If you become bankrupt, a bankruptcy trustee is appointed to manage your bankruptcy, which is commonly referred to as administering your bankrupt estate. The role of a bankruptcy trustee includes:
- Selling certain assets for the benefit of creditors (people you owe money to).
- Notifying your creditors of your bankruptcy and providing reports to creditors.
- If sufficient funds are recovered in your bankrupt estate, paying a dividend to creditors.
You may appoint a private bankruptcy trustee (such as one from Pearce & Heers) to administer your bankrupt estate or you may appoint the Official Trustee from AFSA.
Bankruptcy usually lasts for three years and one day, although this period can be extended by a bankruptcy trustee, which may occur, for example, where a bankrupt fails to co-operate with their bankruptcy trustee, provide requested information to their trustee or fails to pay any required amounts to their bankruptcy trustee from their income (within a reasonable period of time).
Debts you owe to creditors
If you become bankrupt, you will ultimately be released from most of your unsecured debts which are owed at the date of your bankruptcy including:
- Credit card and unsecured loan debts.
- Legal fees.
- Unsecured debts owed to guarantee
- Debts subject to certain legal claims against you.
- Most tax debts.
- Shortfalls suffered by creditors that hold security over your assets.
Bankruptcy will not release you from certain debts including but not limited to:
- Most Centrelink debts.
- Child support and maintenance debts.
- Court imposed penalties and fines.
- HECS & HELP debts.
- Certain unliquidated debts such as unliquidated damages.
- Certain debts incurred by fraud.
- Debts you incur after the date you become bankrupt.
A more detailed summary of the effect of bankruptcy on various types of debts can be found here.
Assets available to be realised in bankruptcy
A bankruptcy trustee has a duty to act in a commercially sound manner for the benefit of creditors. This includes selling or recovering (referred to as realising) assets owned at the date you become bankrupt, including assets owned overseas or held by another person. The assets which a bankruptcy trustee can realise include:
- Your interest in any real property including if you own an interest in the house you reside in.
- Shares in private or public companies, cryptocurrency and other investments.
- A motor vehicle used primarily for transport valued at over an indexed amount.
- Tools of trade used to earn income valued at over an indexed amount.
- Cash at bank in an amount over what can reasonably be considered necessary to meet your immediate modest living expenses.
- Debts or loans owed to you.
- A business that you own or operate as a sole trader.
- Artwork, jewellery and antiques.
- Certain legal actions and rights.
The Bankruptcy Act 1966 (Cth) allows you to keep certain assets if you become bankrupt including:
- Most ordinary household and personal
- Tools of trade used to earn an income up to an indexed amount.
- Motor vehicles where the total value of the vehicles minus the sum owing under finance is no more than an indexed amount.
- Subject to some exceptions, funds in regulated superannuation funds and any withdrawals from regulated superannuation funds made on or after the date of bankruptcy (superannuation withdrawals made before the date of bankruptcy can be realised by a bankruptcy trustee).
- Life insurance policies for you or your spouse and the proceeds from these policies received after
- Compensation for a personal injury or workers’ compensation (whether received before or after the date of bankruptcy).
- Assets held by you on trust for another person.
A more detailed summary of the effect of bankruptcy on various assets can be found here.
Assets you acquire after bankruptcy
A bankruptcy trustee can also recover assets you acquire after the date of your bankruptcy. The types of assets a bankruptcy trustee might be able to recover in these circumstances include:
- Assets which your bankruptcy trustee would have been able to realise had you owned them at the date you became bankrupt.
- An entitlement to receive an inheritance which arose during the period of your bankruptcy.
- Lottery or gambling winnings received whilst you are bankrupt.
- Tax refunds that you receive after your bankruptcy, but relate to the period prior to your bankruptcy.
A bankrupt is entitled to travel overseas with their bankruptcy trustee’s written consent. A bankrupt must not travel overseas if written consent is not given.
Companies and businesses
If you become bankrupt, you cannot be a director of a company and you will be removed from any directorships. You can trade a business as a bankrupt, however, there are certain restrictions on this including:
- You must trade the business in your own name.
- You must tell anyone you obtain credit from (which is over an indexed amount) that you are bankrupt.
- You must keep proper books and records.
Duties of a bankrupt
If you become bankrupt your duties as a bankrupt will include:
- Complying with any requests for information or documents made by your bankruptcy trustee.
- Providing your bankruptcy trustee with information about your income and advising your trustee if your income changes.
- If you move residence, advising your bankruptcy trustee of this.
- Advising your bankruptcy trustee of any assets you acquire after you become bankrupt.
Income and income contributions
Being bankrupt does not restrict you from being employed and earning an income during your bankruptcy. However, if your after-tax income for any of the (generally) three years of your bankruptcy exceeds a certain threshold, you will have to pay amounts to your bankruptcy trustee. The threshold that applies depends on how many dependents you have and your bankruptcy trustee will calculate the amount of the liability for each year of bankruptcy and will send a notice of assessment that outlines the total amount due and request that the amount be paid, most commonly by installments.
Our website contains a calculator which you can use to determine the approximate amount of income contributions you will have to pay if you become bankrupt.
Assets disposed of prior to bankruptcy
If you have disposed of any assets for under their fair value in the four years prior to becoming bankrupt (or at anytime during which you were insolvent), then this may give rise to recovery claims by your bankruptcy trustee.
There are other various provisions in the Bankruptcy Act 1966 (Cth) that provide a trustee with the ability to pursue recovery claims against parties for pre-bankruptcy transactions. If you consider these provisions may apply to you, you should obtain your own legal advice.
Bankruptcy and your credit rating
Bankruptcy will appear on your credit rating for the longer of five years from the date of your bankruptcy or two years after the date which your bankruptcy ends.
Trustee’s remuneration and disbursements
Subject to certain exceptions, a trustee is entitled to be paid from funds realised in a bankrupt estate for remuneration and disbursements that are:
- Approved by creditors or AFSA.
- Reasonable and necessary.
- Incurred legally.
- Supported by documentation.
If you appoint us as your trustees, we will charge remuneration on a time-cost basis using our firm’s hourly rates.
If there are insufficient funds realised in your bankrupt estate to pay all of our remuneration and disbursements then our costs over and above the amount paid from funds realised will not be paid.
You are able to file for bankruptcy and appoint the Official Trustee from AFSA as your bankruptcy trustee even if there are little or no assets expected to be realised in your bankrupt estate.
Filing for bankruptcy
If you wish to file for bankruptcy, you will need to complete a Bankruptcy Form which can be done via a paper form or online. If you wish to appoint a bankruptcy trustee from Pearce & Heers we will have to notify AFSA of this before you become bankrupt. We can also assist you complete the Bankruptcy Form and/or review it once you have completed it.
Advice and assistance
If you cannot pay your debts and would like to better understand the potential consequences and the options available, please contact Pearce & Heers at our Brisbane or Gold Coast offices for an for an initial, obligation-free consultation.