The effects of entering bankruptcy will be different for different people. In this section the legal effects of going bankrupt on a person's property, income and rights are explained.
It is important to understand the effects of going bankrupt and as well as reading through this, you should seek specific advice about your own circumstances.
With some exceptions (see property a bankrupt can keep), a bankrupt's real estate and personal property vests in the Trustee. This is so whether the property is situated in Australia or elsewhere [Bankruptcy Act 1966 (Cth) s 116, Bankruptcy Regulations 1996 regs 6.03, 6.03A, 6.03B].
Property includes the bankrupt's interest in a house (whether owned alone or jointly with someone else), cash in the bank, jewellery, stocks, shares and debentures, fixtures and fittings, gifts and legacies received under a will, crops and more. Any money owed to the bankrupt can be recovered by the trustee unless it is protected (exempt).
The vesting of property in real estate that is owned as a joint tenant with another has the effect of severing the joint tenancy in the property. So, the automatic protection for the non-bankrupt joint owner on the death of the bankrupt is therefore lost.
If a bankrupt owns, or is purchasing, a home which is in the bankrupt's name, the trustee has the right to sell the property and distribute any equity to the creditors. This does not apply to homes purchased with Defence Service Homes loans which are protected under the Defence Service Homes Act 1918 (Cth) and the Director will rarely give permission for the sale to take place.
In the case of jointly owned property, when one owner becomes bankrupt the trustee will become registered as a 'tenant in common' of the home with the non-bankrupt owner, or will lodge a caveat on the title to protect the bankrupt's interest.
If the home was bought with, or substantially with compensation money for an injury it cannot be taken, see property a bankrupt can keep.
A bankrupt is allowed to keep vehicles used for personal transport up to a certain value. The amounts are indexed and can be checked on the AFSA website here.
If there is equity in the car that exceeds the indexed amount, the trustee can sell the car and the indexed amount is returned to the bankrupt to enable him or her to buy and keep a cheaper car.
If a car is under finance, and the repayments are not being maintained by the bankrupt, it is likely that the secured creditor (the lender) will take steps to repossess the car. Any shortfall after the sale of the car is an unsecured debt, and the lender will become another creditor and be asked to lodge a proof of debt in the bankruptcy.
Be careful of allowing someone else to pay out any car loan during the course of the bankruptcy. If the car is valued above the threshold amount, even if someone else has paid it out, it will vest in the trustee and most likely be sold.
If a person borrows money to buy goods, and gives the lender security over those goods, the debt owed to the lender is a secured debt or consumer mortgage. It is often a term of the consumer mortgage that the loan will be in "default" if the person is made bankrupt. Default entitles the lender to seize and sell the goods to recover the debt (see consumer credit).
A lender may agree that a bankrupt can keep goods over which security is held during the course of the bankruptcy, as long as payments are being maintained. This of course depends on whether or not the trustee also agrees, particularly if there is significant equity in the goods.
Certain goods are exempt from seizure by the trustee under the Bankruptcy Act 1966 (Cth). This means that the goods are not available to sell by the trustee to repay creditors. Such goods are household items, cars under a certain value and tools of trade under a certain value. Any other goods are available to the trustee to take, even if the goods are subject to security in favour of a lender.
If goods are paid for in full during the period of bankruptcy (whether the payments are made by the bankrupt or by a family member or friend), and are not exempt (ie not household goods or motor vehicles valued under the threshold amounts which can be found here) the trustee can seize the property and sell it to pay creditors.
At any time during the bankruptcy, the trustee may take any money or other items the bankrupt receives, such as gifts, lottery winnings or money inherited. If the bankrupt does save money and buys some possessions, they may also be taken by the trustee [s 58(1)].
Some debtors, seeing the threat of bankruptcy, try to get rid of their property first by transferring it to others, often to family members. Under the 'clawback' provisions of the Bankruptcy Act 1966 (Cth) a trustee can take back some property that no longer belongs to the bankrupt, such as property that was sold, or given away, with intent to defraud creditors and not for its real value. Trustees have greater powers to set aside certain transactions entered into up to five years before the bankruptcy where the market value was not paid.
A transaction is not void:
[Bankruptcy Act 1966 ss 120, 121]
Where a payment was made to a creditor the Official Receiver may, on behalf of the trustee, issue a notice requiring repayment of the sum [s 139ZQ]. A person disobeying a notice faces up to six months gaol [s 139ZT]. A person can apply to the court to set aside a notice [s 139ZS]. Where the transaction concerns property a charge can be registered over the property [s 139ZR]. The charge has priority over any other mortgage, lien, charge, or encumbrance unless it was a genuine transaction at 'arms length' (i.e. no favours were made as a result of a family relationship or friendship) for valuable and adequate consideration.
Exceptions to this include [s 120]:
Similarly, where a bankrupt (transferor) transfers property to another party (transferee) and the transferee then gives money (or anything else of value) in consideration of this transfer to a third party, these transactions can also be set aside [Bankruptcy Act 1966 s 121A]. The Act allows a trustee to treat the transaction as if it had occurred between the transferor and the third party directly.
All bankrupts must hand over their passports when requested by their trustee (although not all trustees ask for the passport to be handed over), but may ask for the return of the passport during the bankruptcy and the trustee must have a good reason for refusing the request. A bankrupt whether they are a compulsory contributor or not may not leave Australia during the bankruptcy without the trustee's written consent [Bankruptcy Act 1966 (Cth) s 272]. Where the bankrupt is a compulsory contributor, the trustee may impose conditions including payment of the contribution liability [s 272(2)].
Where a bankrupt leaves Australia without the trustee's written consent or contravenes any of the conditions imposed, an offence is committed and the bankruptcy may be extended for eight years commencing on the bankrupt's return to Australia and/or upon conviction face up to one year in gaol.
In determining what household goods can be retained, the trustee must regard:
Bankrupts receiving over a certain income must pay contributions to their trustee. Income includes wages, fees, commission, and the value of fringe benefits (for example, the provision of a motor vehicle or school fees for the bankrupt's children). The contribution is half the bankrupt's income above the threshold. The threshold amount is adjusted to take into account the number of dependents, income tax and child support payments. It is adjusted twice a year in line with movements in the pension rate and is set out on the website of the Australian Financial Security Authority (formerly ITSA). If the bankrupt suffers hardship the contributions may be varied upon a written application [Bankruptcy Act 1966 s 139T].
If a bankrupt does not pay the contributions the trustee can demand payment from a person who owes money or property to the bankrupt (for example, the bankrupt's employer or bank) [s 139ZL]. A person can be gaoled for failing to comply with a demand [s 139ZO]. The trustee can also recover the amount not paid as a debt by taking action against the person in court even after they have been discharged from bankruptcy [s 139ZL(10)].
The Family Law Courts have jurisdiction in any matter arising out of a property settlement under the Family Law Act where one of the parties is a bankrupt. This means that a trustee of a bankrupt can apply to become a party in Family Law proceedings if they can show the Court that the creditors’ interests will be affected.
When this occurs the bankrupt party is not entitled to make any submissions to the Court about property already vested in the trustee, other than with the permission of the Court and this is only granted in exceptional circumstances.
No priority is given to the creditors of the bankrupt party over the non-bankrupt spouse and similarly, no priority is given to the non-bankrupt spouse over the creditors of the bankrupt party. In making any decision the Court must attempt to balance the interests of both parties.
Where property has been vested in the trustee for the bankrupt party, the Court has the power to order the transfer of this property to the non-bankrupt spouse. Once transferred the property is not available to creditors of the bankrupt party.
There are a number of serious offences under the Bankruptcy Act 1966 (Cth) for which a bankrupt person could be prosecuted. The Act has been strengthened in recent years to ensure that there are significant penalties for bankrupts who attempt to dispose of or conceal property in an effort to defeat creditors. The time period in which such actions are viewed as criminal often precedes the commencement date of bankruptcy.
Examples of offences under the Act include:
The following is a short list of some of the more important rights of bankrupts.
A bankrupt can request from their trustee information that they reasonably require concerning their property or affairs [s 170]. The file will probably contain the trustee's reports, copies of any relevant court transcripts, general correspondence and a list of proofs of debt lodged by creditors. Copies of all relevant documents are obtainable under the Freedom of Information Act 1982 (Cth) although charges were recently introduced under that Act. It may now be preferable simply to seek permission to obtain specific information from the trustee’s file.