What is bankruptcy?

Just because someone is broke or is not paying their debts, this will not necessarily mean they are “bankrupt”.

Bankruptcy is a legal process that occurs where a trustee is appointed to an insolvent person’s financial affairs.

Bankruptcy is distinct from the winding up and liquidation process that occurs when companies become insolvent.

Insolvency is the inability of an individual or corporation to pay debts as and when they fall due.

How does an individual become bankrupt?

A person can voluntarily declare bankruptcy by filing a Debtor’s Petition with Insolvency and Trustee Services Australian (ITSA).

Alternatively, a creditor can force someone into bankruptcy by presenting a Creditors Petition to the Federal Court/ Federal Magistrates Court. It takes several months to start and complete a bankruptcy action. In most instances, a creditor must have already sued and obtained a Judgment against the debtor for an amount greater than $2,000 and then served a Bankruptcy Notice on the debtor.

If someone owes you money and you are considering bankrupting them there are costs involved including Court filing costs, solicitor fees, process server fees and search fees. If you already have a judgment against the debtor and the bankruptcy action is undefended you could expect to spend at least $1,500 to $2,000.

What happens next?

Once declared bankrupt, a personal trustee or ITSA will be appointed to administer their affairs.

The trustee’s duties are to -

• determine what assets are available to pay the creditors
• sell or recover those assets for the benefit of the bankrupt and
• pay dividends to the creditor when there are sufficient funds to do so.

The bankrupt will have to fill out a statement of affairs disclosing all of their assets and liabilities and must regularly disclose their income and sources of income.  Certain people associated with the bankrupt will also have a duty to disclose information and documents to enable the trustee to find out as much as possible about the financial position of the bankrupt.

Consequences of bankruptcy

Becoming bankrupt carries with it certain legal consequences.  

Once a bankrupt person earns income over a certain statutory threshold (currently $41, 250.30 for bankrupt’s with no dependants), the extra amount needs to be paid to the trustee.

Also, many limitations apply. A bankrupt can not:

• manage or be an officer of a company;
• borrow money (unless they first tell the bank they are bankrupt);
• retain assets over a certain maximum value
• travel overseas (except in exceptional cirucmstnaces). The passport must be surrendered.

The minimum period of bankruptcy is 3 years.

A bankrupt can apply for early discharge but there are strict rules that apply and early discharge is extremely rare and requires the agreement of a majority of creditors and the trustee.

Can a bankrupt person still hold a building licence?

No.

If the bankrupt person was a builder or licensed contractor, they will automatically lose their licence.

Even after being discharged from bankruptcy there will be a period of time of between 5 to 10 years before the person will be able to hold a building licence again and this will usually be at the discretion of the licensing body.

How do you recover your money from a bankrupt?

Your ability to recover will depend on whether you have your debt secured or not. Once a person is declared bankrupt, any legal action taken against that person must stop.

Secured creditors are normally banks and finance companies who hold a mortgage over property owned by the bankrupt, such as their land or car. They can take steps to repossess their property from the debtor.

Most creditors, such as trades people, suppliers and builders will be unsecured. 

If you are unsecured, you should contact ITSA or the trustee and see if you are listed as a creditor.

You will then need to fill out and lodge a Proof of Debt form. A dividend may be paid to you from funds received from the bankrupt person’s pools of assets.

In most cases, creditors are advised early on in the bankruptcy whether a dividend is likely to be paid.

How to fill out a Proof of Debt

• If you are filling out a Proof of Debt form you should:
• Answer all questions on the form
• Calculate any interest you are entitled to up to the date of bankruptcy only
• Include any GST that was payable on your invoices
• Total the amounts and check that your calculations are correct
• Sign and date the POD
• Disclose your ABN.
• Attach documentary evidence of your claim. Evidence may include copies of:
  • invoices
  • statements
  • Delivery dockets.
  • relevant contracts
  • personal guarantees
  • loan contracts
  • judgments.

Once your proof of debt has been accepted you will be able to particulate in any creditors meetings.

Please contact a HIA Workplace Adviser if you would like a sample Proof of Debt form.

What else can you do?

Early prevention is the key:

• Try and identify any “red flags” to prevent the debt from escalating and getting out of control.
  
  Some telltale signs that the client you are dealing with may be heading for bankruptcy include:
  

  *	habitually paying late
  *	the client is selling off of other assets or having assets repossessed
  *	other contractors are complaining they have not been paid
  *	your client becomes unemployed
  *	your client begins requesting variations to delete major components from the scope of works because they can no longer afford them

• If you are doing work for a home owner who is late with payment, you should issue a notice suspending further works under the contract until payment of all outstanding progress stages are made.
• If you are a trade contractor contracting with a principal contractor, utilise security of payment legislation to ensure that any payment disputes are dealt with quickly.

How do I find out if someone is bankrupt?

Bankruptcy records are maintained by ITSA (www.itsa.gov.au). You can attend their offices and request a search or have another organisation such as Espreon (www.espreon.com.au ) or CITEC (www.CITEC.gov.au) conduct a search for you for a small fee.

For further information contact a workplace adviser on 1300 650 620.