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When an individual is declared bankrupt, certain assets are protected from being accessed by the trustee. The trustee can realise the value of those assets over the threshold specified in the Bankruptcy Act 1966 (Cth) (Act).
A bankrupt will generally be allowed to keep hold of the following (based on current thresholds, which are reviewed from time to time):
- Motor vehicle/s up to a value of $7,600 (indexed amount) used primarily as means of transport (excluding any finance owing on the vehicle/s) (s 116 of the Act)
- Tools of trade up to an amount of $3,700 (indexed amount) used to earn an income (s 116 of the Act)
- Most personal household items, such as furniture
- Assets held on trust (e.g., family trust or child’s bank account)
- Compensation received from a personal injury claim (whether received before or after bankruptcy) and assets bought with that compensation
- Life insurance policies for the bankrupt (or their spouse), and the proceeds from these policies received after the bankruptcy
- Awards with sentimental value, such as sporting and cultural medals or trophies
- Most balances in and payments from regulated superannuation funds received on or after the date of bankruptcy
A bankrupt will likely lose the following:
- Any house or land that they own (unless a joint owner buys their interest)
- Stocks and shares
- Valuable furniture and jewellery
- Gifts and inheritances received under a will
- Motor vehicles and tools of trade over the threshold limit
If a bankrupt tries to dispose of property to defeat creditor claims or at less than market value, the transaction may be deemed to be an undervalued transaction or illegal transfer. If so, the trustee may be able to recover items given away or sold for less than market value in the 5 years preceding bankruptcy.
In many cases a bankrupt is concerned about the impact bankruptcy will have on the family home. We cover this topic in detail in our article Bankruptcy and Houses.
Bankrupts are required to pay to the trustee 50 per cent of the amount which exceeds the income threshold under the Act. The threshold depends on how many dependants the bankrupt has (namely, those who live with the bankrupt, wholly or partly rely on them for economic support and if the dependant’s income is below a certain amount).
The current threshold amounts (as at 28 October 2015, updated bi-annually) are:
|Company 1||Company 2||Company 3|
|Winding up||Liquidation Low ($)||Liquidation High ($)||Liquidation Low ($)||Liquidation High ($)||Liquidation Low ($)||Liquidation High ($)|
|Estimated dividend to priority creditors||N/A||N/A||Nil||Nil||N/A||N/A|
|Estimated return to unsecured creditors (c/$)||5.78%||10.58%||Nil||Nil||53.28%||53.70%|
|% of total group debt||88%||7%||5%|
|Timing of return (from date of liquidation)||12-18 months||N/A||2-4 months|
The following simple example shows how income contributions for a bankrupt with 2 dependents is calculated:
- Bankrupt’s income after tax $70,000.00
- Threshold $67,666.24
- Excess over threshold $2,333.76
- Contribution due (50%) $1,166.88
Based on the above scenario, the bankrupt would be required to contribute $1,166.88 per year to their trustee. This amount is generally payable via instalments.
All of the bankrupt’s unpaid unsecured debts are written off at the conclusion of the bankruptcy. Unsecured debts are those debts where there is no security or charge securing the debt such as a mortgage.
Written off debts can include those debts relating to credit cards, personal loans, utilities, unpaid employee entitlements, trade creditors and unpaid rent and medical fees. Secured debtors have the right to take possession of their security.
Some debts won’t be extinguished, meaning they won’t be written off and will survive bankruptcy, including:
- Debts incurred after bankruptcy
- Court imposed penalties and fines, such as speeding fines
- Debts incurred by fraud
- Maintenance debts, including child support
- Accumulated HECS and HELP debts
The ATO can use a bankrupt’s tax refund or credits to offset Commonwealth debts, such as debts owed to the ATO.