Declaring Bankruptcy in Australia

Being unable to pay your debts is stressful, particularly if you are being contacted by creditors. Bankruptcy is one of the options available if you find yourself in this situation.

Declaring bankruptcy releases you from most debts, but it’s an involved process that has lasting consequences. In this article, we will discuss declaring bankruptcy in Australia, the eligibility criteria, what happens to your assets and more.

What is Bankruptcy?

Bankruptcy is a formal process where an individual declares that they are unable to pay their debts. Declaring bankruptcy will provide relief from creditor demands, release you from most debts, and allow you to restart your life with a clean slate.

If your application for bankruptcy is accepted, a Trustee takes control of your estate. The Trustee will sell your assets and use the proceeds to pay as much of your debt as possible. Most remaining debts are forgiven at the end of the process, and you can continue your life as normal.

Bankruptcy has a lasting impact on your life and should be considered a last resort.

What Causes Bankruptcy?

Bankruptcy is caused by personal “insolvency,” which occurs when an individual is unable to pay all debts as and when they are due. You can declare bankruptcy voluntarily, or a creditor can apply to the court to make you bankrupt if you owe $10,000 or more.

A creditor can only make you bankrupt if they prove you have committed an “act of bankruptcy.” Common acts of bankruptcy include:

Failing to comply with the requirements of a bankruptcy notice
Leaving the country, or remaining outside of the country, with the intention of delaying or defeating creditors
Presenting creditors with a debt agreement proposal
Selling, transferring or otherwise disposing of assets with the intention of delaying or defeating creditors

Am I Eligible for Bankruptcy?

You are eligible for bankruptcy if you are insolvent and if you are present in Australia, or have a residential/business connection to Australia. There are no debt or income thresholds to be eligible for bankruptcy – it’s open to any individual who is unable to pay their debts.

How Long Does Bankruptcy Last?

Bankruptcy typically lasts for 3 years and 1 day from the date your application is accepted by AFSA. Your Trustee may extend the bankruptcy period to 5 or 8 years in certain circumstances.

See our complete guide on how long bankruptcy lasts for more information.

The Role of Your Bankruptcy Trustee

When you declare bankruptcy, a Registered Trustee is appointed to control your estate and oversee the process. You can appoint a Trustee of your choosing, or the Court system will appoint the Official Trustee via AFSA.

Trustees are registered insolvency professionals. It’s their responsibility to take control of your assets, assess your financial situation, and resolve as much of your debt as possible.

The Bankruptcy Process

The bankruptcy process is relatively straightforward. It follows these five steps:

You submit a bankruptcy application to AFSA.
If the application is approved, a Trustee is appointed to oversee the process.
The Trustee takes control of your estate, investigates your finances, sells assets and collects money for distribution to creditors.
Dividends are paid to creditors from any monies that your Trustee was able to collect.
You are discharged from bankruptcy and most remaining debts are extinguished.

Most of this process is handled by the Trustee. You are required to provide information and assistance to help the Trustee fulfill their duty. The bankruptcy period may be extended if you fail to comply with reasonable requests from the Trustee.

Does Bankruptcy Clear All Debts?

Most debts are extinguished at the end of the bankruptcy period. You are still required to pay HECS and HELP debts, child support, court penalties, and debts that were incurred after your bankruptcy began.

See our article on which debts are cleared by bankruptcy for further information.

What Do You Need to Do Before Declaring Bankruptcy?

Speak to a professional adviser or Registered Trustee before declaring bankruptcy. Bankruptcy has an ongoing impact on your life and should be considered a last resort.

A professional adviser can explore your options and may recommend an alternative. Depending on your situation, an adviser can help you access the following insolvency options:

Debt Agreement – A Debt Agreement allows you to negotiate a repayment plan with all of your creditors through your agreement Administrator or Trustee. This may involve reducing the total amount of your debt, extending loan periods, or altering repayment instalments. Debt Agreements are subject to maximum debt, asset and income thresholds.
Personal Insolvency Agreement (PIA) – A PIA is a flexible way to reach an agreement with your creditors. Under your agreement, you’ll make payments in a lump sum or instalments. Creditors typically agree to reduce the total amount of your debt. There are no asset, debt or income thresholds for Personal Insolvency Agreements.
Bankruptcy – Bankruptcy is a formal option that frees you from most debts. Your assets will be sold and the proceeds will be used to pay your creditors. While bankruptcy provides a fresh start, it has an impact on your credit file, your ability to run a company and it may affect your life in other ways.
Temporary Debt Protection (TDP) – TDP provides 21 days of protection from unsecured creditors. During this time, creditors and sheriffs can’t take enforcement action against you, so they can’t seize your assets or garnish your wages. The 21-day period gives you time to assess your options in full.

The Ongoing Effects of Bankruptcy

Bankruptcy has an ongoing effect on your life, even after you are discharged. The lasting impacts include:

Your assets may be sold to repay creditors, including your house and cash savings. You are allowed to keep certain household goods, as well as tools of the trade and a vehicle up to the set amount.
Your details will be permanently recorded on the National Personal Insolvency Index (NPII). The NPII can be searched by anyone for a small fee. Being listed on the NPII can affect your ability to do things like obtain new credit or connect with future clients and investors.
Credit reporting agencies will keep a record of your bankruptcy for up to 5 years, or 2 years after you are discharged, whichever is later. This can impact your ability to obtain new lines of credit.
You are disqualified from acting as the director of a company while bankrupt. You can resume your directorial duties once you are discharged.

Treatment of Property in Bankruptcy

Most of your property is “vested” in the Trustee when bankruptcy proceedings commence. This means the Trustee is the owner of your property and can deal with it in any way that benefits the bankrupt estate.

If property is jointly owned and the co-owner(s) is not bankrupt, the co-owner may need to buy-out the interest of the bankrupt individual. If the co-owner is unable or unwilling to buy out the bankrupt owner, the property may be liquidated, and the proceeds divided according to the proportionate ownership interests.

Property that forms a security interest (e.g. your family home while it’s subject to a mortgage) may or may not be included in your bankrupt estate. The secured creditor generally retains the right to sell the property if the loan is in default. In some situations, a secured creditor may allow their security interest to be included in the bankrupt estate.

Certain property is exempt from your bankrupt estate. You are allowed to retain:

Ordinary household goods (e.g. kitchen equipment and furniture)
Property that you use to earn an income (such as tools)
Superannuation balances
Your primary vehicle (up to a set value)

The property you are allowed to keep is intended to assist you in earning an income and restarting your life. Your primary vehicle and equipment used to earn an income (such as tools or computers) cannot exceed the set amount.

Can I Travel Overseas During Bankruptcy?

You must obtain permission from your Trustee to travel overseas during the bankruptcy period. The Trustee can place restrictions on where and why you are able to travel. People who travel regularly (e.g. for work, or to see family) may receive ongoing approval so you don’t need to apply each time.

Travelling overseas without approval from your Trustee may result in your bankruptcy being extended for 5 or 8 years from the date you return to Australia. You may also face imprisonment.

Employment Restrictions for Bankrupt Individuals

You are disqualified from acting as the director of a company during the bankruptcy period. Other than this, bankruptcy does not restrict you from your normal employment.

Depending on your income and financial circumstances, the Trustee may require you to make regular payments towards your debts during the bankruptcy period.

Can I Be a Sole Trader if I am Bankrupt?

Bankrupt individuals are allowed to operate as a sole trader during the bankruptcy period. If you’re a sole trader, your business name should contain your full name to allow people to search for you on the NPII. If your business name does not contain your full name, you are obligated to tell anyone you are doing business with that you are bankrupt.

Contact SV Partners for More Information on Bankruptcy

Bankruptcy is an accessible tool that may be suitable if you are struggling to pay your debts. It’s not the correct solution for everyone, so it’s important to speak with a professional adviser before lodging your application.

SV Partners has a team of Registered Trustees that are experienced in bankruptcy and personal insolvency. We can discuss your situation and develop a solution that works for you.

Declaring Bankruptcy in Australia