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An Introduction to Bankruptcy

If you receive a Bankruptcy Notice or a Creditor's Petition (the Court documents that a creditor uses to make you go bankrupt), get legal advice quickly. If you are made bankrupt and do not owe the money, it can be very difficult and expensive to annul the bankruptcy.

In addition, bankruptcy can have far-reaching effects, which may extend beyond the period of time that someone is a undischarged bankrupt, or the bankruptcy remains on a person's credit rating.

This chapter is an explanation of selected aspects of the law of bankruptcy.

See also our pamphlet entitled Bankruptcy.

Who is involved?

When people become bankrupt, control of their property is taken over by either a registered trustee or the Official Trustee, who can sell their property, carry on their business, sue for any debts owed to them and generally take over their financial affairs in order to pay creditors. When a person is made bankrupt, creditors can only deal with the person's trustee in relation to debts incurred before the commencement of the bankruptcy.

Registered trustees are accountants in private practice who are registered by the Inspector-General to act as trustees of bankrupt estates. A person wishing to appoint a registered trustee will first have to obtain that trustee's written consent and file it with the Official Receiver at the same time as lodging their petition in bankruptcy. A registered trustee will generally only act if there is sufficient money or assets to ensure payment of his or her fees. A list of registered trustees is available from the AFSA or their website.

The Official Trustee in Bankruptcy is the trustee of bankrupt estates and is part of the Commonwealth Attorney General's portfolio. Where a person does not nominate a private trustee the Official Trustee will automatically become that person's trustee. If payments are made by the bankrupt towards his or her debts, the Official Trustee will first take its fees and charges and the balance will be paid to creditors. Upon release from bankruptcy, even where no payments have been made, the bankrupt does not owe any fees.

There is one Official Receiver who delegates responsibilities to personnel within AFSA in each State, who act in the name, and on behalf of, the Official Trustee.

The Inspector-General in Bankruptcy has the power to inquire into, and investigate, bankruptcy procedures [Bankruptcy Act 1966 (Cth) s 12]. The Inspector-General who is also the Chief Executive of the Australian Financial Security Authority (formerly ITSA) is responsible for the overall operation of the personal insolvency system and the administration of the Bankruptcy Act. The Australian Financial Security Authority offers a 'one stop service ' on bankruptcy matters where forms can be completed, lodged and information obtained on options of bankruptcy and the alternatives. AFSA also maintains certain other registers and services unrelated to bankruptcy.

Bankruptcy Courts and Jurisdiction

The law governing bankruptcy is contained in the Bankruptcy Act 1966 (Cth). As this is a Commonwealth Act, it applies throughout Australia. The government agency responsible for administering the legislation is the Australian Financial Security Authority (formerly ITSA).

The Federal Court of Australia and the Federal Circuit Court have the power to hear and decide bankruptcy cases. The Federal Court may also alter its orders under the Act and may annul sequestration orders (the orders which take the control of property away from the bankrupt).

The Federal Circuit Court has concurrent jurisdiction with the Federal Court of Australia under the Bankruptcy Act 1966 (Cth). The only exception is the ability to have trials with a jury under s 30(3) of the Act, and that power is limited to the Federal Court. The Federal Circuit Court has power to transfer bankruptcy proceedings to the Federal Court of Australia.

The Family Court and Federal Circuit Court have jurisdiction in any matter related to the bankruptcy of a party in proceedings for property settlement or spousal maintenance (see Applying for property settlement).

Appeals from a single judge of the Federal Court are heard by the Full Court of the Federal Court.

What is Bankruptcy?

Bankruptcy was originally designed to stop people who could not pay their debts being put in gaol. It is a method by which some control can be taken over a debtor's affairs, so that the entire financial disaster can be brought to an end and the debtor can make a fresh start.

When a debtor becomes bankrupt , the bankrupt's property and any property acquired during his or her bankruptcy comes under a trustee's control [Bankruptcy Act 1966 (Cth) s 58(1)]. A bankrupt is required to assist the trustee in the administration of his or her financial affairs [s 77]. The money received from the sale of a bankrupt's property is distributed by the trustee to creditors on a pro rata (or percentage of overall debts) basis. With some exceptions, from the date the bankruptcy begins, creditors are prevented from taking any further debt recovery action against the bankrupt or his or her property.

The trustee's role is to realise assets for the benefit of the unsecured creditors of the bankrupt. As a result, if a person has no assets, the trustee has very little to do during the bankruptcy. The benefit to a person declaring bankruptcy voluntarily is that certain debts are no longer recoverable from that person, but any debts incurred after the date of bankruptcy remain.

There are many restrictions on the bankrupt's life. A bankrupt may not be able to practise certain occupations and is unable to obtain credit over an indexed amount without informing the potential creditor of his or her bankruptcy. Further information about the indexed amount may be obtained from the website of the Australian Financial Security Authority (formerly ITSA).

A bankrupt may not be able to travel overseas, while business bankrupts must hand over all relevant books, documents and property as directed by the trustee and must supply any other relevant information that is requested.

Bankruptcy generally continues until discharge (whether the debts have been paid in full or not). Usually discharge occurs automatically after three years unless an objection has been lodged by the trustee [s 149D]. In certain circumstances it can last longer, see ending bankruptcy. After discharge all a bankrupt's remaining debts that were incurred before the bankruptcy are cancelled. For certain exceptions to this rule, see debts.

What does it cost to go bankrupt?

There is no cost for a debtor to file a bankruptcy petition.

If a debtor is discharged from bankruptcy without paying any payments toward their debts, no fees are payable.

Where a bankrupt's trustee collects (realises) money through either the recovery or sale of assets or through contributions, fees and percentages are payable to the Official Trustee. The administration charges are set out on the Fees and charges page of the AFSA website.

Private trustees' fees are based on an hourly rate and can be very expensive. A small debt may be dramatically increased if a person is made bankrupt unnecessarily.

A creditor who issues Court proceedings to make a person bankrupt must pay a Court filing fee as well as meet the cost of preparing the documents, and appearing in Court. This cost is recoverable from the bankrupt's estate, but only if there are sufficient assets available to meet the claims of creditors. The cost can be significant, and it is prudent for a creditor to undertake investigation of the debtor's assets prior to spending money on a creditor's petition.

Who should consider bankruptcy?

After carefully considering the advantages and disadvantages of bankruptcy and after taking the best available advice, it may be that, for some people, bankruptcy is the most desirable solution. Such people may include:

  • pensioners or beneficiaries who do not own a home, whose household goods have been purchased using a credit card or unsecured loan (but not subject to a consumer mortgage), who are unlikely to be earning other substantial income in the near future and who are being harassed by creditors
  • deserted spouses or widows who have debts of their own and who are otherwise in the same position as pensioners or beneficiaries. However, if the debts are the responsibility of the other spouse (whether living or dead), bankruptcy may not be necessary
  • low wage earners, especially if they have a large family, pressing debt problems and heavy, additional expenses, such as a sick child or a child with a disability.

Where a debtor would not benefit from bankruptcy, it may be possible to come to an arrangement with the creditors to pay all, or part, of the debts by instalments over a particular period. However, unless a formal agreement is made a creditor could still bankrupt the debtor and, should the debtor subsequently become bankrupt, any money paid to a creditor may be recovered later by the trustee as a preferential payment, see alternatives to bankruptcy.

Because of the far reaching effects of bankruptcy, always get legal advice regarding your options. A financial counsellor can also help you negotiate with creditors, and suggest options for dealing with unmanageable debt.

Who can become bankrupt?

Only people can be made bankrupt (not companies). Companies cannot become bankrupt under the Act; they are wound up (or liquidated) under the Corporations Act 2001 (Cth).

Where there is a partnership, all or a majority of the partners in a business file for bankruptcy. If a majority of the partners apply for bankruptcy, any other partners will have to take action to avoid also being declared bankrupt.

A married person who has debts that he or she cannot pay can be made, or can become, bankrupt. Normally this will have no effect upon the person's spouse, provided they are not a guarantor or jointly liable for the debt (in which case the creditor will normally require that he or she pay the total debt).

A child (a person under 18) can only be made bankrupt if there is an enforceable debt (in most cases, only contracts for necessary goods or services are enforceable against children), although children can enter bankruptcy voluntarily. The legal definition of necessary goods and services (called necessaries) is complex (see consumer contracts), although it appears in practice that the trustee decides whether goods or services are necessary and is generally sympathetic to a child in these circumstances. A trustee might consider food, clothing and accommodation to be necessaries, but other items, such as cars or even trade debts, may not be.

People who are not Australian citizens can be made, or become, bankrupt and have their assets in Australia made available to their Australian creditors [Bankruptcy Act 1966 s 43].

Sometimes people who are not insolvent (that is, who have enough money or property to pay their debts) are made bankrupt because they do not take action when a bankruptcy notice or petition is issued against them. Although, after bankruptcy, they might pay the debts and obtain a discharge or annulment (cancellation) of the bankruptcy, the disadvantages of having been made bankrupt continue, including having their name remain on a national register called the National Personal Insolvency Index (NPII) as a permanent record.

People who become bankrupt while already bankrupt are discharged from each bankruptcy (unless an objection is lodged) three years and one day from the date the statement of affairs is filed for that bankruptcy [Bankruptcy Act 1966 s 149].

    An Introduction to Bankruptcy  :  Last Revised: Tue Jan 10th 2017
    The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.