Bankruptcy is a process available to individuals who cannot pay their debts and/or are experiencing severe and ongoing financial hardship. When a person becomes bankrupt, they no longer have to pay most unsecured debts, offering them the opportunity at a fresh financial start. However, bankruptcy also involves significant consequences, including the possible sale of assets owned by a bankrupt.
We provide further information regarding bankruptcy and its consequences below.
How Does a Person Become Bankrupt?
There are two common ways a person can become bankrupt.
Voluntary Bankruptcy
A person who can’t pay their debts may voluntarily file for bankruptcy by filing a Debtor’s Petition with the Official Receiver from the Australian Financial Security Authority (AFSA). AFSA is a Commonwealth Government agency. A person filing for bankruptcy may appoint the Official Trustee from AFSA to act as their trustee, or they may appoint a private trustee, such as those at Pearce & Heers.
Creditor Initiated Bankruptcy
Creditors can also apply to Court to make a person who is unable to pay their debts bankrupt. To do this a creditor must generally have a judgment against the person for over $10,000 and have issued a Bankruptcy Notice. A creditor who applies to Court in order to bankrupt someone may elect to have the Court appoint a private trustee or they can arrange for the Court to appoint the Official Trustee.
What are Some of the Impacts of Bankruptcy
Appointment of a Bankruptcy Trustee
If you become bankrupt a bankruptcy Trustee will be appointed to investigate your financial affairs, sell any assets which are divisible property, collect income contributions when applicable, report to and deal with creditors and distribute any surplus funds to creditors.
Bankruptcy Releases you from Unsecured Provable Debts
Bankruptcy releases a person from most unsecured debts, including tax debts, credit cards, personal loans, unpaid rent, medical bills, and utility debts. However, certain debts cannot be discharged, such as court‑imposed fines, child support, HECS‑HELP debts, and debts incurred through fraud.
Property That Can Be Sold in Bankruptcy
A bankrupt’s assets which are divisible property may be sold. This includes real estate, shares, cryptocurrency, bank balances and motor vehicles and tools valued above statutory limits. Additionally, if a bankrupt acquires assets during their bankruptcy they may also be able to be sold, with the most common type of asset in this regard being the entitlement to or receipt of an inheritance.
Certain assets are however, protected and cannot be sold. These assets generally include superannuation, household furniture, clothing, essential personal items and motor vehicles and tools of trade valued under statutory limits.
Income During Bankruptcy
Bankruptcy does not prevent a person from working or earning income. However, if their net income exceeds the statutory threshold in any of the three years of their bankruptcy, they must pay income contributions to your bankruptcy Trustee. These thresholds increase over time and vary depending on the number of dependents a person has.
We have a calculator for determining any income contributions payable here – Income Contribution Calculator.
Trading a Business While Bankrupt
You can trade a business as a sole trader whilst bankrupt, however, you cannot trade a business through a company as you cannot be, or act as, a company director. However, if you trade a business while bankrupt there are some restrictions including:
- You must have your full name in your business name;
- If you apply for credit over a statutory limit (about $5,000), you must disclose you are bankrupt;
- Your bankruptcy Trustee will likely sell any material assets your business owns, however, you are able to retain certain tools of trade;
- You must retain proper books and records and provide your bankruptcy Trustee with evidence of your income. If your income exceeds a certain threshold in any year of your bankruptcy you will have to pay income contributions to your bankruptcy Trustee; and
- Some industries (for example building, real estate, accounting, law) may impose licensing restrictions on bankrupt individuals.
Impact on Bankruptcy on Superannuation
Most super held in a regulated superannuation fund, an approved deposit fund, or an exempt public sector fund is protected from creditors and cannot be claimed by the bankruptcy trustee. This protection also extends to lump sum withdrawals made after bankruptcy, including assets purchased with those lump sums. However:
- There are provisions in the Bankruptcy Act 1966 (Cth) which give a bankruptcy Trustee powers to claim certain (usually large lump sum payments) made to a superannuation fund in the period leading up to a bankruptcy.
- If you receive a superannuation lump sum before you become bankrupt, that money can be claimed by the trustee. And any assets purchased with those funds (e.g. a house or car) can also be claimed.
A bankrupt cannot be a trustee or company director, which disqualifies them from managing a self-managed super fund (SMSF). If you have an SMSF and become bankrupt you must notify the ATO and move your super to a different complying fund within six months. If this doesn’t occur within the required timeframe, the SMSF can become non complying, losing tax advantages and super protection.
Other Impacts of Bankruptcy
Some of the other common impacts of bankruptcy are:
- A person must prepare and lodge a Statement of Affairs with AFSA at the time of filing a Debtor’s Petition for bankruptcy or a person made bankrupt by the Court must provide their bankruptcy Trustee with a Statement of Affairs within 14 days of being notified of their bankruptcy;
- Bankruptcy generally does not release a person from their secured debts such as finance for motor vehicles or mortgages or caveats over properties;
- There will be a permanent record of a person’s bankruptcy on the National Personal Insolvency Index, which is a register maintained by AFSA of people who have become bankrupt or been a party to other types of insolvency proceedings;
- A person who is bankrupt cannot act as a company director;
- Undischarged bankrupts are not entitled to incur credit over a certain statutory limit without advising the person that they are dealing with that they are bankrupt;
- A person who is bankrupt must inform their bankruptcy Trustee of certain things during their bankruptcy, such as if they change address, their contact details change, the level of their income changes or if they acquire or become entitled to any assets; and
- A person who is bankrupt must deliver their passport to their bankruptcy Trustee and must not travel overseas without their trustee’s written consent.
Distribution of Funds in Bankruptcy
Any funds recovered by your bankruptcy Trustee are firstly paid towards realisations charge at a rate of 7% to the Federal Government, then towards a bankruptcy Trustees’ costs and after payment of costs by way of a distribution to creditors.
Seeking Information and Professional Advice
If you would like to obtain further general information regarding bankruptcy you may wish to view our Bankruptcy FAQs.
If you are seeking advice regarding bankruptcy please contact our Brisbane or Gold Coast office and our experienced staff will be able to assist you.
