Bankruptcy – 9 things you must know!

What is Bankruptcy?

Bankruptcy is the legal process of declaring that you cannot pay your debts. It can relieve you from an obligation to pay some or most of your debts. The main legislative instruments governing Bankruptcy in Australia are the Bankruptcy Act 1966 (Cth) and the Bankruptcy Regulations 2021 (Cth).

How do you become Bankrupt?

Two avenues may cause an individual to become bankrupt:

  • Voluntary Bankruptcy; and
  • By sequestration order or Court order.

Voluntary Bankruptcy is completed when an individual submits a bankruptcy form through the Australian Financial Security Authority (AFSA).

In contrast, a sequestration order is an involuntary process where a creditor applies to the Federal Court. If the Court is satisfied that the creditor has met the requirements of the Bankruptcy Act, an order is made against an individual, rendering that individual bankrupt.

However, there are certain conditions a creditor must satisfy before petitioning the Court for your Bankruptcy:

  • The creditor or creditors must be owed an amount of $10,000 or more;
  • The amount owed is a liquidated sum and is payable immediately or at a specific future time; and
  • An “act of bankruptcy” under section 40 of the Bankruptcy Act has been committed within six (6) months of their petition.

Different conditions may apply if the petition is for a secured creditor, against joint debtors, or a partnership.

What happens if a sequestration order is made against me?

After making a sequestration order, a trustee will be appointed to manage your financial affairs, either a registered private trustee or the Official Trustee, who forms part of the AFSA. Your Trustee will notify you of your Bankruptcy in writing and explain your obligations as a bankrupt.

What are the consequences of Bankruptcy?

A bankrupt person relinquishes control of their financial affairs to the Trustee, who can investigate their financial matters, sell their assets, and recover income over a certain threshold.

Other consequences of Bankruptcy include:

  • Not being able to become a director of a business or company;
  • Significantly affecting your borrowings and credit;
  • A permanent record of Bankruptcy on the National Personal Solvency Index;
  • Inability to travel overseas without written consent;
  • Restricting your ability to hold certain public positions or work in some trades and professions; and
  • Affecting your ability to retain rental properties or insurance contracts.

Will Bankruptcy provide relief for all my debts?

Although Bankruptcy can provide relief to some debtors, a person may be required to pay some debts even if they are declared bankrupt. These include:

  • HECS or SFSS debts;
  • Child support debts;
  • Court-imposed fines or penalties;
  • Debts you are liable to pay for wrongdoing; and
  • Eliminate tax debt.

It is important to note that if an individual incurs any debts after becoming bankrupt, they will not be released from those debts and will be liable to pay.

How long are you bankrupt?

Bankruptcy generally ends three (3) years and one (1) day from when your bankruptcy application was accepted, or if a creditor made you bankrupt, three (3) years and one (1) day after the acceptance of your statement of affairs.

There may be some circumstances that may give rise to a discharge of Bankruptcy.

I am bankrupt. How can I annul my Bankruptcy?

If you are currently bankrupt, there are numerous ways you can annul your Bankruptcy:

  • Pay debts in full – speak to your Trustee about resolving all debts owing, which may include interest, fees, or other costs;
  • Composition arrangement – an offer to the creditors to repay a percentage of your debts; or
  • Appeal the Bankruptcy before the Court – prove that, given your circumstances, you should not have become bankrupt.

How can I avoid becoming bankrupt?

You may be able to manage your outstanding debts or creditors by utilising the following:

  • Declaration of intention – protects you for 21 days from unsecured creditors;
  • Debt Agreement – arrangement to settle debts, provided you are below particular debt, income, and asset thresholds;
  • Personal insolvency agreement – arrangement to settle debts without threshold. 

Should I get legal advice?

You should seek legal advice if the following apply to you:

  • You are thinking of applying for Bankruptcy;
  • You have creditors chasing you for monies owed;
  • Your creditors have petitioned the Court for debts owed;
  • You have had a sequestration order made against you;
  • You wish to annul your Bankruptcy;
  • You wish to avoid becoming bankrupt; or
  • You are a creditor wishing to recover a debt owed.

Bankruptcy has serious consequences, so you must be advised of all options available to your matter. Bankruptcy should only be considered a last resort, and if you are considering applying for Bankruptcy, you should obtain legal advice.

The team of highly skilled solicitors at Foulsham & Geddes is ready to help. If you feel any of the information is useful and relevant to your situation, please don’t hesitate to get in touch with our dedicated team at Foulsham and Geddes to speak about your matter.