankruptcy. Furthermore a bankrupt will be liable to pay for all debts incurred after his or her date of bankruptcy, commonly known as post bankruptcy debts. If you don’t pay post bankruptcy debts you could become bankrupt again.
How do I become bankrupt?
A person may become bankrupt in a number of ways – either you can file for bankruptcy voluntarily (debtor’s petition) or you can be forced into bankruptcy by your creditors through court action (creditors’ petition).
Debtors’ petition
To file for bankruptcy voluntarily, you will need to complete a Debtor’s Petition and a Statement of Affairs and lodge them with the Insolvency Trustee Service Australia. The forms can be downloaded for free from ITSA. If you are struggling to complete the forms, we offer a bankruptcy form service whereby we will assist you in completing them. With a debtors’ petition you can appoint a trustee of your choosing. We can offer the services of a Registered Trustee (a private trustee) to manage your bankruptcy.
It is critical that you complete your forms correctly. If you fail to disclose debts or you conceal an asset your trustee could file an objection and your bankruptcy term could be extended.
Creditors’ petition
A creditor to whom you owe money to (currently $2,000) can apply through the Bankruptcy Court for a sequestration order (otherwise known as a Creditors’ Petition). If this occurs the creditor can also obtain consent from a trustee of their choosing (ie you will not have a choice in the matter).
Will I pay Income Contributions?
In bankruptcy you will be assessed for compulsory income contributions. If you earn more than the statutory thresholds (which varies with the number of dependents) you may become liable to pay compulsory income contributions to your trustee. The statutory thresholds are published by ITSA. We have also prepared a calculator for you to assess if you will become liable for contributions (please note our calculator is a guide only). It is your trustee that will assess your compulsory income contributions.
Your trustee will undertake this assessment every year of your bankruptcy (so at least 3 times).
A bankrupt’s income can also include the value of benefits received from their employer or friends.
What are my restrictions in bankruptcy?
You won’t be able to freely travel overseas
You will need to surrender your passport to your trustee. Your trustee may allow you to travel, however, it will be at their discretion. Your trustee may require all income contributions to be paid up to date before consent to travel will be provided.
You can’t incur credit
As a bankrupt will not be able to incur credit of more than $4,764 without disclosing that you are bankrupt.
You cannot be a director of a company whilst you are bankrupt
Under the Corporations Act you are ineligible to be a company director whilst bankrupt.
You cannot accumulate assets whilst bankrupt
If you accumulate assets as a bankrupt these assets will vest in your trustee as after acquired property.
What are my obligations in bankruptcy?
Disclose all debts
You must disclose all debts to your trustee. Failure to do so is an offence and your trustee is obliged to refer it to ITSA for investigation. This could lead to prosecution.
Complete yearly income assessment questionnaire
Your trustee will ask that you complete an income contribution questionnaire for each year of your bankruptcy. Your trustee will then determine if you are liable to pay statutory income contributions. If your trustee assesses you to pay income contributions and you fail to do so your trustee can object to your discharge from bankruptcy which will extend the term of your bankruptcy.
Keep your trustee appraised of your whereabouts
You must keep your trustee appraised of your current contact details and residential address. If you fail to do so your trustee can object to your discharge from bankruptcy which will extend the term of your bankruptcy
What happens to my credit rating as a bankrupt?
Declaring bankruptcy affects your credit rating.
Bankruptcy is recorded for 7 years with credit reporting agencies from the commencement of your bankruptcy even if your bankruptcy has been discharged.
Bankrupts are listed permanently on the National Personal Insolvency Index which is a database maintained by ITSA.