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Do you owe money? What you need to know about bankruptcy

Bankruptcy is a legal process that declares an individual as being unable to pay their debts as and when they fall due. It can be initiated by a creditor if you owe $10,000 or more, but it can also be initiated by an individual who chooses to voluntarily enter bankruptcy due to financial stress. Bankruptcy has serious legal implications and care should be taken when either considering voluntary bankruptcy or when receiving a creditor bankruptcy notice. Bankruptcy does not release you from all debts for instance, child support and maintenance and debts you incur after your bankruptcy begins.

This information sheet provides an overview of bankruptcy for individuals who may be in financial distress and considering their options. If you are a creditor, find out what you can do when someone owes you money, including commencing bankruptcy proceedings.

Bankruptcy is different to the winding up and liquidation process which applies to companies. Find out more information regarding corporate insolvencies.

Key terms

Term Definition
Bankruptcy A legal process where you’re declared unable to pay your debts.
Creditor A person or business who is owed money.
Creditors Petition A legal application made by a creditor to a Court seeking to have a debtor made bankrupt.
Debtor
A person or business who owes money.
Insolvency
Being unable to pay debts when and as they become due and payable.
Solvency A person or business is solvent only if they are able to pay all of their debts as and when they become due and payable.

What is bankruptcy?

Bankruptcy is a legal process that occurs when a person is unable to pay their debts and either voluntarily enters bankruptcy, or is made bankrupt by another party who they owe money to. A court will make orders that a trustee is appointed to take control of the financial affairs of the person. This means that the trustee can administer their financial affairs on their behalf and has control of their assets and liabilities.

How is the bankruptcy process started? 

A person can become a bankrupt in two ways:

  1. The debtor voluntarily declares that they are bankrupt and makes an application to the Australian Financial Security Authority by filing a Bankruptcy Form; or
  2. A creditor files a creditor's petition and a court makes bankruptcy orders against the debtor.

Voluntary bankruptcy

If you are struggling to pay your debts, you can voluntarily declare yourself to be bankrupt. Bankruptcy may release you from debts and provide a fresh start, however there are serious legal consequences that you must be aware of, including:

  • You will be unable to travel overseas.
  • Your name will permanently appear on the National Personal Insolvency Index, a searchable public register.
  • You will be banned from holding the position of company director.
  • Your ability to obtain credit will be impacted.

What to do before becoming bankrupt

Seek independent financial advice

Before taking any steps towards bankruptcy, it is critical that you obtain financial and legal advice. The National Debt Helpline (1800 007 007) provides free financial advice from financial counsellors who can provide confidential advice. You should also consult with your solicitor regarding any legal implications for yourself and your business before filing for bankruptcy. 

Talk to your creditors

If you are struggling to pay your invoices, loan repayments or other services on time, reach out to your credit or service providers. Many providers have financial hardship programs to assist you before you reach the point of bankruptcy.

Understand all of your options and their consequences

Bankruptcy is not the only option available to you. HIA urges members to seek advice from a financial counsellor or your accountant to see what option suits you best. This may include bankruptcy, a debt agreement, personal insolvency agreements or temporary debt protections. As described above, there are many consequences that follow from declaring bankruptcy and you should take seriously the effects that follow from bankruptcy.

Act as soon as possible

It is critical that you do not ignore any paperwork which is served on you, which may include court documents or bankruptcy notices as these documents have strict deadlines. HIA recommends that you consult a solicitor as soon as possible as a solicitor may be able to negotiate a result and avoid parties proceeding through bankruptcy.

Review any joint debts

A joint debt is a debt you have with another individual for example, you may have joint debts with business partners and it is important to let anyone that you share a debt with know that you are about to become bankrupt.

Usually, if one person becomes bankrupt, the other person on the loan documents is 100% liable for the debt.

If there is a guarantor for a loan, the guarantor would normally become 100% liable for the debt.

What happens when I become bankrupt?

Sale of property

When you become bankrupt, a trustee will be appointed to your estate and this person will manage your finances including your debts and creditors. The trustee may sell your assets, including cash, your house, car and property, to repay your creditors. However, you can keep tools up to $3,800 or vehicles up to $8,150 and your household goods.

Income

You are not restricted when it comes to earning an income during bankruptcy, however if you earn over a set amount, you will be required to make income contributions towards repaying creditors. Find out more about the income thresholds.

Business considerations

If you are a company director, you will cease to hold this position and you will be unable to manage a company again unless you obtain court approval. If you are a sole trader, you can continue to run your business however there are requirements regarding disclosure of your bankruptcy status.

For example, your business name should contain your full name so that your business partners, clients and creditors can search the National Property Insolvency Index to see if you are bankrupt or not. If you do not have a business with your full name in it, you will be required to tell all people you do business with that you are bankrupt.

To find out more about your business options during bankruptcy, contact ASIC (for corporations) or ATO (for ABN holders).

Obtaining credit

When you apply for credit in the future, you may be required to disclose your bankruptcy status. Additionally, your credit rating will be affected for up to 5 years.

Find out more about the court processes including what a creditor can do against you in a bankruptcy proceeding.

How long am I bankrupt for?

Bankruptcy normally lasts for 3 years and 1 day from the day the Australian Financial Security Authority accepts your bankruptcy application. At the end of this period, you are released from most of your debts.

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