Bankruptcy and its Implications

What is bankruptcy?

Bankruptcy is best described as a legal process where a trustee is appointed to administer an insolvent person’s affairs to provide a fair distribution of that person’s assets to their creditors.

The Bankruptcy Act protects both debtors (the bankrupt) and creditors.

The debtor is protected from being pursued by his or her creditors and, with limited exceptions, is released from his or her debts at the end of the bankruptcy. It effectively provides a debtor with a fresh start.

Bankruptcy protects the interests of creditors by having an independent, qualified professional control and investigate the affairs of the bankrupt and oversee the collection and distribution of the bankrupt’s assets.

A person may become bankrupt by filing a debtor’s petition with the Official Receiver or be made bankrupt by the Federal Court on the application of one of their creditors through a “creditor’s petition” usually after service of a Bankruptcy Notice on a debtor who does not comply with that Bankruptcy Notice.

Impact of Bankruptcy

During the period of bankruptcy a bankrupt:

  • Cannot act as a company officer;
  • Cannot trade under a registered business name without advising people that they are bankrupt;
  • Must make all of their divisible assets available to the trustee;
  • Cannot incur credit over an indexed amount without advising the lender they are bankrupt;
  • Must surrender their passport and seek permission for overseas travel; and
  • Must make all books and records and financial statements available to their Trustee.

A bankrupt may continue to earn income.

If income earned during bankruptcy exceeds certain indexed threshold limits the bankrupt will have to pay a contribution from that income to the estate for the benefit of creditors.

How Does Bankruptcy Affect Property?

All of a bankrupt’s divisible property is controlled by their trustee (see related article on Bankruptcy on this website).

The trustee will investigate any sales or transfers of property that occurred within the five years before the bankruptcy. If these transactions appear improper, undervalued or had the purpose of attempting to defeat creditors, that property or its value may be recovered from the recipient.

The trustee may also recover monies from creditors who may have received payment of their debts in the six months prior to the bankruptcy. These payments are commonly referred to as preferential payments.

In respect of real property the trustee of a bankrupt estate may have their name placed on title in place of the bankrupt. The trustee will usually invite any co-owner of the property to either buy the bankrupt’s interest or join in selling the property. If the co-owner does not cooperate or they cannot agree on a satisfactory arrangement the trustee can force the sale of joint property.

The trustee will also receive any monies that may be owed to the bankrupt by a trust and receive any distribution due to the bankrupt.

Secured Creditors

Bankruptcy does not affect the rights of secured creditors in relation to their security. Secured creditors can enforce their charges or securities and prove for any deficiency in the estate.

Non-Provable Debts

Certain debts cannot be claimed in the bankruptcy. Non-provable debts cannot be proved and will not be released at the end of the bankruptcy. Examples include:

  • Some portion of a HECS debt;
  • Court imposed fines; and
  • The remainder of maintenance agreements under the Family Law Act.

Period of Bankruptcy

The bankruptcy period automatically ends (the bankrupt is discharged) three years after the date on which the bankrupt files his or her Statement of Affairs.

The period of bankruptcy may be extended for up to five years. This is done when the trustee lodges an objection to discharge. This may happen if the bankrupt fails to cooperate with the trustee or does not comply with his legal obligations as a bankrupt.

Should you require further information please contact Trevor Rosenthal. The advice provided in this information sheet is general advice only and may not apply to your particular circumstances. You should seek you own independent legal advice and not rely on this general information.