If a person is unable to pay their debts, and their attempts to come to an agreement about repayment with creditors have failed, then they face the prospect of declaring bankruptcy. Declaring bankruptcy involves having a trustee appointed to take control of one’s assets and income so that they can pay down the person’s debts and discharge them. Before a person considers declaring bankruptcy, they must clearly understand the consequences of doing so.
How Do I Declare Bankruptcy?
A person can become bankrupt either by declaring bankruptcy themself (called a ‘debtor’s petition’) or by order of the Federal Court, following an application by a creditor (called a ‘creditor’s petition’).
If a person wants to enter into bankruptcy voluntarily, they should lodge an application with the Australian Financial Services Authority (AFSA). They should also lodge a financial statement and sign it to acknowledge they have read the prescribed information on the back of the form.
The forms must be lodged within 28 days of being signed, and cannot be withdrawn once they are lodged.
Any creditor who is owed more than $5000 and is unable to reach an agreement with the debtor regarding repayment of the debt can apply for a sequestration order to the Federal Court. The debtor will be notified of the impending court hearing and have the opportunity to object to the proceedings. The court will issue the order if the creditor can demonstrate that the debtor has committed an act of bankruptcy, the most common of which is a failure to comply with a bankruptcy notice, which is issued by the AFSA at the request of the creditor, demanding payment of the debt.
Once a sequestration order is made, the debtor is officially bankrupt. They must provide the AFSA with a statement of affairs within 14 days of the order. The relevant forms can be found on the AFSA’s website, and further information about the court proceedings is available on the Federal Court website.
What Happens After Declaring Bankruptcy?
Once the AFSA has received a debtor’s statement of affairs, the debtor’s bankruptcy Trustee will begin investigating their financial affairs. They will also notify the creditors that the debtor has been declared bankrupt, and notify them again after the trustee has determined how best to deal with the debts.
Trustee is appointed after declaring bankruptcy
The AFSA will appoint a trustee to manage a debtor’s bankruptcy. If the person has voluntarily elected bankruptcy, they can apply to have their own registered trustee appointed and will need to submit a Trustee Consent to Act Declaration along with their bankruptcy application.
The AFSA may also appoint a registered trustee after a request from a bankrupt’s creditors. A bankrupt’s creditors also have the power to remove and replace their Trustee.
What Happens to My Assets After Declaring Bankruptcy?
Most of a person’s assets will ‘vest’ in their trustee once they are declared bankrupt, so that they can sell the assets to pay down the debts. Certain assets are dealt with in a particular way (for example, assets held by secured creditors, like mortgagees, who have security over a particular asset) and some assets are exempt. These are:
- personal household items
- a car, up to a certain value
- tools required to work, up to a certain value
- sentimental trophies, medals, awards
- funds in superannuation.
- life insurance policies, and
Can I Earn An Income?
Yes, a person can earn an income up to a certain amount during bankruptcy. If they earn above the threshold, they will be required to pay to their trustee half of the amount they earn in excess of the threshold.
The trustee will assess their expenses, based upon their particular circumstances and taking into account the number of dependents they support and issue them with an assessment for the amount they need to pay for the year.
How Long Does Bankruptcy Last?
A person will generally be discharged from bankruptcy after three years and one day of submitting their application to the AFSA. Where a person is bankrupt as the result of a creditor’s petition they will be discharged three years and one day after they submit their statement of affairs.
A trustee may seek to extend a person’s period of bankruptcy to five, or even eight years, where they fail to cooperate with the trustee.
Are All of My Debts Discharged?
While a trustee attempts to satisfy the majority of the bankrupt’s creditors, they will still be liable to pay certain debts during and after their bankruptcy such as:
- child support payments
- court fines
- HECS/HELP fees
- amounts acquired as the result of fraud
- payments to secured creditors (eg to a mortgagee).
Will My Bankruptcy Affect My Credit Rating?
Yes – a record of bankruptcy will be kept on the National Personal Insolvency Index, which is publicly available. Credit reporting agencies may also keep a record of a person’s bankruptcy for 5 years or longer.
What Are The Ongoing Consequences of Bankruptcy?
Some ongoing consequences of bankruptcy include:
- The person is not able to act as director of a company;
- Tf the person opens a new business, they must inform creditors that they are bankrupt;
- They are unable to travel overseas without their Trustee’s permission;
- Their credit rating is affected;
- They cannot own any assets over the threshold value;
- Some debts will continue through bankruptcy and beyond.
Declaring bankruptcy is not to be done lightly, as it has serious consequences. A person considering declaring bankruptcy should investigate their financial options thoroughly and seek legal advice before declaring bankruptcy, or if they are facing court-ordered bankruptcy.
If you require legal advice or representation in any legal matter, please contact Armstrong Legal.