Considering Bankruptcy? Here’s what You Should Know Before Taking Action

by The FindLaw Team

It’s sobering to note that the combined household debt of all Australians according to the Reserve Bank is over 100 percent of the GDP. Many people who have accumulated debts seek alternative solutions in an attempt to dig themselves out of their financial hole, with the last resort for a person who cannot pay off their debts is to declare bankruptcy. Before considering bankruptcy as an option, readers should be informed on what bankruptcy entails before making an application.

How does a person become bankrupt?

When a person cannot seek alternative arrangements to their financial problems, they can voluntarily declare themselves bankrupt. Alternatively, a creditor can apply to the Federal Court or the Federal Magistrate’s Court to have a person declared bankrupt. However, if a person’s debts are below $5000, a creditor cannot pursue an action of bankruptcy.

There’s no minimum amount for an individual to declare bankruptcy, although, the Official Receiver in Bankruptcy can reject an application if a person has declared for bankruptcy multiple times, was bankrupt in the previous five years, or is unwilling to pay off any of their debts.

A person who declares bankruptcy voluntarily, a ‘Debtor’s Petition’ form must be completed which lists all of the person’s debts, their creditors, and the total amount of their debts. If the Insolvency and Trustee Service of Australia (ITSA) accepts the application, notice will be given to the person their application has been successful, along with an outline of their rights and obligations. The standard period of bankruptcy is three years, but can be extended by an application from the trustee.

Once a person has become bankrupt, a trustee is appointed to manage the debt, with all property now belonging to the trustee. The trustee now has the power to arrange how the debtor’s property will be distributed to creditors.

Should a person declare bankruptcy?

The immediate benefit of declaring bankruptcy is that unsecured creditors cannot pursue legal action against the person. Creditors such as banks are also prevented from pursuing their debts against property that is secured. It’s important to note, that a person who is bankrupt is not released from their obligation to pay off their debts, especially in regards to child or spousal support payments, along with any Social Security debts. Furthermore, a person who is bankrupt, but accumulates more debt, is responsible for any debt after a declaration of bankruptcy is made.

A person who is bankrupt must also surrender their passport to the trustee, declare any gifts or windfalls, as well as requiring a court order to receive payments made from a bank, credit union, or any other financial institution. The trustee must be kept informed of all personal changes, including a change of name or marital status.

What property can be taken from a person who is bankrupt?

In s 116 of the Bankruptcy Act, some of the properties that may be taken from a trustee to pay off creditors are:

• any property interests
• jewellery
• stocks and shares
• gifts from a will
• cash held in any financial institution
• household fixtures and fittings that are of any monetary value
• money that may be owed to the person who is bankrupt.

What property cannot be taken from a person who is bankrupt?

In s 116(2) of the Bankruptcy Act, outlines property that cannot be claimed by creditors to pay off debts which may include the following:

• property held in trust for someone else
• property that has sentimental value
• household goods, which may include furniture, televisions, fridges, and  washing machines
• policies such as life assurance, or any similar assurance and endowments
• some property of a non-bankrupt spouse.

Property that is needed for work such as tools is also protected from creditors, although, up to $3,400 in value. Tools that have a value greater than $3,400 will be used to pay off creditors. Vehicles are also protected from creditors, however, just like tools, vehicles that are worth at least $6,850 will be used to pay off creditors.

What can a person do if they object to the actions of their trustees?

A person who is bankrupt can make an application to the Inspector-General, the Federal Court or the Federal Magistrate’s Court in relation to any unsatisfactory decisions made by a trustee.

How does a bankruptcy come to an end?

Bankruptcy can come to an end after the three year period, provided that there is no successful application by a trustee to extend the bankruptcy. A bankruptcy will also come to an end upon the full payment of debts to creditors, or by a special resolution with all the creditors who are willing to accept a lesser amount of re-payment.

An action in court seeking an annulment to the debt can also be sought in the event there was a failing in the legal process – leading to the bankruptcy.

Declaring for bankruptcy may seem like a quick fix but is a decision that should not be taken lightly. For anyone who might be considering declaring for bankruptcy, seek advice in regards to their situation.



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