Bankruptcy & personal insolvency

From sudden unemployment and over-reliance on credit to relationship breakdowns and ill health, there are many reasons why people suffer financial hardship and experience unmanageable debt. In these situations, bankruptcy is an option.

Bankruptcy can either be voluntary or involuntary. There are also a number of formal creditor/debtor arrangements available under the Bankruptcy Act 1966 (Cth) (Act) which avoid the need for bankruptcy.

Voluntary bankruptcy

If an individual cannot pay their debts as and when they fall due, and they haven’t been able to reach an agreement with creditors, they may declare themselves bankrupt. To do this, they need to file a ‘debtor’s petition’ and ‘statement of affairs’ with the body that governs personal insolvency, namely, the AFSA.

The individual needs to identify all creditors, their contact details and the amounts owed to each creditor as well as details of their personal assets. A trustee is then appointed to administer the bankruptcy by investigating their financial affairs and realising available assets to pay creditors.

Involuntary bankruptcy

A creditor may take action to have an individual declared bankrupt by order of the Court (a sequestration order). Involuntary bankruptcy occurs when a creditor who is owed more than $5,000 applies to the Court to have an individual declared bankrupt.

Regardless of the debtor’s capacity to pay the debt, if the debtor doesn’t defend a bankruptcy notice, they are deemed to be insolvent and can subsequently be made bankrupt.

Read more about the methods of pursuing debts and bankruptcy notices.

Informal & formal debt arrangements

To avoid being declared bankrupt, a debtor may enter into informal creditor arrangements, including reaching an agreement to allow the debtor further time to pay or for the creditors to accept a smaller lump sum in satisfaction of the debt.

Other more formal arrangements under the Act include:

Interim relief

A mechanism to provide temporary relief from creditor enforcement, interim relief involves a declaration of the intention to present a debtor’s petition, giving an individual 21 days to consider bankruptcy or other alternatives.

Debt agreement

A debt agreement is a legally binding agreement under Part IX of the Act where a majority of creditors (in value) can accept payment of a sum of money that the debtor can afford or an instalment arrangement to satisfy the debt. If a debtor proposes a debt agreement, it’s an act of bankruptcy.

If the creditors don’t accept the proposal, the creditors can use this act to apply to the Court to have the debtor declared bankrupt. Therefore, this type of action is not without an element of risk for the debtor.

To be eligible for a debt agreement, the debtor must:

• Be insolvent, not previously declared bankrupt or subject to a debt agreement or given an authority under Part X of the Act in the last 10 years (the Official Receiver can verify this by searching the National Personal Insolvency Index, NPII)
• Have unsecured debts and assets (e.g., the equity on those assets or divisible property) less than the indexed amount, currently $106,561.00
• Have after-tax income for the next 12 months of less than the indexed amount, currently $79,920.75
• Be aware that their ability to get credit will likely be affected by this type of arrangement and that their name and other details will appear permanently on the NPII, which is a public record

On the upside, if creditors accept the debt agreement proposal, the debtor isn’t declared bankrupt and all unsecured creditors are bound by the agreement, paid in proportion to their debts. Secured creditors still have the ability to seize and sell assets in the event of debtor default and the debtor is protected from any action from unsecured creditors.

Personal insolvency agreement

A personal insolvency agreement (PIA) is a legally binding agreement between a debtor and creditors for the debtor to pay the debt in full, by instalments or an agreed lump sum. Unlike debt agreements, no asset, income or debt limits apply to be eligible for this type of arrangement.

A PIA is a flexible type of agreement which allows a debtor to avoid bankruptcy and can involve a sale or transfer of assets to pay creditors, lump-sum payments or repayment arrangements. A trustee is appointed to investigate the debtor’s financial affairs and administer the arrangement.

Declared bankrupt: what next?

When you’re declared bankrupt, your trustee will sell assets you’re not allowed to keep to repay your creditors to the extent possible with the proceeds. The trustee has access to your net income if it’s above a certain threshold for payment to creditors. There will be a permanent record of your bankruptcy on the NPII.

Learn more about the impact of bankruptcy.

How long does bankruptcy last?

The normal period of bankruptcy is 3 years from when the ‘statement of affairs’ is lodged. However, this can be extended to 5 or 8 years if the trustee lodges an objection to discharge for failure to comply with the conditions of your bankruptcy.

The bankruptcy can be annulled if the debts are paid in full (including interest, and the trustee’s expenses and fees), the creditors accept a payment proposal under s 73 of the Act or the bankrupt successfully applies to the court for an annulment.

Learn more about the end of bankruptcy.

Advantages of bankruptcy

• Unpaid unsecured debts will be written off at the end of the bankruptcy and wage garnishment will cease
• Creditors can no longer pursue the bankrupt for payment and must deal with the trustee
• The bankrupt’s goods are saved from seizure by the Sheriff (however, these may be dealt with by the trustee)
• In certain situations, the bankrupt may be able to keep their home
• The bankrupt can still earn an income (with income contributions payable to the trustee if the bankrupt’s income exceeds the specified limit).
• The bankrupt can keep necessary personal effects such as clothing, furniture and certain assets
• Superannuation is protected (with some exceptions)

Disadvantages of bankruptcy

• The bankrupt must make divisible assets available for the trustee to sell
• The bankrupt cannot act as a company director or officer or trade under an assumed name or registered business name without disclosure of bankruptcy
• The bankrupt must surrender their passport to the trustee and can only travel overseas with the trustee’s permission.
• The bankrupt can only apply for credit up to the sum of $5,387 (indexed amount) after which disclosure of the bankruptcy to creditors must be made
• The bankrupt’s credit rating may be affected
• The bankrupt must surrender all books and records to the trustee