Bankruptcy is a legitimate and fair way for a debtor to solve their debt problems, and it is one way for creditors to take action against someone for unpaid debts.
Why choose bankruptcy?
The Bankruptcy Act 1966 exists to protect debtors (i.e. the bankrupt) and creditors.
The debtor is protected from being pursued by creditors and, with limited exceptions, is released from their debts at the end of the bankruptcy. Bankruptcy provides a debtor with a fresh start.
Bankruptcy protects creditors’ interests by having an independent, qualified accountant a “Bankruptcy Trustee” control and investigate the bankrupt’s affairs, and collect and distribute the bankrupt’s assets.
How does a person become bankrupt?
A person may become bankrupt in one of two ways:
A person can bankrupt themselves by filing a ‘debtor’s petition’ and a Statement of Affairs with the Official Receiver. This process is referred to as ‘lodging a debtor’s petition’. A person is made bankrupt when the Official Receiver processes the debtor’s petition and issues an estate number.
A creditor can apply to the Federal Court through a ‘creditor’s petition’. In most instances, a creditor must have a court judgement on their debt and served a ‘bankruptcy notice’ on the debtor. If the debt remains unpaid at the bankruptcy notice’s expiry, the creditor may file a creditor’s petition with the Federal Court seeking a sequestration order – bankrupting the debtor.
What is a Statement of Affairs?
A Statement of Affairs must be completed by all bankrupts and sets out their personal and financial information. A Statement of Affairs is an important document for two reasons:
- It is the financial disclosure of a bankrupt’s assets and debts, and this information is used by the trustee in administering the estate.
- The date the Statement of Affairs is lodged will determine when the bankruptcy ends (i.e. the date of discharge).
Can a debtor be made bankrupt if their assets exceed their debts?
Yes. A person is legally insolvent if they are unable to pay their debts when they fall due. If a debtor owns sufficient assets to cover their debts, but is unable to liquidate them (i.e. sell them or borrow against them) to actually pay the debts, they can be bankrupted. Technically, a debtor is legally insolvent if they do not satisfy a bankruptcy notice, regardless of whether they can pay the debt or not.
However, the Official Receiver has the discretion to not accept a debtor’s petition if they believe that the debtor is solvent and could satisfy their debts.
Who looks after a bankrupt estate?
When a person is made bankrupt, a “Bankruptcy Trustee” is appointed to administer the bankrupt’s estate.
The trustee is an appropriately qualified and registered specialist accountant who is either an officer of the Federal Court (i.e. a registered trustee) or a public servant (i.e. the Official Receiver).
A person presenting a debtor’s petition or a creditor’s petition can obtain consent from a registered trustee of their choice. If no consent is obtained, the Official Receiver will be the trustee.
What are the Trustee’s powers?
A trustee has the power to:
- sell any divisible property of the bankrupt
- investigate the affairs of the bankrupt
- examine the bankrupt and others under oath
- conduct and sell any business of the bankrupt
- admit debts
- distribute dividends.
The trustee can exercise all the rights and powers that the bankrupt had before they became bankrupt. In addition, the trustee has recovery powers that the bankrupt does not have.
In summary, the trustee will:
- find and protect the assets of the bankrupt
- realise those assets
- conduct investigations into the financial affairs of the bankrupt and any suspicious transactions
- make appropriate recoveries
- report to creditors
- report offences to the Australian Financial Security Authority (AFSA)
- distribute surplus funds to creditors.
How does bankruptcy affect someone?
A person is an ‘undischarged bankrupt’ from the date of bankruptcy until they are either discharged or their bankruptcy is annulled.
During this period a bankrupt:
- cannot act as a company officer
- cannot trade under a registered business name without advising people that they are bankrupt; however, they can trade under their own name
- must make all of their divisible assets available to the trustee
- cannot incur credit over an indexed amount set from time to time without disclosing to the lender they are bankrupt
- must handover any passport and obtain permission to travel overseas
must make all books, records and financial statements available, including those of associated entities (e.g. companies and trusts).