In Australia, the bankruptcy process typically lasts for 3 years and 1 day, as per the Bankruptcy Act 1966.
The Bankruptcy period may be extended to 5 or 8 years by request of your Trustee.
Bankruptcy can be a lengthy process. However, it is governed by a set of regulations that mean the process cannot be extended without meeting strict criteria.
What is Bankruptcy?
Bankruptcy is a formal process where you are declared unable to repay your debts (known as “insolvency”).
Entering bankruptcy provides relief from creditors and releases you from most debts. There are two main types of bankruptcy in Australia:
- Voluntary bankruptcy. If you’ve become insolvent, you can voluntarily file for bankruptcy. A voluntary bankruptcy application can be made regardless of your income or the amount of debt you hold.
- Involuntary bankruptcy. If you owe a creditor $10,000 or more, they may apply to the court to make you bankrupt. Creditors will resort to this method if they feel it is their best option to recover the debt they are owed.
During bankruptcy, a registered Trustee is appointed to manage your estate.
The Trustee will protect, gather and sell your assets in order to repay the debts you owe. Once the Trustee has completed their work, you are released from most remaining debts, allowing you to start afresh.
What Causes Bankruptcy?
An individual can declare bankruptcy if they are unable to pay their debts.
This situation often leads to creditors, lawyers or debt collectors sending notices of overdue debts.
If this continues, they may apply to the court to make you bankrupt in order to recover the money they are owed.
According to the Parliament of Australia, bankruptcies are most commonly caused by:
- Loss of income
- Spending beyond your means (such as credit card debt)
- Domestic problems
- Poor health and medical bills
- Unfavourable legal disputes
- Excessive gambling
- Making personal guarantees to secure finance for your business
Bankruptcy is a very final solution. If you experience financial stress or are concerned about repaying your debts, speak to a financial adviser as soon as possible.
The Bankruptcy Process
The bankruptcy process can be lengthy, but it is designed to be straightforward and accessible for anyone experiencing serious financial difficulty:
- Submit a Bankruptcy form to AFSA. Bankruptcy commences when you submit a Bankruptcy Form to AFSA. You can submit the form yourself, or it can be submitted on your behalf by a registered Trustee.
- A Trustee is appointed. Once AFSA accepts your application, a Trustee is appointed to oversee the process and manage your estate. You can appoint a registered Trustee yourself, or AFSA will automatically appoint one for you.
- The Trustee gathers and sells your assets. Your Trustee immediately takes control of your estate. It is their responsibility to assess your finances, gather and sell assets, communicate with creditors, and distribute money to repay debts. This can be a long process, and you are expected to provide any assistance the Trustee asks for along the way.
- Dividends are paid to creditors. Any money collected by the Trustee is paid to creditors as a dividend.
- Discharge from bankruptcy. You are discharged from bankruptcy after 3 years and 1 day. You are released from most remaining debts (excluding fines and penalties, HECS/HELP debt, child support and debts incurred after the bankruptcy started).
Bankruptcy follows the same process if you are made bankrupt by a creditor. The key difference is that the creditor will apply to the court for a sequestration order, instead of you making an application to AFSA.
What Happens at The End of Bankruptcy?
At the end of the bankruptcy period, the bankrupt individual is ‘discharged.’ For voluntary bankruptcy, the period begins one day after filing your petition with the
Australian Financial Security Authority (AFSA). If you were made bankrupt by court order, the bankruptcy period begins one day after your statement of affairs is accepted by AFSA.
Regardless of whether you enter into voluntary bankruptcy or are made bankrupt by court order, the period of 3 years and 1 day applies.
The bankruptcy period may end early if you reach a Part IX or Part X Debt Agreement with your creditors.
The administration of a bankrupt estate can continue beyond discharge if the Trustee has ongoing investigations or additional assets to realise and distribute.
Extended Bankruptcy Periods
Individual bankruptcy proceedings can be extended to 5 or even 8 years. The decision to extend bankruptcy is made by the Trustee, who will extend the period if the bankrupt individual is nonresponsive or fails to fulfil any obligations.
Your Trustee may file an ‘Objection to Discharge’ and have your bankruptcy extended if you fail to:
- Provide information requested by the Trustee
- Disclose all income and income sources
- Make compulsory payments
- Disclose all assets and debts
If you feel that your Trustee filed an objection wrongfully, you can appeal the Trustee’s decision by lodging a Request for Review form with AFSA.
What are the Ongoing Effects of Bankruptcy?
While bankruptcy lasts between 3 and 8 years, declaring bankruptcy can have an impact on your life beyond that period:
- Your details will appear on the National Personal Insolvency Index (NPII) permanently. The NPII maintains records of your name, address, occupation and details of the bankruptcy proceedings. The NPII is publicly available and can be searched for a small fee.
- Credit reporting agencies are permitted to keep a record of bankruptcies up to 5 years from the date you became bankrupt, or 2 years from when your bankruptcy ended, whichever is later. This can have a major effect on your ability to obtain new sources of credit, such as business loans, car loans and mortgages.
- Bankrupt individuals are disqualified from acting as the director of a company during the bankruptcy period. If you are serving as the director of a company when you declare bankruptcy, your shares in the company will pass to the Trustee, who can choose to sell the shares or liquidate the company. You are permitted to become the director of a company after being discharged from bankruptcy.
Need Bankruptcy or Personal Insolvency Advice? Speak to SV Partners Today
Being unable to pay your debts can be a stressful experience.
If you find yourself facing financial stress, remember that help is available.
Bankruptcy is just one option to help manage personal insolvency and it should only be entered into after receiving professional advice. If you need more information on personal insolvency or bankruptcy proceedings, contact SV Partners today.