Declaring Bankruptcy in Australia: What you need to know

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DECLARING BANKRUPTCY IN AUSTRALIA In Australia, if you are unable to pay your

debts, and your attempts to come to an agreement with your creditors about repayment have failed,

then you may be faced with the prospect of declaring bankruptcy. Declaring yourself bankrupt

involves having a Trustee appointed to take control of your assets and income so that

they can pay down your debts and discharge them.

Before you consider declaring bankruptcy, you need to understand the consequences, as

it will have serious repercussions for your future. An understanding of the bankruptcy

laws, along with expert legal advice, will allow you to make an informed decision about

your financial situation.

You can become bankrupt either by declaring bankruptcy yourself through what is known as a

‘debtor’s petition’, or by order of the Federal Court following an application by one of your creditors, known

as a ‘creditor’s petition’. If you would like to enter into bankruptcy

voluntarily by Debtor’s Petition, you need to lodge an application with the Australian

Financial Services Authority or AFSA. You will also need to lodge a financial statement

and sign to acknowledge that you have read the prescribed information on the rear of

the form. The forms must be lodged within 28 days of signing, and once they are lodged

they cannot be withdrawn. You can find the forms on the AFSA website.

Any creditor who is owed $5000 or more and is unable to reach agreement with

you regarding repayment of the debt can apply to the Federal Court for a sequestration order.

You will be notified of the impending court hearing and have an opportunity to object

to the proceedings. The Court will issue the order where the creditor

can show that you have committed an act of bankruptcy. The most common act of bankruptcy

is a failure to comply with a bankruptcy notice, which is issued by the AFSA at the request

of the creditor, demanding payment of the debt.

Once a sequestration order is made you are officially bankrupt. You must provide the

AFSA with a statement of affairs within 14 days of the order. You will find the relevant

forms on the AFSA website. Further information about the court proceedings can be found on

the website for the Federal Court. Once the AFSA has received your statement

of affairs (either by debtor’s or creditor’s petition) your bankruptcy Trustee will begin

investigating your financial affairs. They will notify your creditors that you have been

declared bankrupt. The Trustee will again notify your creditors once they have determined

how best to deal with your debts. The AFSA will appoint a Trustee to manage

your bankruptcy. If you have voluntarily elected bankruptcy, you can apply to have your own

registered Trustee appointed and will need to submit a Trustee Consent to Act Declaration

along with your bankruptcy application. The AFSA may also appoint a registered Trustee

following a request from your creditors. Your creditors also have the power to remove and

replace your Trustee. Most of your assets will vest in your Trustee

once you are declared bankrupt so that they can sell them to pay down your debts. Certain

assets are dealt with in a specific way, such as those over which mortgagees hold a security.

Some assets are exempt altogether, such as personal household items, tools up to a certain

value which are required for work, a car up to a certain value, sentimental trophies,

medals and awards, life insurance policies, and funds in superannuation.

You can earn an income during bankruptcy but only up to a certain amount. If you earn above

the threshold, you will be required to pay to your Trustee half of the amount you earn

in excess of the threshold. Your Trustee will assess your expenses, based upon your particular

circumstances and the number of dependants you support, and will issue you with an assessment

for the amount you need to pay for the year. You will generally be discharged from bankruptcy

after 3 years and 1 day of submitting your application to the AFSA. Where you are bankrupt

as the result of a creditor’s petition you will be discharged 3 years and 1 day after

you submit your statement of affairs. If you fail to cooperate with your Trustee, they

may seek to extend the period of bankruptcy to 5 or even 8 years.

While your Trustee attempts to satisfy the majority of your creditors, you will still

be liable to pay certain debts both during and after your bankruptcy. This includes child

support payments, HECS or HELP fees, court fines, any amounts acquired through fraud,

and payments to secured creditors such as a mortgagee.

A record of your bankruptcy will be kept on the National Personal Insolvency Index which

is accessible to the public. Credit reporting agencies may also keep a record of your bankruptcy

for 5 years or more. Bankruptcy carries with it significant ongoing

consequences. For example, you are not able to act as a director of a company. If you

open a new business, you must inform creditors that you are bankrupt. You cannot travel overseas

without your Trustee’s permission. Your credit rating will be affected. You cannot

own any assets over the threshold value, and some debts will continue through bankruptcy

and beyond. Declaring bankruptcy is not a process to be

taken lightly. You should investigate your financial options thoroughly and seek legal

advice before deciding to declare yourself bankrupt, or if you are facing a Court-ordered

bankruptcy. If you or someone you know is facing bankruptcy,

Go To Court Lawyers operate a Legal Hotline on 1300 636 846 where you can talk directly

to a lawyer 7am - midnight, 7 days/week. Your call will be treated with the strictest confidentiality

and without judgement. The lawyer will assess your matter and recommend

a course of action. Should you need a lawyer, even if it is at

very short notice, the Legal Hotline staff will be able to arrange legal representation

for you. You can also request a call back via the website and a lawyer

will call you back to assess your matter.