Bankruptcy

Contributed by AndrewGeorge and Colette Legeret, as amended by DamienMcDonald and current to April 2024

Bankruptcy is a method that enables some control to be taken over a debtor's affairs, so that their financial disaster can be brought to an end, and they can make a fresh start. Bankruptcy was originally designed to prevent the gaoling of people who couldn't pay their debts.

The Bankruptcy Act 1966 (Cth) sets up a structure that enables the money received from the sale of a bankrupt's property to be 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 their property.

Probably the best way to understand bankruptcy is to see it as a swap. In return for protection from further legal action by creditors and for total release from specific debts at the end of the bankruptcy period, the debtor agrees to give up to the trustee certain assets and (for a while) a large degree of control over their financial affairs. However, for people who don't have any valuable assets and are on a low income, bankruptcy amounts to no real change in their control over their financial affairs because there is nothing for the trustee to take. Bankruptcy is a sensible option for some people, but not the best solution for others. Information on your options can be obtained from a registered bankruptcy trustee, a financial counsellor, legal aid or a community legal centre, a solicitor, accountant or the Australian Financial Security Authority (AFSA).

Overview of bankruptcy

There were some 9,930 personal insolvencies in the 2022–23 financial year – around 4% higher than 9,545 in 2021–22.

Bankruptcy is a legal status that a person has under the Bankruptcy Act 1966 (Cth) ('Bankruptcy Act') where, once they are declared bankrupt:

1. with some exceptions, creditors are prevented from further pursuing them for payment (s 58(3)); and 1 their property (with some exceptions, e.g. household furniture, personal injuries compensation and certain vehicles) is made available, through a trustee, for distribution among creditors (ss 109, 116).

Key Terms

All references to legislation in this chapter are to the Bankruptcy Act or the Bankruptcy Regulations 1996 (Cth) ('Bankruptcy Regulations') unless otherwise noted.

Key terms in relation to bankruptcy and the law:

Asset: anything owned by an individual or entity that has value, monetary or otherwise. See liquid and Illiquid asset.

Bankrupt: a person who has become bankrupt either by a debtor's petition or a sequestration order.

Creditor: person or entity to whom a debt is owed.

Debt: a sum of money owed to another person or entity.

Debtor: a person or entity who owes a debt to another, for example a creditor.

Discharge from bankruptcy: A permanent order that releases the debtor from personal liability for certain specified types of debts, thereby releasing the debtor from any legal obligation to pay any discharged debts

Liquid or liquidated asset: an asset that is cash or something that can be readily turned into cash with minimal loss.

Insolvent: a person who is not solvent, is insolvent.

Solvent: person is solvent if they are able to pay all of their debts when they fall due.

Secured creditor: a creditor that has lent money in exchange for security, such as a mortgage. Being a secured creditor means that if the debtor becomes bankrupt or insolvent, the debt can be paid by selling the asset(s) over which the loan was secured.

Trustee: person appointed to oversee the management of the bankrupt's estate

Unsecured creditor: a creditor that has lent money without security. Being an unsecured loan puts the creditor at a disadvantage as secured creditors are paid out of the proceeds of the sale of the assets of which they were secured. This means that there are limited amounts available to the unsecured creditor to claim the debt.

Illiquid or non-liquid asset: an asset that cannot readily be turned into cash.

Purpose of bankruptcy

The two main purposes of bankruptcy are:

1. to give a debtor who is in a difficult or hopeless financial position a fresh start by wiping most of their debts; and
2. to fairly distribute the debtor's assets among creditors.

Types of proceedings

A person can become bankrupt under the Bankruptcy Act in the three following ways:

1. 'voluntary' bankruptcy: the debtor files a debtor's petition; (Pt IV div 3)
2. forced bankruptcy: the creditor(s) files a creditor's petition; or (Pt IV divs 2)
3. deceased bankruptcy: either the legal personal representative of the deceased or the creditor can petition for an order that treats the deceased person as a bankrupt (Pt XI)

NOTE: Many of the monetary limits referred to in this chapter change periodically. Check the amounts referred to by contacting the Australian Financial Security Authority (AFSA) on 1300 364 785, or check "Indexed Amounts" on AFSA's website (at www.afsa.gov.au).

Advantages

• After discharge from bankruptcy, the bankrupt is released from almost all debts (the exceptions are discussed in this chapter).
• Once a person is declared bankrupt, almost all unsecured creditors are unable to take any further legal action against the debtor in relation to almost all debts (in rare cases the court might grant the creditor a right to continue with court action).
• Once a person is declared bankrupt, unsecured creditors should stop making contact with and harassing the bankrupt, and should instead communicate with the trustee about the bankrupt's debts.
• Bankrupts with no dependents who have an income of less than $68,768.70 net per annum cannot have any of that income taken to pay their debts. However in contrast, low-income wage earners who are not bankrupt may be forced by creditors to make payments from income under a Court attachment of earnings order.
• The Bankruptcy Act gives significant protection to superannuation payments (though note the strict regulation of these referred to below), life assurance payments and compensation payments for personal injuries. The Act also gives some protection to assets bought with these payments. These payments and assets are not protected if a debtor is not bankrupt and the creditor gets an order for payment of a debt in a Court.

Disadvantages

• It will probably be very difficult to obtain credit for some time after bankruptcy. A record of the bankruptcy is added to the debtor's credit report and stays there for five years or two years starting on the day that you are no longer bankrupt, whichever is later.
• The Inspector-General keeps a record of the bankruptcy forever. The record is kept on an electronic index known as the National Personal Insolvency Index (NPII) and can be searched by anyone on payment of a nominal fee.
• Certain areas of employment are not open to bankrupts (because of the rules and legislation pertaining to that type of employment, not because of any provisions in the Bankruptcy Act). A person who is considering bankruptcy should make enquiries regarding the type of work they do or intend to do, especially if a licence is required. Bankruptcy might cause employment problems for the following people: company directors, people in managerial positions, lawyers, accountants, tax agents, sheriffs, police, estate agents, armed forces personnel, some public servants, licensed builders, and security workers. (This is not an exhaustive list.)
• A bankrupt cannot act as a director or promoter of a corporation, or be in any way involved in the management of a corporation, without the permission of the court.
• A bankrupt cannot be a trustee of a superannuation fund.
• The bankrupt will lose property that is defined by the Bankruptcy Act as divisible. This includes property acquired after the commencement of the bankruptcy (but before the date of discharge) (s 116). (See Divisible property.)
• The bankrupt might have to pay regular contributions to the trustee if net annual income is above a certain amount ($68,768.70 (indexed) net per year if there are no dependents).
• Insurers can cancel some insurance contracts if the insured person becomes bankrupt, but only if there is a term in the contract that specifically says this. See Insurance policies.
• Some insurers refuse to insure bankrupts and refuse to renew insurance policies for bankrupts.
• The bankrupt might be required to surrender their passport to the trustee, and must obtain permission from their trustee to leave Australia (s 272).
• The trustee can investigate past financial dealings of the bankrupt. The trustee in some cases has power to recover property that the debtor has transferred in the period beginning five years before the commencement of the bankruptcy (or longer if it was done for the purpose of defeating creditors).
• Obtaining credit (including hiring goods or writing cheques) of $$6,852 (indexed) or more without disclosing the bankruptcy to the person extending the credit is a criminal offence (ss 269(1)(a), (aa), (ab), (ad) and ss 304A(1)(g), (j)).
• If a debtor has had significant gambling debts and then bankrupts, they might be charged with a criminal offence under the Bankruptcy Act (s 271).

Considering all the options

It is strongly recommended that debtors considering bankruptcy seek advice from an independent and qualified source, such as a free financial counsellor. A financial counsellor can assist a low-income debtor to weigh up all of their options, including negotiating with creditors and seeking hardship arrangements.

If a creditor is threatening a debtor with bankruptcy, the debtor should seek legal advice urgently, especially where there is a court judgment and where the debtor owns divisible property, such as a house.

Who can be made bankrupt?

Can companies or businesses be bankrupted?

Only people can be made bankrupt, not businesses or companies. Where a partnership or persons trading under a business name are insolvent, it is not the business that is bankrupted but the individual or individuals who run that business. The Bankruptcy Act does not cover companies (s 7). (See the Corporations Act 2001 (Cth) for information on companies or businesses).

Can minors be bankrupted?

A person under the age of 18 years can be made bankrupt (s 7(1A)), but not if the debts which are the trigger for the bankruptcy are unenforceable due to the person's age.

Can citizens of other countries be bankrupted?

Debtors who do not have Australian citizenship or residency can become bankrupt if they live in Australia or have a business connection with Australia..

Who administers the bankruptcy law?

The Bankruptcy Act is a Commonwealth Act; therefore it applies in all states and territories. The relevant courts are the Federal Court (General Division) and the Federal Circuit Court. The Family Court of Australia also has jurisdiction under the Bankruptcy Act where the trustee is a party to family law property or spousal maintenance proceedings. Furthermore, both the Federal Court and the Federal Circuit Court are empowered to transfer proceedings to the Family Court under the Bankruptcy Act (ss 35, 35A).

Federal Court of Australia

Level 3, Supreme Court Building
State Square, Darwin NT 0800
Tel: (08) 8941 2333
Email: ntreg@fedcourt.gov.au
Web: http://www.fedcourt.gov.au/

Federal Circuit Court of Australia

Level 3, Supreme Court Building
State Square, Darwin NT 0800
Tel: 1300 352 000
Email: ntreg@fedcourt.gov.au
Web: http://www.federalcircuitcourt.gov.au/wps/wcm/connect/fccweb/home

Australian Financial Security Authority (AFSA)

The Bankruptcy Act creates the roles of Inspector-General in Bankruptcy, Official Receiver and Official Trustee in Bankruptcy. The Australian Financial Security Authority (AFSA) undertakes each of these roles. When a person becomes bankrupt all their "divisible property" (see "Divisible property", below) vests in (ownership rights are moved to) the Official Trustee in Bankruptcy or in the registered trustee if there is a private trustee. AFSA in its role as the Official Trustee in Bankruptcy is the trustee of around 80% of bankruptcies, the remainder are under the control of private registered trustees.

The trustee can require a bankrupt to provide all financial documents and any other information relevant to the bankruptcy. The trustee might require the bankrupt to hand over their passport. A trustee in bankruptcy also has the power to investigate the conduct and dealings of the bankrupt and the reason for bankruptcy; and seize and sell certain assets and distribute the proceeds. AFSA can be contacted at:

Post: GPO Box 821, Canberra ACT 2601
Tel: 1300 364 785
Web: www.afsa.gov.au

The AFSA website is very useful: it includes legislation, statutory forms, indexable amounts, statistics and comments on recent events.

AFSA as trustee vs a private trustee

A non-business bankrupt with no assets who has bankrupted via a debtor's petition usually has AFSA as their trustee rather than having a private registered trustee.

A private registered trustee usually becomes trustee at the request of a petitioning creditor or debtor before the debtor becomes bankrupt. In some cases the creditor can ask for a private registered trustee to replace AFSA as the trustee after the debtor becomes bankrupt (ss 156A, 157).

For bankruptcies entered into after 1 December 2010 private trustees can (and usually do) charge a bankrupt a minimum administration fee of $5,000 (indexed). However private trustees can only recover this fee if there are any funds in the bankrupt estate.

Complaints about independent trustees

Anybody with a concern about a trustee or any other aspect of their bankruptcy administration can make a complaint to the Regulation and Enforcement area of AFSA, which reports directly to the Inspector-General. AFSA Regulation and Enforcement will investigate complaints against private trustees and against AFSA itself.

To lodge a complaint, visit the AFSA website and use the online enquiry/feedback/complaint form, write a letter, or telephone AFSA and ask to speak to someone in AFSA Regulation and Enforcement. (For more information on the Bankruptcy Regulation and Enforcement area and its complaints procedures, visit AFSA's website at www.afsa.gov.au).

What happens to the bankrupt's property?

Divisible property

Property that can be taken by the trustee is called divisible property. This includes houses, land, and motor vehicles worth over $7,600 (indexed).

The general rule, to which there are important exceptions, is that all property owned by the bankrupt at the time of the bankruptcy, or acquired during the bankruptcy, is divisible or vests in the trustee. This means that the trustee becomes the legal owner of the property, and has a duty to sell the property so that the proceeds can be distributed to creditors. The trustee will also sell any part share which the bankrupt has in jointly owned or mortgaged property if commercially practicable.

Non-divisible property

Section 116 of the Bankruptcy Act and the Bankruptcy Regulations 6.03 and 6.04 lists the property that the trustee cannot take from a bankrupt. This list includes:

• necessary household property that is reasonably necessary, having regard to current social standards (e.g. beds, sporting and recreation equipment, fridge, crockery, linen, etc.);
• property the bankrupt uses to earn income, such as tools of trade, plant and equipment, professional instruments and reference books of the bankrupt to the value of $4,200 (indexed) in value, and such other items of the same nature as the creditors or the court might allow;
• a motor vehicle that does not exceed the value of $ 9,100 (indexed). If the vehicle is worth more than this, the trustee can take the vehicle but must refund the $ 9,100 to the bankrupt;
• the interest of a bankrupt in a regulated superannuation fund, or a payment from such a fund received on or after the date of bankruptcy, if the payment is not a pension;
• the proceeds of certain damages claims for compensation, and any property purchased with, or substantially with, the proceeds of such a claim;
• policies of life insurance or endowment assurance in respect of the life of the bankrupt or the bankrupt's spouse, or the proceeds of such policies that are received on or after the date of bankruptcy;
• the amount of money a bankrupt holds in a retirement savings account ("RSA"), as defined in the Retirement Savings Accounts Act 1997 (Cth) ("RSAA"), and any payment to a bankrupt from an RSA received on or after the date of bankruptcy if the payment is not a pension;
• money paid by way of loan or grants through certain government rural support schemes, generally where the money was for household support or rehabilitation;
• a payment to the bankrupt under a payment split under part VIIIB (Superannuation Interests) of the Family Law Act 1975 (Cth) ("FLA") where the eligible superannuation plan involved is a regulated superannuation fund or an RSA and the splittable payment involved is not a pension under the Superannuation Industry (Supervision) Act 1993 (Cth) or the RSAA; and
• any property that, under an order under part VIII of the FLA, the trustee is required to transfer to the spouse of the bankrupt.

Market value of divisible property

When considering whether to seize and sell certain assets, the trustee must have regard to the costs of seizing and selling the asset in relation to the item's value (e.g. r 6.03 Bankruptcy Regulations). The trustee must also have regard to any special or health or medical needs of members of the bankrupt's household and whether the property is reasonably necessary for the functioning of the bankrupt's household (r 6.03).

Offering to buy an asset from the trustee

Sometimes, the trustee might ask if the bankrupt knows someone (usually a spouse/partner) who is prepared to purchase an asset or a share in an asset. This might happen where the bankrupt has equity in a house, or where the asset would not attract a good price. If you are in this situation, make sure that you are not paying more than market value for the asset or share of the asset.

The May 2013, PIR Newsletter reported that, "Certain trustees are inviting (or only consider) offers well in excess of the available equity in the property based on independent appraisal or valuation. In some cases trustees have asked for offers of up to $15,000 to purchase the vested bankrupts interest in property with nominal equity".

The PIR Newsletter goes on to say, "Trustees are expected to exercise discretion and commercial judgment when dealing with parties to realise assets. Trustees are not to use their position to extract unreasonable or unfair consideration from purchasers given the bankrupt's interest in (and the value of) vested property".

Defence services homes mortgages

The trustee cannot take the equity of a member of the Defence Force in a house subject to a Defence Service Homes Mortgage without the approval of the Secretary to the Department of Veterans' Affairs (s 45A Defence Service Homes Act 1918 (Cth)). Whether or not consent is given is dependent on the government's policy at the time and therefore should be checked with the department before bankrupting.

If the Secretary does not give consent the trustee can ask for the Secretary's refusal to consent to be reviewed internally and can make a further appeal to the Administrative Appeals Tribunal (AAT). Please note that there is a cost involved if you appeal to the AAT, however you may be eligible to pay a significantly reduced fee. If the house is sold before the bankrupt is discharged, the trustee will be able to take the proceeds of sale.

Property acquired during bankruptcy

The trustee can take any divisible property the bankrupt acquires after the date of becoming bankrupt and before being discharged. This might include:

• sentimental property given to the bankrupt
• some tools of trade;
• property inherited by the bankrupt; or
• mortgaged goods paid off during bankruptcy.

Mortgaged property

Can a mortgagee sell a security property if the bankrupt does not default on loan payments?

No. A mortgagee retains its right to sell the mortgaged property or goods if the bankrupt defaults under the mortgage during the period of the bankruptcy. However, there must be a default: the Bankruptcy Act prevents a mortgagee from selling property simply because a debtor becomes bankrupt (s 302).

If there is a mortgagee sale, the proceeds will go first to pay the debt owing to the mortgagee. If any money is left over, it will be claimed by the trustee to pay the creditors in the bankruptcy.

Can a trustee sell a security property even if the bankrupt does not default on loan payments?

Yes. Whether or not the bankrupt defaults on loan payments, the trustee can sell mortgaged goods or land if the bankrupt has sufficient equity in them. Equity equals the market value of property minus amounts owed to mortgagees. If the equity is so low that the trustee is not interested in repossession, a bankrupt can keep the mortgaged goods, so long as payments to the creditor are maintained.

Keeping a mortgaged car during the bankruptcy

A bankrupt can keep a mortgaged car provided:

1. they do not default on payments; and
2. the equity in the car is so low that it is not commercially practicable for the trustee to seize and sell the car.

The bankrupt needs to be aware that the equity in the car will increase as payments are made. If the equity becomes more than the protected amount for a car used for transport (i.e. $ 9,100 (indexed)) before the bankruptcy ends, the trustee might become interested in selling the car. However, the increase in equity might not be significant if the car also depreciates significantly over the bankruptcy period.

For example, if a car is worth $12,000 and the bankrupt owes $2,500 to the creditor, the bankrupt's equity is $9,500. The trustee could seize the car, but is unlikely to be interested if the amount of seizable equity is only $400. By the time three years of bankruptcy is completed, even if the bankrupt pays out the mortgage, the effect of depreciation will probably keep the bankrupt's equity in the car at less than $9,500. If this is the case the trustee will not be able to claim the car.

Jewellery and antiques

The trustee is only likely to claim jewellery, antiques and collections of significant value. The trustee does not claim the average wedding or engagement ring nor other sentimental personal property(s 116(2)(ba)).

Trophies and awards

A bankrupt can keep trophies and awards that are described in the Bankruptcy Regulations. At present, the Bankruptcy Regulations protect sporting, cultural, military or academic awards made to the bankrupt in recognition of their performance (ss 116(2)(ba)(i),(ii); Bankruptcy Act; r 6.03A Bankruptcy Regulations).

Bank accounts

Closing bank accounts

The trustee is entitled to claim money held by the bankrupt in accounts with banks, credit unions, building societies, etc. In general, the trustee will not close the bankrupt's bank accounts or stipulate how many accounts the bankrupt can keep open.

If a bank is a creditor in the bankruptcy, AFSA sometimes recommends that a bankrupt close any old accounts with that bank in order to prevent the bank from attempting to freeze accounts or set off debts.

How much can a bankrupt keep in a bank account?

While all the money in the accounts of a bankrupt vests in the trustee upon bankruptcy, under section 134(1)(ma) of the Bankruptcy Act the trustee may make such allowance out of the estate as he or she thinks just to the bankrupt, the spouse of the bankrupt or the family of the bankrupt. Accordingly, the trustee may allow the bankrupt to keep some monies in a bank account that are necessary for normal living expenses. If there is money set aside for a specific expense, such as rent, school expenses or a fuel bill, the bankrupt should either make this clear to the trustee, or withdraw the money and pay the bill before entering into bankruptcy.

If a trustee fails to provide the bankrupt with sufficient funds for living expenses, the bankrupt should contact AFSA's Bankruptcy Regulation Branch, which will then investigate the matter.

Closure or freezing of account by trustee or bank

If a bank follows section 125 of the Bankruptcy Act and freezes its bankrupt customer's funds (including Centrelink payments) on being advised of the bankruptcy, the bankrupt should give their trustee the account number and the bank's facsimile number so that the trustee can instruct the bank to unfreeze the funds.

Withdrawing money from bank accounts before bankruptcy

Although it might be reasonable to withdraw money to pay household expenses prior to bankruptcy, it is not advisable to transfer money to another account or withdraw it before bankruptcy in an attempt to hide the asset from the trustee. Concealing or removing property to the value of $20 or more in the 12 months before bankruptcy is a criminal offence (ss 265 (4), (7)), and the trustee has the right to investigate the matter and claim the money, even if it is not in the bankrupt's name at the time of the bankruptcy.

Motor vehicles

A bankrupt can keep a motor vehicle if their equity in the car does not exceed $9,100 (indexed), or more if the court or creditors agree. The bankrupt must use the vehicle primarily as a means of transport. Therefore, if the vehicle is unregistered and just sitting in the garage, the bankrupt will not be able to keep it.

If the vehicle is worth more than $ 9,100 (indexed), the trustee can sell it but must return $ 9,100 (indexed) to the bankrupt (s 116(2C)).

Superannuation

Superannuation received after the date of bankruptcy

In general, the trustee cannot claim superannuation contributions received on or after the date of bankruptcy if the payment is a lump sum. If the payment is a pension it will be treated as income (see What happens to the bankrupt's income?). However, trustees are empowered to claw back (reverse) contributions to an eligible superannuation plan made by a person who later becomes bankrupt in circumstances where the property would probably have become part of the bankrupt's estate, or would probably have been available to creditors if the property had not been transferred and the bankrupt's main purpose in making the transfer was to prevent the property becoming divisible amongst the creditors (see s 128B). Section 128C of the Bankruptcy Act extends this power to contributions made by a third person for the benefit of the bankrupt.

Superannuation received before bankruptcy

The trustee can claim superannuation contributions received by a debtor before the date of bankruptcy.

NOTE: There are conflicting views as to whether an amount awarded to a bankrupt as a result of a temporary or permanent disablement insurance claim under the bankrupt's superannuation fund whether received before or after bankruptcy is protected in bankruptcy.

Personal injuries compensation

The trustee cannot seize:

1. damages money that the bankrupt has received for a personal injury; or
2. any goods bought with, or substantially with, damages money.

If the trustee sells property and the bankrupt has used damages money to pay some (but not a substantial part) of the purchase price of the property the trustee must pay the bankrupt 'so much of the proceeds of realising the property as can be fairly attributed to the protected [compensation] money' (ss 116(2)(g), 116(4)).

Pain and suffering vs loss of income component of damages

In the case of Re Manjit Dosanjh Ex Parte: Ross Andrew Duus Trustee of the Estate of Manjit Dosanjh [1995] FCA 1161, it was established that the court would not:

1. split personal injury damages amounts into amounts for pain and suffering and amounts for loss of income; nor
2. allow a trustee in bankruptcy to claim the loss of income component of the damages amount paid to a bankrupt.

In Re Dosanjh, the trustee attempted to argue that the damages payment should be separated into different heads of damages (that is, categories of damage, such as 'general damages', 'future economic loss' and 'special damages'), and that the trustee could claim the special damages component of the payment. However, the court ruled against this argument and stated that, as long as the damages are awarded on a claim for personal injury rather than property, the whole amount of a damages payment is protected by section 116.

Household goods and furniture

While valuable art collections or antiques will vest with the trustee, the Official Receiver will not claim assets that would be considered normal household property. (For a list of items a bankrupt can keep, see r 6.03 of the Bankruptcy Regulations)

Insurance policies

Payment of claims

Insurers cannot refuse to pay a claim just because the insured person goes bankrupt. Section 54 of the Insurance Contracts Act 1984 (Cth) ("IC Act") requires the insurer to pay a claim if the insured's conduct did not cause or contribute to the loss. Most insurance claims relate to damage to a house, car or person, and so have no connection with any conduct leading to bankruptcy.

Cancellation of a policy

Insurers cannot cancel a policy just because a person becomes bankrupt, unless the policy has a specific term allowing this to be done. Further, section 60 of the IC Act provides that an insurer can cancel an insurance contract in certain circumstances, but bankruptcy is not one of these circumstances.

It is important to note that bankruptcy may make it difficult to obtain or renew some types of insurance policies.

Refusal to cover

Some insurers refuse new applications from bankrupts for insurance coverage. This can be a particular problem for tradespeople who need public liability insurance in order to work. Consumer advocates are advocating for reform in this area, on the basis that underwriting guidelines in relation to insurance and bankruptcy which state that a person should be refused insurance on the basis of a bankruptcy are outdated, however to date there has been no reform.

If an insurer refuses a claim or cancels a policy

If an insurer does refuse a bankrupt's claim, or cancels a policy on the sole ground that the insured is a bankrupt, without there being a specific term in the contract, the bankrupt should contact the Australian Financial Complaints Authority to lodge a complaint.

Houses and land

The trustee's power to sell

A trustee can sell a bankrupt's house or land whether or not it is secured by a mortgage.

The mortgagee's power to sell

A creditor who holds a mortgage over the property can sell the property without the trustee's consent, if mortgage payments fall into arrears.

Proceeds of sale

In general, after payment of loans that are secured by a mortgage over the house, legal fees and selling expenses, the proceeds of sale are divided between any joint non-bankrupt owners and the trustee.

What happens if there is no equity in the property?

The trustee will not take action to sell property if the bankrupt has no equity in the property. The trustee might, however, lodge a caveat on the title even where there is no equity. Equity in the property might increase during the time allowed to the trustee to sell the property, due either to increases in property values or to payments made by the bankrupt or another person.

Selling equity to the non-bankrupt spouse

While the trustee generally has an obligation to sell any property, the trustee might choose not to sell property immediately if the bankrupt's equity (share) is not valuable enough to leave any surplus for the creditors after paying expenses and the trustee's costs. In such a case, the trustee is often happy to accept an offer from a friend or relative of the bankrupt to purchase the bankrupt's share.

Trustee's power to sell property after discharge

The trustee retains the power to sell the property even after the bankrupt is discharged. The trustee has this power of sale even if a bankrupt had no equity in the property at the time of bankruptcy, but later builds up significant equity, for example due to increases in land values.

The trustee has the power to make a claim on any equity that the bankrupt might have in the property for a certain period of time after the bankrupt is discharged (ss 127, 129AA(3)). The length of time available to the trustee to make a claim is for property:

1. property disclosed in the statement of affairs: six years after discharge;
2. acquired before the bankruptcy and not disclosed in the statement of affairs: 20 years from the date on which the person became a bankrupt;
3. that is acquired after the bankruptcy and disclosed to the trustee prior to discharge: six years after discharge; and
4. that is acquired after the bankruptcy and disclosed after discharge: six years after disclosure.

The trustee can extend the six-year period referred to above by giving the bankrupt written notice within the six-year period. The notice can extend the period for up to three years. There is no limit on the number of extension notices that a trustee might give.

Challenging a trustee's claim to equity in a property that has increased in value after the date of the bankruptcy

Depending on the facts, a discharged bankrupt might be able to defeat a trustee's claim for equity built up in a property after bankruptcy. (See O'Brien v Sheahan [2002] FCA 1292, where the trustee allowed bankrupts with no equity in their property to remain in the property for four years without properly explaining to them that the trustee could later claim the property. The court held that the trustee's behaviour in this case amounted to a representation that the trustee was no longer interested in realising the property and had, in effect, abandoned it to the appellants.

Jointly owned house

If a bankrupt, B, owns a house jointly with a non-bankrupt, C, the trustee can register as joint owner with C. C is often given an option to purchase the trustee's interest in the property. If C cannot afford to do this, C might join with the trustee in the sale of the house. C and the trustee will then usually receive equal shares of any money that is left after paying all mortgages and expenses. If C refuses to cooperate in a sale, the trustee can apply to the court to obtain an order of sale. The trustee can then sell the house without C's consent.

Family Court issues

Where a bankrupt is, or becomes, involved in family law property or spousal maintenance proceedings, the Family Court must, on the application of the trustee, join the trustee to the proceedings in circumstances where the court is satisfied that the interests of the bankrupt's creditors may be affected by the proceedings (see pt VIII FLA).

Once the trustee becomes a party to family law property or spousal maintenance proceedings, the bankrupt is not entitled, without the court's consent, to make any submissions in relation to any property that is vested with the trustee (see pt VIII FLA). The court is required to consider the effect of any proposed order on the creditors' ability to recover a debt when making family law property orders.

Where a person becomes bankrupt after the finalisation of family law property or spousal maintenance orders, the trustee may also apply to vary or set aside those orders (s 79A FLA).

A bankrupt is obliged to tell the trustee if they are involved in, or become involved, in family law property or spousal maintenance proceedings. They must also disclose to the trustee any family law property or spousal maintenance orders that they have been a party to.

The above information also applies to a person who has entered into a personal insolvency agreement under part X of the Bankruptcy Act. Under section 35A of the Bankruptcy Act, both the Federal Court and the Federal Circuit Court may order that bankruptcy proceedings be transferred to the Family Court.

Expert advice should be obtained in relation to family law proceedings where one party to the marriage is bankrupt or becomes bankrupt (whether or not Family Court orders have been made).

Where the bankrupt partner has used some house equity solely for their own benefit

If the bankrupt has mortgaged a house in order to raise money solely for their own benefit (e.g. the bankrupt got a loan in their own name for overseas travel), the non-bankrupt spouse should get advice on whether the trustee should be claiming less than 50% of the equity. For further information see Lin v Official Trustee in Bankruptcy (No. 1) [2001] FMCA 106.

Non-bankrupt spouse contributed more than 50% of sale price and/or mortgage repayments

Get further advice, as the non-bankrupt spouse might be entitled to claim more than a 50% share of the property.

When can't the trustee sell the bankrupt's house?

The trustee cannot sell a bankrupt's house if:

1. the bankrupt bought the house with "protected money"; or
2. the house is subject to a Defence Service Homes Mortgage (see Mortgaged property).

"Protected money" is defined in section 116 of the Bankruptcy Act and includes damages money for personal injuries, rural adjustment scheme money and superannuation money received after the date of bankruptcy (subject to the regulations referred to above under Superannuation).

Property held overseas

In theory, a trustee can take action against a bankrupt's overseas property. In practice, the trustee is unlikely to take any action unless the creditors agree to pay all costs. Whether or not the trustee will be able to obtain control of any property overseas will also depend on the domestic law of the place where the property is held.

Property of a non-bankrupt spouse

Jointly owned property

See Jointly owned house for discussion of jointly owned houses. If there is other jointly owned property (e.g. a joint bank account) the trustee will try to find out the contribution to the property and then claim the proportion contributed by the bankrupt.

Property in the sole name of the non-bankrupt spouse

Where the bankrupt has made no contributions to the purchase of the property

If the non-bankrupt spouse has property in their own name (e.g. money in the bank, a car etc.) and this property has been purchased without the aid of the bankrupt, then the trustee cannot take that property.

Property transferred by the bankrupt prior to bankruptcy

The trustee can sometimes claim property that is in the name of the non-bankrupt spouse (or another person) if the bankrupt contributed to the purchase of property and then transferred ownership to the non-bankrupt spouse before the bankruptcy.

The trustee can claim property that the bankrupt transferred (ss 120, 121, 121A): 1 within four years prior to bankruptcy if the property was transferred for less than market value;

1. within five years prior to bankruptcy if the property was transferred for less than market value and the bankrupt was insolvent at the time of the transfer; and
2. at any time prior to bankruptcy if the transfer was made with the intention of defrauding creditors.

NOTE: There will be a rebuttable presumption of insolvency for the purposes of point two, above, if the bankrupt failed to keep proper books, accounts and records during the time of the transfer or, if they did keep such account, failed to preserve them.

The trustee will also be able to recover the loss to the bankrupt estate where the consideration for the bankrupt's property at the time of the transfer went to a third party other than the bankrupt.

For two High Court decisions regarding these provisions see:

1. Peldan v Anderson [2006] HCA 48, regarding the question of whether a unilateral severance of joint tenancy constitutes a "transfer of property" under s 121; and 1 Trustees of the Property of John Daniel Cummins v Cummins [2006] HCA 6, relating to the question of whether the bankrupt's 'main purpose' in transferring property was to defeat creditors.

The trustee will not be able to claim property, even if it falls within the first two of the above categories, if:

1. the transfer was made in order to pay tax debts or maintenance liabilities (not including liabilities under a binding financial agreement within the meaning of the FLA); or
2. the transfer was under a debt agreement; or
3. the cost of recovering the property would outweigh the benefit to creditors.

What happens to the bankrupt's income?

Contributions to trustee

Bankrupts who earn above a certain amount must make some payments (contributions) from their income to their trustee.

Definition of income

The Bankruptcy Act defines income broadly. Examples include a pension paid from a superannuation fund and fringe benefits such as subsidised rent or use of a company car (s 139L).

Actual income threshold amounts

The net income that a bankrupt can earn before being required to make contributions is called the actual income threshold amount (AITA). The AITA for a bankrupt with no dependents as at September 2023 was 68,768.70 net per year (indexed). The bankrupt's AITA is made up of all income derived during the assessment period, less any income tax payable and less (with certain limits) any amount due for child support, plus any income tax refunds and plus relevant percentage increases for dependents' income. AFSA website (at www.afsa.gov.au) keeps an updated table showing the current AITA amounts.

If the bankrupt has one dependent, their income threshold is increased by 18%; by 27% for two dependants, by 32% for three, by 34% for four, and by 36% for more than four dependants (s 139K).

Definition of dependant

Section 139K defines a dependant as someone who lives with the bankrupt, is wholly or partly dependent on the bankrupt and does not earn more than the 'prescribed amount'. The current prescribed amount is $4,253 (indexed).

EXAMPLE: A bankrupt has one child who is wholly dependent. The bankrupt's net income is $90,000 per year. The bankrupt's actual income threshold = $ 81,147.70. The bankrupt's income exceeds their actual income threshold by $8,852.30, so the bankrupt must contribute 50%, i.e. $4,426.15, to the trustee in that year.

Applying to vary income contributions on hardship grounds

The bankrupt can apply in writing to the trustee to have their income contribution varied on the basis of hardship, for reasons such as ongoing medical expenses, the need to pay for child care in order to work, or the expense of paying for private rental accommodation (s 139T).

If the bankrupt is not happy with the trustee's response, or if the trustee does not make a decision after 30 days, the bankrupt can:

1. request the Inspector-General to review the trustee's decision, and apply to the AAT if not satisfied with the Inspector-General's decision; or
2. apply directly to the AAT for a review of the decision if the Inspector-General refuses a request to review the decision (s 139ZF).

Please note that there is a cost involved if you appeal the decision to the AAT, however you may be eligible to pay a significantly reduced fee.

See Milsom and Official Receiver in Bankruptcy [2004] AATA 275 (16 March 2004) and Pescott and Inspector-General in Bankruptcy [2013] AATA 680 (24 September 2013) for examples of a successful application to the AAT by a bankrupt.

Providing annual statements of income to the trustee

A bankrupt must provide a statement of income (with supporting documents) at the end of each 12-month period after the date of bankruptcy. A trustee can file an objection to the bankrupt's discharge from bankruptcy if the bankrupt fails to provide the statements of income (s 170A).

Failure to pay a contribution: the supervised account regime

If (and only if) a bankrupt fails to pay the whole of their income contribution, or an instalment of their contribution, at or before the time it becomes payable, the trustee may determine that the supervised account regime applies to the bankrupt (s 139ZIC). Upon determining that the supervised account regime applies to a bankrupt, the trustee is required to provide the bankrupt with a written notice requiring the bankrupt to open a supervised account within the time specified in the notice (being a minimum of 10 working days after the notice is given to the bankrupt). The supervised account must comply with certain requirements set out in section 139ZIE.

The supervised account regime requires the bankrupt to open an account (the supervised account) into which all of their income must be deposited. If the bankrupt receives their income by cash (the trustee must consent to this form of income) or cheque, they must deposit it into the supervised account within five days of its receipt (s 139ZIF).

In general, a bankrupt to whom the supervised account regime applies, must not make withdrawals from the supervised account without the consent of the trustee (s 139ZIG). Accordingly, it is necessary for a bankrupt to reach agreement with the trustee in relation to the amount that may be withdrawn from the supervised account for living expenses.

A bankrupt may be liable to criminal penalties if they breach the requirements of the supervised account regime (ss 139ZIE, 139ZIF, 139ZIG, 139ZIH, 139ZIHA, 139ZII).

In accordance with the meaning of 'reviewable decision' in section 139ZIB, certain decisions of the trustee in relation to the supervised account regime are reviewable by the Inspector-General and/or the AAT (ss 139ZIO, 139ZIT). These include the decision to subject a bankrupt to the supervised account regime and the decision to withhold consent in relation to the bankrupt making a withdrawal from the supervised account.

The effect of bankruptcy on debts

After bankruptcy a bankrupt is released from most 'provable' debts. A bankrupt is not released from any 'non-provable' debts.

Provable debts

The term provable means that a creditor can lodge a proof of debt (s 84) or a claim to be paid, and then be paid a proportion of the money (if any) raised by the sale of the bankrupt's property. Most debts for which the bankrupt was liable at the date of bankruptcy are provable in bankruptcy.

Provable debts that are not wiped by bankruptcy

Some provable debts are not wiped by bankruptcy (s 153). Provable debts that are not wiped by bankruptcy are debts:

1. incurred by fraud;
2. under a maintenance agreement order; or
3. in relation to a bond or to certain other criminal law penalties.

Non-provable debts

The main categories of debts that are non-provable (and so not wiped by bankruptcy) are:

1. debts incurred after the date of bankruptcy;
2. court fines;
3. HELP debts under the Higher Education Support Act 2003 (Cth); and
4. unliquidated damages (an amount claimed by a creditor for damages that has not yet been fixed by formal agreement or by the court).

Secured debts

The trustee's rights to a secured property are subject to the rights of the secured creditor. A secured creditor keeps its interest in any secured goods or land (property) by way of its security even after bankruptcy.

The secured creditor's right to sell the security property

A secured creditor can only force a sale of the property if the debtor is in breach of the contract.

Under section 302 of the Bankruptcy Act, any provision in a mortgage, bill of sale, mortgage lien or charge that provides that a borrower might be in breach of a secured credit contract merely by entering into bankruptcy is void. Therefore, a creditor who has a mortgage etc. cannot take action against a debtor simply because the debtor bankrupts.

The trustee's right to sell the security property

The trustee can sell a security property whether or not the bankrupt has defaulted in payments. The trustee will sell the property if there is sufficient equity to make it commercially practicable. If the trustee sells the property it will pay the secured creditor from the proceeds of sale and keep the balance for the bankrupt estate.

Security over furniture and other household goods

Historically some fringe lenders have taken mortgages over people's essential household goods to secure payment of debts. The threat to repossess goods is then used to force payment of the debt even after bankruptcy. For credit contracts entered into on or after 1 July 2010 these types of mortgages are void under the National Credit Code (s 50). For credit contracts entered into before 1 July 2010, or for other types of contracts, this type of mortgage could breach various laws relating to unfair contract terms or unconscionable conduct.

Seek advice from Consumer Affairs Northern Territory (1800 019 319 or (08) 8999 1999) if this is happening to you or your clients.

Mortgages over houses and land

The trustee has no power to prevent the sale of a house by the mortgagee if the bankrupt is in default under the mortgage. If the bankrupt is not in default, the mortgagee will not be able to take action against the debtor. In this case, the bankrupt might be able to stay in the house and continue making payments, but the property will vest with the trustee and could be sold years later.

Guaranteed debts

The bankrupt as guarantor

A debtor who has guaranteed someone else's debt will be released from any liability under the guarantee after bankruptcy. Such a debt should be included on the bankrupt's statement of affairs as a debt (s 185NA(1)).

The bankrupt's friend or relative as guarantor

A bankrupt will also be released from debts that have been guaranteed by someone else. However, the guarantor will not be released from the debt (s 185NA(3)(b)). The guarantor or the person guaranteeing the bankrupt's debt is usually a friend or relative. Once the bankrupt stops paying the debt, the creditor will then usually take action against the friend or relative under the guarantee. Therefore, in many cases, a bankrupt will want to continue paying such a debt. The Bankruptcy Act does not prevent the bankrupt from doing this.

Although a mortgage cannot include a term providing that if the debtor becomes bankrupt the mortgage is breached (s 302), this provision does not apply to guarantees. Therefore, a creditor might be able to say that a guarantee has been breached due to the bankruptcy of the primary debtor and so claim payment from the guarantor. This will depend on the terms of each guarantee.

Debts to friends or relatives

Debts owed to friends and relatives usually result from a verbal rather than a written contract. These debts should be shown on the statement of affairs as unsecured debts, regardless of whether or not the contract is in writing. A bankrupt can, if they wish, continue to pay such a debt after the date of bankruptcy.

Unliquidated damages

Unliquidated damages debts are not wiped by bankruptcy (ss 82, 153). This is a technical area of law. However, it is an issue that affects many consumer debtors, especially debtors who have car accident debts.

Damages are 'unliquidated' if a court has not assessed them or if the parties involved have not agreed on the amount of damages. The most common example of unliquidated damages for consumer debtors is a claim for property damage as a result of a car accident.

Under section 82(2), demands in the nature of unliquidated damages are not provable in bankruptcy unless they arise out of a breach of contract or breach of trust. A discharged bankrupt is only released from debts that are provable in the bankruptcy (s 153) and therefore will not be released from debts arising from unliquidated damages.

If a debtor has a property damage debt and legal action for the debt appears unlikely in the short term, the debtor should consider whether:

1. it is worth bankrupting on this debt if this is the only debt it may not be worth bankrupting;
2. they are able to wait until the other party gets a court judgment against them; or
3. they can replace the claim for unliquidated damages with a claim under a contract or a deed by settling the claim.

Replacing a claim for unliquidated damages with a claim under a deed or contract

A settlement of a damages claim in a deed, or via an exchange of letters, can liquidate a damages claim. If the exchange of letters forms a contract, the creditor will then have a claim in contract. If the settlement is in a deed, the creditor will have a claim under the deed. As a claim under a contract or a deed is provable in bankruptcy, the bankrupt should then be released from the claim by the bankruptcy.

WARNING: Debtors should be aware that a creditor could always challenge this type of settlement and, if such a challenge were successful, the debt would then become unprovable and so not extinguished by the bankruptcy.

The debtor must prove that the liquidation occurred at least the day before the hearing of the creditor's petition or a few days before the presentation of a debtor's petition. The debt will not be included in the bankruptcy if the liquidation occurs after the date of the bankruptcy.

Maintenance/child support

Maintenance debts under a maintenance agreement or order, and child support debts, are provable in bankruptcy. However, a bankrupt is not released from maintenance debts or child support debts on discharge unless the court orders otherwise (s 153(2)(c)).

Taxation

Tax debts that arise before the date of the bankruptcy

Tax debts for the period before the date of bankruptcy are provable and extinguished after bankruptcy whether or not they have been assessed by the Australian Taxation Office (ATO).

If tax has not been assessed at the time of bankruptcy

If the ATO has not issued and served a notice of assessment at the time of the bankruptcy, a tax liability is a contingent liability and is provable under section 82.

If a debtor becomes bankrupt before the end of a financial year, the Taxation Commissioner can issue a tax assessment for the year to date. Once the bankrupt gets this separate assessment they should only be liable for any tax amounts that arise after the bankruptcy.

If the ATO refuses to issue a separate assessment for the year to the date of the bankruptcy, the bankrupt can consider appealing this decision (see Deputy Commissioner of Taxation v Jones [1999] FCA 308 (29 March 1999)).

Tax debts that arise after the date of the bankruptcy

Debts arising from tax periods after the date of bankruptcy are not provable.

Tax refunds

The ATO's right to take refunds

The ATO can take refunds during the period of the bankruptcy if the bankrupt has a tax debt from before the bankruptcy. If a bankrupt is entitled to a refund, the ATO can offset the refund due during the period of the bankruptcy against tax debts, including those provable tax debts incurred prior to bankruptcy.

In general, under the Bankruptcy Act, a creditor is not entitled to take any action in respect of a provable debt once a bankruptcy has commenced (s 58(3)). However, the Federal Court in Taylor v Commissioner of Taxation (1987) 16 FCR 212 decided that the offset provisions of the Income Tax Assessment Act 1936 (Cth) ('ITAA 1936') override section 58(3).

The trustee's right to take refunds

The trustee can take a refund if it relates to a year prior to the bankruptcy. If the refund relates to a year after the date of the bankruptcy, it is treated as income and the trustee takes the amount into account when calculating income contribution.

Centrelink debts

Except in limited circumstances, Centrelink debts are wiped by bankruptcy. However, this is a complicated area of law and debtors should seek advice from the Darwin Community Legal Service, Northern Australian Aboriginal Justice Agency, NT Legal Aid Commission or a solicitor experienced in social security law and bankruptcy. Financial counsellors also have extensive experience in dealing with Centrelink debts and bankruptcy. Generally, the following will apply.

1. As soon as Centrelink receives notification of a client's bankruptcy from AFSA, it should stop all debt recovery action on the client's Centrelink debts (including withholding action).
2. Centrelink should stop all debt recovery action for the period of the bankruptcy; it should also refund any payments/withholdings that it has deducted after the date of bankruptcy and before discharge.
3. Non-fraudulent Centrelink debts are generally extinguished by bankruptcy.
4. Fraudulent Centrelink debts are not extinguished by bankruptcy. Centrelink will recommence withholdings for fraudulent debts when the debtor is discharged from bankruptcy.

(See Secretary, Department of Social Security v Southcott [1998] FCA 323.)

Centrelink overpayments

Centrelink debts are not wiped by bankruptcy if the debt occurred as a result of a consumer's fraudulent behaviour.

In the experience of consumer workers, Centrelink can make incorrect decisions as to what constitutes fraudulent behaviour. As a result of these incorrect decisions by Centrelink, many discharged bankrupts might be repaying Centrelink debts that should have been wiped by the bankruptcy. Dobson; Department of Family and Community Services [2000] AATA 41 indicates that not all overpayment debts are fraudulent.

If a debtor is bankrupting (or has bankrupted) and has a Centrelink debt, they should get advice on:

1. whether there are circumstances to support an application that the debt was not fraudulently incurred;
2. the review processes within Centrelink and the Social Securities Appeals Tribunal in relation to challenging a Centrelink decision to pursue the debt after bankruptcy; and
3. if the debtor has already been discharged from bankruptcy, whether they can apply for a refund of any payments made to Centrelink or taken by Centrelink.

Fines

Section 82 of the Bankruptcy Act states that, with the exception of proceeds of crime orders, penalties or fines imposed by a court in respect of an offence against a law, are not provable in bankruptcy. In Victoria v Mansfield [2003] FCAFC 154 (18 July 2003), the full Federal Court held that parking fines issued by a local council were not provable in bankruptcy. However, the application of the Bankruptcy Act to fines is a complex area of law and legal advice should be sought where a person is considering bankrupting on a fine, as the particular circumstances surrounding the imposition of a fine may impact upon whether or not that fine is extinguished upon discharge from bankruptcy.

Debts resulting from fraud

A debt incurred by fraud, or fraudulent breach of trust, can be provable in bankruptcy, but generally is not extinguished on discharge from bankruptcy (s 153(2)).

Note that there is some case law holding that if a civil judgment has been made in relation to the debt, this might extinguish the debt (Power v Kenny [1977] WAR 87).

After bankruptcy a debtor can apply under section 60(1) to stay an action by the creditor in relation to a fraudulent debt. Such an application, if successful, would have the same effect as extinguishing the debt.

Debts arising from restitution or compensation orders

There are various types of restitution or compensation orders (e.g. Part 16 Sentencing Act 1995 (NT); and sections on pecuniary penalty orders in the Proceeds of Crime Act 2002 (Cth)).

Non-provable orders

Section 82(3A) of the Bankruptcy Act provides that an amount payable under an order made under a proceeds of crime law is not provable in bankruptcy.

Provable orders

The Bankruptcy Act does not categorise other types of restitution orders as being either provable or not provable. In the past it was argued that a restitution order was not provable; however, the court decided in Re Lenske; Ex parte Lenske [1986] 9 FCR 532 that a debt payable under a restitution order is a provable debt. (Note that the debt in Re Lenske was not wiped by the bankruptcy even though it was held to be provable, rather the debtor applied to the court to stay enforcement of the orders insofar as they required payment of restitution.)Deciding whether to cease payment under the order

Before deciding that bankruptcy means that you can cease payment under a restitution order, first get a copy of the order to decide what type of restitution order has been made. Check that:

1. it is not an order made under proceeds of crime legislation;
2. the debtor will not face a criminal penalty or other adverse consequence for failure to pay; and
3. the debtor does not need to apply for a stay of restitution.

Other adverse consequences of non-payment

Even if the order is not one made under proceeds of crime legislation, check to see if the order has any adverse consequences on non-payment. For example, the order might include a condition that breach of the order results in imprisonment; if so, this condition may apply regardless of whether the debtor has bankrupted.

However, note that under section 60(1) of the Bankruptcy Act, the court may exercise discretion to stay any legal process against the debtor, including imprisonment for non-payment of a restitution or compensation order. For examples of cases where the courts have exercised this discretion, see Storey v Lane [1981] HCA 47; [1981] 147 CLR 549; Re Lenske; Ex parte Lenske [1986] 9 FCR 532; and Moore-McQuillan v Scot [2006] FCA 63.

Restitution/compensation orders and fraud

If the restitution order has been made in relation to a fraud, the debt arising under the order might be provable but might not be extinguished after bankruptcy.

Joint debts

Where a debt is in joint names and one debtor is bankrupt, the non-bankrupt debtor, in almost all cases, continues to be liable for the whole of the debt.

Rent

Rent debts are wiped in bankruptcy. However, this does not prevent the landlord from evicting a tenant for non-payment of rent.

Utilities/telecommunications

The practices of different companies vary. The law is that bills relating to the period up to the date of bankruptcy are wiped by the bankruptcy, but the bankrupt will still owe bills relating to the use of these services after the date of bankruptcy. After the bankruptcy, utility and telco companies sometimes open a new account, and require payment of a security deposit, or restrict the service in some way. For example, Telstra may disconnect its service and then reconnect it with a bar on long-distance calls.

HELP debts (previously HECS debts)

On 1 January 2005, the Higher Education Loan Program (HELP) came into effect, incorporating the Higher Education Contribution Scheme (HECS), with changes. On 1 June 2006, existing accumulated HECS debts converted to new accumulated HELP debts. HELP debts that arise under the Higher Education Support Act 2003 (Cth), are not provable in bankruptcy (s 82(3AB) Bankruptcy Act). Accordingly, they may be recovered during and after bankruptcy.

For more information regarding the conversion of HECS debts to HELP debts and its effect on bankruptcy, contact AFSA on 1300 364 785 or the ATO's personal tax information line on 13 28 61.

Leaving Australia

Surrendering passports

Under section 77(1)(a) of the Bankruptcy Act, bankrupts must hand their passport to the trustee unless excused by the trustee. In general, AFSA, if it is the trustee in the bankruptcy, will not require bankrupts to hand in their passports.

Applications for permission to travel overseas

Bankrupts must apply in writing to the trustee for permission to travel overseas and pay a fee to make this application. If AFSA is the trustee, it generally considers the following criteria when deciding whether or not to give permission to travel.

1. Is the travel necessary to earn income?
2. Does the travel relate to the death or serious illness of a close relative?
3. Has the bankrupt made arrangements for making compulsory contributions in advance?
4. Can the bankrupt show that someone else is paying for the travel?
5. Is there a return ticket?

Offences

The Bankruptcy Act creates criminal offences that can arise from the behaviour of the bankrupt before and during bankruptcy. In some cases, this behaviour would not have been considered an offence if the debtor had not bankrupted (e.g. gambling). Prosecution for bankruptcy offences can lead to a prison sentence or a fine.

The Bankruptcy Act defines a number of offences, generally relating to acts of fraud or recklessness, which have led up to the bankruptcy, or which are committed during the bankruptcy. There are generally few prosecutions compared with the number of bankruptcies.

The Bankruptcy Legislation Amendment Act 2010 (Cth) made a number of changes to offence provisions under the Bankruptcy Act, including introducing stronger penalties for some offences.

Types of offences

Offences under the Bankruptcy Act include:

• materially contributing to, or increasing the extent of, insolvency by gambling or rash and hazardous speculation (s 271);
• obtaining, after the date of bankruptcy, credit of $5,409 (indexed) or more without disclosure of the bankruptcy (ss 269(1)(a), 304A(1)(j));
• leaving Australia with intent to defeat creditors, or without obtaining a court order where required;
• incurring, within two years before the date of bankruptcy, a debt without any reasonable expectation of repayment (s 265(8));
• obtaining credit or property by fraud after bankruptcy;
• failing to disclose to a trustee, particulars of any disposition of property made in the two years before the date of bankruptcy;
• disposing of property before bankruptcy with intent to defraud creditors;
• disposing of property after bankruptcy;
• concealing property with intent to defraud creditors;
• failing to deliver up property divisible among creditors;
• failing to attend before the Official Receiver when requested;
• obstructing a person with intent to defeat the seizure of property;
• failing to deliver up books of account and other records;
• failing to comply with a supervised account notice; and
• failing to deposit income into a supervised account.

Penalties

A debtor who has committed an act that is an offence under the Bankruptcy Act and who is considering bankruptcy should check both the maximum penalty for the offence and the probable penalty.

Details of prior prosecutions

The Annual Report by the Inspector-General in Bankruptcy, Operation of the Bankruptcy Act, contains details of prior prosecutions and the penalties imposed. AFSA publishes these annual reports on its website.

Whether a bankrupt is prosecuted for an offence, and the type of penalty imposed, will depend on a variety of factors, including the seriousness of the offence and the extent of the bankrupt's indebtedness.

A debtor need not reject the option of bankruptcy because a potential offence has been committed. Even if convicted, it might be worth paying the penalty in order to be released from the demands of creditors.

Process of going bankrupt

Debtor's petition

Documents to be completed

A debtor who wants to go bankrupt must complete:

1. a debtor's petition for bankruptcy;
2. a statement of affairs; and
3. an acknowledgment that the debtor has read the 'prescribed information'.

Debtors can obtain a Debtor's Petition form containing these three documents from the AFSA office or website (at www.afsa.gov.au).

Filing or 'presenting' the documents

After completing the documents, the debtor needs to either post, or email them to AFSA.

There is no minimum amount that has to be owed before a debtor files a petition for bankruptcy.

When does the debtor become bankrupt?

When the Official Receiver accepts the petition, and allocates a bankruptcy number, the debtor becomes bankrupt. The bankruptcy actually takes effect from midnight of the night before the petition is accepted. The Official Receiver generally accepts the petition on the day it is received or the day after. AFSA usually processes a debtor's petition within 24 to 48 hours.

Assistance to complete documents

Low-income debtors can get free assistance from financial counselling services to complete a statement of affairs. Financial counsellors will also assess whether there are any options available for a debtor other than bankruptcy.

What happens after the documents are sent to AFSA?

Once the debtor is bankrupt, the trustee might ask them to come in for an interview. However, consumer bankrupts with no assets are not usually required to attend a trustee's office for an interview. The trustee might also sometimes ask for copies of contracts and documents relating to the debts, and might require the bankrupt to hand over their passport. Again this is unlikely to happen to a consumer bankrupt with no assets.

Declaration of intention to present a debtor's petition

A debtor may present to the Official Receiver (AFSA) a declaration of an intention to present a debtor's petition. This has the effect of stopping a creditor from taking enforcement action in relation to a debt, which would be provable in bankruptcy, for a period of (21 days). The idea is to allow a debtor and their creditors time to make an arrangement to pay the debts and to avoid the need for bankruptcy.

It is important to note that the presentation of such a declaration is an 'act of bankruptcy' upon which a creditor can petition for bankruptcy if no agreement is reached (s 40(1)(da)). The 21-day stay will not stop:

1. a secured creditor repossessing secured property;
2. a creditor's petition being filed; or
3. a sequestration order being made.

It is conceivable that in many cases the presentation of such a declaration may harm a debtor's position. Therefore, it is recommended that advice be obtained before presenting such a declaration and careful thought be given to the debtor's other options.

Creditor's petition

If a debtor owes $10,000 or more to a creditor, the creditor can enforce the debt by taking bankruptcy proceedings against the debtor. To do this the creditor must file a creditor's petition in either the Federal Court or the Federal Circuit Court.

Act of bankruptcy

At the hearing of the creditor's petition, the creditor must establish that the debtor committed an act of bankruptcy within the six months before the petition was filed in court. An act of bankruptcy is an action of a debtor that shows an inability to pay their creditors. Section 40 of the Bankruptcy Act lists over 20 actions that are considered to be acts of bankruptcy. In almost all cases, the act of bankruptcy used by creditors is a failure to comply with a bankruptcy notice (s 40(1)(g)).

Bankruptcy notices

A creditor who has obtained a court order against a debtor can apply to the Official Receiver for a bankruptcy notice. The Regulations prescribe the form of the bankruptcy notice. Before a bankruptcy notice can be applied for, the final order or orders must be for at least $5,000 and be less than six years old. The bankruptcy notice is attached to a copy of the court order and demands payment of the debt within 21 days of service.

If the debtor does not pay within the time period, they will have committed an act of bankruptcy and the creditor will then be able to file a creditor's petition.

Extending time for compliance

If a bankruptcy notice has been served on a debtor, the debtor can apply to the Federal Court or Federal Circuit Court to extend time for compliance with the notice, as long as:

1. the time for compliance has not expired; and either
2. proceedings to have the judgment or order set aside have been instituted; or
3. an application to set aside the bankruptcy notice has been filed with the Federal Court or Federal Circuit Court (s 41(6A)).

The court will not extend time if it is of the opinion that the proceedings to set aside the judgment or order either:

1. have not been instituted bona fide (with an honest intention); or
2. are not being prosecuted with due diligence.

After the bankruptcy notice has expired

If the debtor fails to comply with the requirements of the bankruptcy notice, an act of bankruptcy has been committed and the creditor can then use this as grounds for petitioning the court for the bankruptcy of the debtor. The creditor can then file a creditor's petition and serve it on the debtor. The petition will contain the date of the bankruptcy hearing.

At the hearing of the petition, the Federal Court or Federal Circuit Court may make a 'sequestration order' (an order giving the trustee control of the debtor's property) and make the debtor bankrupt (s 43).

Contesting the creditor's petition at the hearing

Under the Federal Circuit Court (Bankruptcy) Rules 2006 (Cth), a person who intends to oppose a creditor's petition must file and serve a notice of appearance, a notice stating the grounds of opposition, and an affidavit in support of the grounds of opposition at least three days before the hearing date, or at the hearing with leave of the court (r 2.06). Therefore, it is important to get advice quickly if you have been served with a creditor's petition.

A debtor can sometimes avoid becoming bankrupt by turning up in court on the morning of the hearing for the sequestration order with the money in hand. In such circumstances, the debtor is usually required to prove to the court that they are solvent, for the petition to be withdrawn. The debtor might be required to give evidence to the court or produce an affidavit.

Filing a statement of affairs

Once the court has made the sequestration order, the debtor must file a statement of affairs with the Official Receiver. This must be done in the prescribed form within 14 days of being notified of the bankruptcy and verified by affidavit. A copy must be given to the trustee (s 54).

Examinations of the bankrupt and others

There are three main ways in which a bankrupt can be examined under the Bankruptcy Act. Under two of these procedures, 'other persons' can also be examined.

• Under section 81, the court or a Registrar can at any time, whether before or after the end of the bankruptcy, summons the bankrupt, or an 'examinable person' to be examined in public in relation to the bankruptcy. 'Examinable person' has a very wide definition in section 5 of the Act, including a person who might be able to give information in relation to the bankruptcy.
• Under section 77C, a bankrupt or any other person can be required by written notice to 'give evidence' to the Official Receiver.
• Under section 77(1)(c), the trustee can require a bankrupt to attend a meeting of creditors. (These meetings are not common). The meetings can be held at the request of the creditors or the discretion of the trustee.

Examination under section 77

Section 77 concerns 'duties of the bankrupt as to discovery of property'. Questions should not be put merely for the purpose of showing that the person being examined has committed some offence against the Bankruptcy Act.

It is unlikely that a consumer debtor who has not transferred property within the five years before the commencement of the bankruptcy would be examined.

If the trustee detects evidence indicating that the bankrupt might have committed an offence under the Bankruptcy Act, the trustee might refer the matter to the Bankruptcy Fraud Investigation section within AFSA. If the Fraud Investigation section believes that the offence can be substantiated, the matter will be referred to the Director of Public Prosecutions. The public prosecutor will then decide whether to proceed with the prosecution.

Under section 77C, any person can be required to attend before the Official Receiver and give evidence and produce documents relating to any matters connected with the performance of the functions of the Official Receiver or a trustee under the Bankruptcy Act.

Section 77C does not specifically allow a person who is examined to be represented by counsel or by a solicitor. However, section 77C is based on section 264 of the ITAA 1936, and the case law on section 264 seems to assume that the person who is examined is entitled to have representation. Therefore, it is arguable that a court would hold that a person would also be entitled to representation under section 77C. AFSA generally allows a person who is examined to be represented by a lawyer, and again it is recommended that anyone who is summonsed should obtain representation.

Examination under section 81

Under section 81 of the Bankruptcy Act, the Registrar or the court might summons the bankrupt or a person associated with the bankrupt for a public examination of the bankrupt for a number of reasons. There might, for example, be a suspicion that assets have been hidden or that an offence has been committed. Either a creditor, the trustee or the Official Receiver might apply to the court to summons the bankrupt for an examination.

At the public examination the trustee or a representative, such as a barrister, questions the bankrupt. A creditor is allowed to ask questions of the bankrupt, provided that the Registrar is satisfied that the questions are relevant. The court or the Registrar of the Federal Court hears the examination. If the Registrar or the Court thinks fit, a magistrate might hear the examination.

The examination might be held for the purpose of obtaining further details of the bankrupt's assets, or of the bankrupt's and present affairs, or to ascertain whether the bankrupt has committed an offence.

A person who is summonsed for an examination is entitled to be represented by counsel or by a solicitor. As the transcript of the public examination might be admissible in evidence in other proceedings, it is recommended that anyone who is summonsed obtain representation.

When does bankruptcy end?

Automatic discharge

Bankruptcy usually lasts for three years after the date the bankrupt files the statement of affairs. The discharge is automatic unless the trustee files an objection to the discharge and the objection has 'taken effect' (see Objections to discharge).

Early discharge

The early discharge provisions of the Bankruptcy Act were abolished for debtors who became bankrupt on or after 5 May 2003.

Objections to discharge

Either the Official Receiver or the trustee can file a written objection to discharge of the bankruptcy. If the objection 'takes effect', the bankruptcy will be extended to either five or eight years, depending on the grounds for objection. The objection will take effect as soon as it is filed with the Official Receiver and entered on the NPII. The objection ceases to have effect if the trustee or Official Receiver withdraws the objection.

The grounds on which an objection can be lodged are detailed in section 149D of the Bankruptcy Act.

Extension of bankruptcy to eight years

Some of the grounds on which the period of bankruptcy can be extended to eight years are:

1. failing to pay compulsory income contributions;
2. failing to provide details of property or income; or
3. failing to disclose a liability that existed before the date of bankruptcy.

Extension of bankruptcy to five years

Some of the grounds of objection on which the period of bankruptcy can be extended to five years are:

1. failing to notify the trustee of a change of address;
2. failing to disclose all debts and creditors; or
3. failing to attend an interview.

Failure to disclose particulars of debts and creditors does not have to be deliberate in order for an objection to take effect. It is important to give accurate details of all debts when filing the statement of affairs.

A bankrupt can apply to the Inspector-General or to the AAT to review a decision in relation to an objection to discharge.

Annulment

A bankruptcy can be annulled if:

1. a bankrupt pays all debts in full, including interest and fees owing to the trustee; or
2. the bankrupt makes an offer to pay their debts which is accepted by creditors and approved by the court; or
3. the court is satisfied that a sequestration order ought not to have been made or a debtor's petition ought not to have been presented (s 153B).

The bankrupt's obligations after discharge

In general, a discharged bankrupt is not released from, and continues to be liable to pay, the following debts:

1. debts incurred after the commencement of the bankruptcy;
2. debts incurred by fraud;
3. maintenance arrears (subject to a court order to the contrary);
4. non-provable debts such as unliquidated damages, HELP debts, etc.;
5. income contributions due during the bankruptcy; and
6. some criminal penalties, such as payments due under good behaviour bonds.

The bankrupt is otherwise released from any obligation to pay provable debts on discharge, although secured creditors maintain the right to seize and sell any secured property.

A discharged bankrupt is still required to give assistance under section 152 to the trustee in the realisation and distribution of property vested in the trustee.

Other procedures under the Act

Part IX debt agreements

Under part IX of the Bankruptcy Act, a debtor can enter into a binding debt agreement with their creditors as an alternative to bankruptcy. The number of part IX debt agreements being entered into has increased rapidly over recent years, as a result of heavy marketing by debt agreement administrators.

Reforms to part IX agreements

For many years, financial counsellors and other community workers who work with people on low incomes raised concerns about debt agreements actually worsening a debtor's situation, particularly when private firms administer agreements. These concerns related to the lack of regulation and expertise of debt administrators, the charging of large fees by administrators, and proposals often being unsustainable due to payments being set too high, and agreements generally being of no benefit to debtors. The Bankruptcy Legislation Amendment (Debt Agreements) Act 2007 (Cth) made a number to changes to part IX to try to address these concerns.

WARNING: A debtor should get independent advice (from a financial counsellor if they are on a low income) on all their options before entering into a part IX debt agreement. Other options available to debtors might include applying for a hardship variation through the various Ombudsmen, making an informal arrangement with creditors, voluntary bankruptcy, disputing the legality of a debt, selling assets to pay the debts or doing nothing at all.

Advantages

Some of the benefits of entering into a debt agreement are:

• all the protection of bankruptcy, such as staying enforcement action against provable debts, relief from harassment, etc.;
• release from debts that would be provable in a bankruptcy if the debtor satisfies all the obligations under the debt agreement;
• unlike an informal agreement to settle debts, a debtor does not have to get all creditors to agree to a debt agreement proposal; and
• it might be possible to keep a house, however be very cautious here as if the payments under the agreement are too high, then you may fall into arrears on your mortgage and the house will be repossessed and sold anyway.

Disadvantages

Some of the disadvantages of debt agreements are:

• lodging a debt agreement proposal, acceptance of the agreement and breaching or terminating the agreement are all acts of bankruptcy. Therefore, a creditor may seek to bankrupt a debtor where the Official Receiver or creditors reject a proposal, or a debtor breaches or terminates the agreement;
• the debtor's details will appear on the NPII from the time that the debt agreement proposal is accepted by AFSA to send to creditors;
• the debtor's ability to obtain credit may be affected. Details of the debt agreement may be recorded on the debtor's credit file for up to seven years; and
• fees charged by administrators can be expensive.

Other concerns with debt agreements include:

• a debt agreement may be detrimental to a debtor's interests if other ways of settling a debt are not considered (e.g. negotiating informally with creditors, or applying to have the debt waived due to the creditor's unconscionable conduct, etc.); and
• a debt agreement may be of no practical benefit for a debtor (i.e. their credit report is still adversely affected and they still have to make payments from their income that they may not be able to afford).

Complaints against debt agreement administrators

Debt agreement administrators who administer more than five debt agreements are required to be registered under the Bankruptcy Act. An administrator's registration can be cancelled if they are unable or fail to properly carry out their duties.

If you have a concern about a debt agreement administrator you can lodge a complaint with AFSA's Regulation and Enforcement branch.

Practice

Step 1: Is the debtor eligible to enter into a debt agreement?

A debtor is eligible to enter into a debt agreement if:

A debtor is eligible to enter into a debt agreement if:

1. the debtor is insolvent (unable to pay debts as and when they fall due);
2. the debtor's unsecured debts are more than $137,537.40, and equity in divisible property do not exceed $ 275,074.80 (indexed);
3. the debtor's after-tax income in the 12 months after the beginning of the agreement is not likely to be more than $ 103,153.05 (indexed); or
4. the debtor in the past 10 years has not been a bankrupt or a party to a debt agreement, or given a part X authority.

Step 2: Lodging a proposal with the Official Receiver

To commence a part IX agreement, the debtor, or their agent, gives a debt agreement proposal, an explanatory statement and a statement of affairs to the Official Receiver within 14 days of the documents being signed. A financial counsellor may be able to help a debtor to draft the proposal.

If it is proposed that an administrator is to administer that agreement, then they must certify that, amongst other things, they have reasonable grounds for believing:

1. that the debtor is likely to be able to meet their obligations under the proposal; and
2. that all the information required in the statement of affairs and explanatory statement has been set out.

Step 3: The Official Receiver considers the proposal

The Official Receiver then assesses whether or not the proposal contains all the required information and whether or not the debtor is eligible to enter into a debt agreement.

Step 4: The Official Receiver asks the creditors to respond to the proposal

Once the Official Receiver is satisfied that the proposal complies with the Bankruptcy Act, they will then write to the creditors and ask them to respond to the proposal (s 185EA). If a majority in value of the creditors who reply to the proposal accept it, then the proposal becomes binding on all creditors (s 185EC). Where a creditor holds property as security, the value of their debt for the purpose of voting on the proposal is deemed to be the amount by which the debt exceeds the value of the secured goods.

Content of a debt agreement proposal

Section 185C(3) provides that a debt agreement proposal can provide for any matter relating to the debtor's financial affairs. Examples of what can be included in a proposal are:

• payment of less than the full amount of all or any of the debts;
• instalment payments; and
• a moratorium on payment of debts.

The formal requirements of the debt agreement proposal are specified in section 185C of the Bankruptcy Act and include, among other things, that the proposal must:

1. identify the property that is being dealt with under the agreement (e.g. motor vehicle, future income, money in bank);
2. specify how the property is to be dealt with;
3. authorise the Official Trustee or another specified person to deal with the property.
4. provide that all provable debts in relation to the agreement rank equally and if the total amount paid by the debtor under the agreement is insufficient to meet those provable debts in full, those provable debts are to be paid proportionately;
5. provide that a creditor is not entitled to receive, in respect of a provable debt, more than the amount of the debt;
6. must not provide for the transfer of property (other than money) to a creditor; and
7. if the agreement provides for the remuneration of the administrator of the agreement, the remuneration must be specified and must be expressed as a fixed percentage of the total amounts payable by the debtor under the agreement in respect of the provable debts. The administrator is entitled to take as remuneration the specified percentage of each payment made by the debt.

NOTE: For further information about the formal requirements of a part IX agreement, visit the AFSA website (www.afsa.gov.au).

Varying a debt agreement

A debtor or creditor can put a written proposal in an approved form to the Official Receiver to vary a debt agreement (s 185M). The agreement will be varied if the majority in value of the creditors accept the variation proposal. The procedure for varying the proposal is the same as the procedure for accepting the original debt agreement proposal.

Ending a debt agreement

A debt agreement will generally end when all obligations under the agreement have been satisfied. A debt agreement can also be terminated if:

1. a debtor puts a proposal to terminate the agreement to the Official Receiver and this is passed by the creditors in the same way as a debt agreement is passed (s 185P); 1 a court order is made after an application by a debtor, creditor or the Official Receiver (s 185Q); 1 the debtor fails to make a payment under the agreement for a continuous period of six months (s 185QA); 1 the debtor failed to complete the agreement within six months of the time specified in the agreement for its completion (s 185QA); or 1 the debtor becomes a bankrupt.

As mentioned above (see Disadvantages), termination of a debt agreement constitutes an act of bankruptcy by the debtor and may be used by creditors to bankrupt the debtor (s 40(hd)).

Personal insolvency agreements under part X

Personal insolvency agreements provide a way for high-income earning debtors to put a proposal to creditors to settle outstanding debts. The Bankruptcy Legislation Amendment Act 2004 (Cth) introduced a new unified arrangement known as a 'personal insolvency agreement', designed to streamline the system.

Personal insolvency agreements must be accepted by a special resolution of creditors before they are binding. A special resolution means a resolution passed by a majority in number and at least 75% in value of the creditors present (personally, by telephone, by attorney or by proxy) at a meeting of creditors and voting on the resolution.

Under a personal insolvency agreement a debtor can make various arrangements with their creditors in return for a release from all debts. Such arrangements include:

• assigning all property to a trustee to be sold;
• arranging to pay some or all debts; and/or
• arranging for someone else to carry on the debtor's business or for the debtor to carry on the business under supervision.

Personal insolvency agreements are usually organised by registered trustees. The AFSA website (www.afsa.gov.au) has a list of all registered trustees in Northern Territory, and their contact details. You can get quite a bit of free advice before starting the personal insolvency agreement process, as many registered trustees will give some free initial telephone advice and will also give a first free 30-minute consultation.

Part X procedures are often of little relevance to low-income earners who do not have the financial resources to bargain for an agreement. Furthermore, it will be necessary for the debtor to pay fees to a registered trustee for part X procedures. The payment of the trustee's fees is in fact the first matter on the agenda at the meeting of creditors, who must agree to the payment of fees.