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When is bankruptcy an option to get paid

If you are unable to recover a debt, you may take formal action such as commencing legal proceedings which may result in a court order. If you are still having trouble getting paid, you may be considering what enforcement options are available to you.

This information sheet provides an overview of what you can do when you are owed money by an individual, including bankruptcy proceedings. If you have a debt against a company, you may issue a statutory demand which may lead to the company being wound up. Find out more about statutory demands and corporate insolvencies.

Legal proceedings to recover a debt

If you commence legal proceedings to recover a debt, the court will consider your case and may decide in your favour by ordering that the other party do something, for example, repay the debt in addition to costs or interest. This is called a court order or judgment. However, receiving a court order does not automatically guarantee that you will receive payment.

There are several options available when seeking to enforce a judgment debt to force a debtor to pay you. For example, you can enforce a judgment and recover a debt by filing an enforcement warrant for the seizure and sale of the debtor’s personal property, such as motor vehicles. You can find out more about different methods of enforcement available. Alternatively, you can file and serve a bankruptcy notice to make the debtor bankrupt. 

Before taking any action

Commencing legal and bankruptcy proceedings are serious and complex matters. Ensure that you understand your rights, responsibilities, and risks in taking these steps by consulting with your solicitor before taking any action.

Key terms



Act of bankruptcy  This is defined under section 40 of the Bankruptcy Act 1966 (Cth) and covers a range of events. However, the most common act of bankruptcy is when a bankruptcy notice is served, and the debtor fails to comply with the notice.
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.
A person or business who owes money.
Being unable to pay debts when and as they become due and payable.
Secured Creditor  A creditor who holds a security interest in some or all of a person’s property. For example, a mortgagor, such as a bank, is a secured creditor.
Security Interests  A security interest is created by an agreement where a person can take property if a debt is not paid. This can include personal property (e.g. a motor vehicle) and real property (e.g. the property you are building on).
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.
Unsecured Creditor  Someone who is owed money but doesn’t hold a security interest over the debtor’s property. For example, this may occur if you don’t have a contract.

What does bankruptcy mean for creditors?

When an individual becomes bankrupt, a trustee is appointed to take control of their financial affairs. This means that the trustee can administer their financial affairs on their behalf and has control of their assets and liabilities.

A creditor may be able to recover any losses from the assets of the bankrupt, however creditors will be subject to their relative security interests (for example, a mortgagor with a registered mortgage would have a higher security over someone who is owed money under a contract). This means that payment to creditors from the debtor’s assets will be made in accordance with the ranking of their security interests. For example, a secured creditor whose interest arose via agreement dated 5 years ago will take priority over an unsecured creditor or even a secured creditor whose interest arose a week ago.

Bankruptcy proceedings

A creditor can initiate a bankruptcy proceeding if an individual owes the creditor $10,000 or more. However, there are several steps required to be completed before a bankruptcy order is issued against a debtor.

Commence proceedings

A creditor must commence legal proceedings to recover the debt. This may be via a Claim and Statement of Claim in the local Magistrates Court (or higher courts depending on the amount of the debt). The debtor has 28 days to file their defence, failing which the creditor may apply to the court for default judgment.

Bankruptcy notice

Once a court order is made, the creditor may apply for a bankruptcy notice. The bankruptcy notice is filed online with the Australian Financial Security Authority and must be personally served on the debtor within six months of filing. If this notice cannot be served within this timeframe, the notice will expire and need to be refiled.

Creditor’s petition

If the debtor fails to comply with the bankruptcy notice (namely failing to pay the debt in its entirety or make arrangements for payment of the debt within 21 days), a creditor you may then file a creditor’s petition with the Federal Court. The court will register the petition and a hearing date will be set. You can expect a first hearing date within two to six weeks of filing an application, depending on the nature of the application.

Hearing of creditor’s petition

At the hearing, the creditor must prove that the debtor has committed an ‘act of bankruptcy’ within the last 6 months prior to the creditor petition being filed. Provided the court is satisfied that this has occurred, they may make an order that the debtor is bankrupt, and a trustee is then appointed. 

Recovery of money as a creditor

If you become aware that your client has entered bankruptcy and they owe you money, you can still pursue payment via the bankrupt trustee (if available) however, you can no longer pursue them yourself.

To confirm that someone is bankrupt, you can search the Bankruptcy Register.

As a creditor, you can add yourself and your debt to an existing bankruptcy by completing this form.

What can be recovered?

Most unsecured debts can be recovered in a bankruptcy proceeding, including trade debts, employee wages and personal loans. However, you will need to provide the trustee with evidence of the debts. Unfortunately, any debt incurred after the bankruptcy started will not be recoverable.

If you are a secured creditor, bankruptcy does not change your rights. This means that you can still pursue the individual for the debt and recover and sell the secured goods. For example, you leased machinery to your contractor and registered your interest via a security interest on the Personal Property Security Register (PPSR). This makes you a secured creditor and you may recover your debt or the goods.

What is the PPSR?

You can register your security interest in personal property, such as cars, goods or company assets on the PPSR. You cannot register a security interest in land, buildings or fixtures on the PPSR. However, just because you are owed payment doesn’t mean that you can register automatically on the PPSR – you must have a valid agreement creating a security interest first.

Accordingly, it is unlikely that you would register on the PPSR against your clients. However, it is very likely that if you have entered into a commercial credit agreement with your suppliers, they may have a security interest against you as a builder and may be able to register their interest against you.

You can find out more about the PPSR.

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