A person is legally insolvent if they are unable to pay their debts as and when they fall due.
A person may become bankrupt in one of two ways.
- They may bankrupt themselves by filing and lodging a debtor’s petition and a Statement of Affairs with the Official Receiver
- A person may be made bankrupt by the Federal Court on the application of one of their creditors through a Creditor’s Petition. A creditor obtains a judgment on their debt and serves a Bankruptcy Notice on the debtor. If the debtor does not pay the debt before the expiry of the bankruptcy notice, the creditor may file a creditor’s petition with the Federal Court seeking a sequestration order bankrupting the debtor
A debtor who may own sufficient assets to cover their debts but is unable to liquidate them and pay the debts, may also be bankrupted. The Official Receiver has the discretion not to accept a debtor’s petition if they believe the debtor is solvent and could satisfy their debts.
- not act as a company officer;
- trade under a registered business name without advising people that they are bankrupt (they can trade under their own name);
- make all of their assets available to the Trustee;
- not incur credit over an indexed amount without advising the lender that they are bankrupt;
- surrender their passport and must seek permission for overseas travel; and
- make all books and records and financial statements available, including ALL associated entities such as companies and trusts.
A bankrupt may continue to earn income and if income earned during the bankruptcy exceeds certain indexed threshold limits, the bankrupt will have to pay a contribution from that income to the estate. Income under these provisions includes personal income, certain benefits provided by third parties and income from superannuation or trusts.
The bankrupt may be re-bankrupted by the Trustee for non-payment of contributions.
Impact on Property
All of a bankrupt’s property is controlled by the Trustee. This includes all property the bankrupt owned when he or she was bankrupted and all property received after the date of bankruptcy but before discharge.
Some property is not divisible and includes the following:
- Necessary clothing and household items
- Tools of trade to an indexed amount
- A motor vehicle to an indexed amount
- Life assurance or endowment policies (subject to some limitations)
- Certain damages and compensation payments
- Sentimental property as defined in the Bankruptcy Act
- Superannuation payments, subject to certain limitations
The Trustee will look at any sales or transfers of property that occurred within the five years before the bankruptcy. If these transactions appear improper, that property or its value may be recovered from the recipient.
The Trustee may also recover monies from creditors who may have received preferential payment of their debts in the six months before the bankruptcy.
The Trustee of a bankrupt estate may have his or her name placed on the title deed in place of the bankrupt. The Trustee will usually invite the co-owner of the property to either buy the bankrupt’s interest or join in selling the property. If the co-owner will not cooperate with the Trustee or they cannot agree on a satisfactory arrangement, the Trustee can force the sale of joint property.
A Trustee may recover any property that a bankrupt has given or sold to a trust at less than its true value. The Trustee will also receive any monies that may be owed to the bankrupt by a trust in the form of a loan or outstanding entitlements, and receive any distribution due to the bankrupt.
The bankruptcy is discharged three years after the date on which the bankrupt files his or her Statement of Affairs. The conduct of the estate may continue for some time thereafter.
The period of bankruptcy may be extended for an additional five years. This may happen if the bankrupt fails to cooperate with the Trustee, leaves Australia without permission, manages a company without the leave of the Court, or engages in misleading conduct.
A bankruptcy may be annulled. An annulment is the cancellation of the bankruptcy and reinstatement of the affairs of the debtor as if no bankruptcy had occurred. An annulment can be obtained.
The Trustee has the power to sell any divisible asset of the bankrupt, investigate the affairs of the bankrupt and examine the bankrupt and others under oath, conduct and sell any business of the bankrupt, admit debts and distribute dividends. The Trustee is empowered to exercise all of the rights and powers that the bankrupt would have had if they had not become bankrupt, plus has recovery powers that the bankrupt would not have.