Personal Bankruptcy FAQ’s
Depending on your circumstances, NR Consulting may be able to help get you out of your sticky situation or in some cases Personal Bankruptcy can be a great choice for you. This can help reduce the stress associated with outstanding monies owed to creditors and lenders, and give you some time to adjust your lifestyle to suit your means. Once you have grounded yourself and removed the stress, you would be surprised to learn how fast you can get back on track.
What is bankruptcy?
Bankruptcy is a legal process where a trustee is appointed to administer a person’s affairs so as to provide a fair distribution of that person’s assets to their creditors. Bankruptcy occurs when a person is insolvent and either they make themselves bankrupt, or one of their creditors bankrupts them through the courts. It is a legitimate and just way for a debtor to solve their debt problems, and is the correct way for creditors to take action against someone for unpaid debts.
Why choose bankruptcy?
The Bankruptcy Act has been developed for the protection of both debtors and creditors.
A bankrupt is protected from being pursued by his or her creditors and, with limited exceptions, is released from his or her debts at the conclusion of the bankruptcy. It gives a person a fresh start on their discharge from bankruptcy.
Bankruptcy protects the interests of creditors by having an independent person control and investigate the affairs of the bankrupt, and oversee the collection and distribution of the bankrupt’s assets.
How does a person become bankrupt?
A person may become bankrupt in one of two ways.
They may bankrupt themselves on their own application by filing both a Debtor’s Petition and a Statement of Affairs with the Official Receiver. This process is referred to as lodging a debtor’s petition.
A person may be made bankrupt by the Federal Court on the application of one of their creditors through what is called a Creditor’s Petition. In most instances, a creditor must have obtained a Judgment on their debt and have served a Bankruptcy Notice on the debtor, giving the required statutory period for the debtor to pay the Judgment debt. If the debtor does not pay the debt, the creditor files a Creditor’s Petition with the federal Court seeking a Sequestration Order against the debtor.
Can a debtor be made bankrupt if their assets exceed their debts?
Yes. If someone is unable to pay their debts as and when they fall due, they are legally insolvent. If a debtor owns sufficient assets to cover his debts but is unable to liquidate them to actually pay those debts, they are insolvent and may be bankrupted. The Official Receiver has the discretion not to accept a debtor’s petition if they believe that the debtor is solvent and could satisfy their debts with a little effort.
What is a Statement of Affairs?
A Statement of Affairs is a document completed by all bankrupts that sets out their personal and financial information.
How does bankruptcy affect someone?
(i) can’t act as a company officer; (ii) can’t trade under a registered business name without advising people that they are bankrupt (they can trade under their own name); (iii) must make all of their divisible assets available to the trustee; (iv) can’t incur credit over an indexed amount without advising the lender that they are bankrupt; (v) must surrender their passport(s) and will have limitations on overseas travel; and (vi) must make all books and records and financial statements available, including those of associated entities such as companies and trusts.
Can a bankrupt continue to earn income?
Yes, a bankrupt may continue to earn income and is encouraged to do so.
Does any of this income need to be paid to the estate?
If income exceeds certain indexed threshold limits, the bankrupt will have to pay a contribution from that income to the estate. Income includes personal income, certain benefits provided by third parties and income from superannuation or trusts. The level of income assessed is reduced by the income tax payable on the income, legitimate business expenses (where appropriate) and certain child support payments.
What if the contribution is not paid?
The liability to pay this contribution to the estate survives beyond the discharge of the bankruptcy and can be enforced by the trustee. The trustee may garnishee the bankrupt’s wages or use the supervised account regime to collect contributions. The bankrupt may be re-bankrupted for non payment of contributions.
How does the bankruptcy affect property?
All of a bankrupt’s divisible property is controlled by their trustee. Property includes all property of the bankrupt at the commencement of the bankruptcy and all property received after the date of bankruptcy but before discharge.
Is all property lost in a bankruptcy?
No. Some property is not divisible. Divisible property (i.e. property that can be divided amongst creditors) does not include the following:
(i) Necessary clothing and household items; (ii) Tools of trade to an indexed amount; (iii) A motor vehicle to an indexed amount; (iv) Life assurance or endowment policies (subject to some limitations); (v) Certain damages and compensation payments; (vi) Sentimental property (as defined in the Bankruptcy Act); (vii) Superannuation payments (subject to certain limitations).
Can the trustee recover property that was sold before the bankruptcy?
Maybe. 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, undervalued, or to have had the purpose of attempting to defeat creditors, that property or its value may be recovered from the recipient. The trustee may also recover monies from creditors who may have received payment of their debts in the six months before the bankruptcy. Such payments are commonly referred to as preferential or preference payments.
How does bankruptcy affect jointly owned real property?
The trustee of a bankrupt estate is entitled to have his or her name entered on the title deed in place of the bankrupt (entering transmission). 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 by applying for the appointment of a Statutory Trustee over the property.
Can a bankruptcy affect a family trust?
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. Usually the trustee of a discretionary trust will not make distributions to someone while they are bankrupt. Trustees of unit trusts will not have that discretion.
How are creditors affected?
At the time a person is made bankrupt, creditors exchange their right to enforce their claims for a right to prove in the bankrupt estate for a dividend. All creditors with present or future, or certain or contingent claims at the date of bankruptcy can prove for a dividend. Some debts (including any debts incurred after the bankruptcy started) are not released by the bankruptcy and generally cannot be proved in the estate.
What rights to secured creditors have?
The bankruptcy does not affect the rights of secured creditors. They can enforce their charges or securities and prove for any deficiency in the estate. There are special provisions on how secured creditors may prove for shortfalls before the secured assets have been sold. These are detailed on another Fact Sheet.
What are non-provable debts?
Certain debts cannot be claimed in the bankruptcy. Non-provable debts cannot be proved and will not be released at the end of the bankruptcy. These debts include:
(a) Some portion of a HECS debt;
(b) Court imposed fines; and
(c) Maintenance Agreements under the Family Law Act;
Full details of provable debts are set out in section 82 of the Bankruptcy Act.
Can the trustee pay dividends?
Yes. Ultimately the role of the trustee is the distribution of the bankrupt’s assets to the creditors.
Are the dividends paid under certain priorities?
Yes. The Bankruptcy Act sets out certain priorities for the payment of dividends. Some payments and certain debts need to be paid before dividends are paid to unsecured creditors.
When does bankruptcy end?
The bankruptcy period automatically ends (the bankrupt is discharged) three years after the date on which the bankrupt files his or her statement of affairs.
Can a bankruptcy be extended?
Yes. A period of bankruptcy may be extended by the trustee for a period of either two or five years by lodging an objection to discharge. 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 in relation to an amount over an indexed sum.
What is an annulment of a bankruptcy?
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:
(a) by an Order of the Court on the basis that the bankruptcy should not have occurred; (b) by the bankrupt’s debts and the costs of the administration being paid in full; or (c) by a proposal under section 73 being accepted by creditors.
Who looks after a bankrupt estate?
When a person is made bankrupt, a trustee in bankruptcy is appointed to administer the bankrupt’s estate – made up of their assets, business interests and debts. The trustee is an appropriately qualified and registered specialist accountant who is either an officer of the Federal Court (a registered trustee) or a top public servant (the official receiver).
Who chooses the trustee?
A debtor presenting a debtor’s petition or a creditor filing a creditor’s petition can obtain a consent from a trustee to become the trustee of the estate. If no consent is obtained, the official receiver will be the trustee.
What is the trustee’s role?
The trustee’s role is to collect and sell the bankrupt’s assets, conduct appropriate investigations to determine whether there are further assets available, and distribute a dividend to bankrupt’s creditors.
What are the trustee’s powers?
The trustee has the power to sell any divisible asset of the bankrupt, investigate the affairs of the bankrupt and exam 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 does not have.
What does the trustee do?
In summary, the trustee will:
(a) find and protect the assets of the bankrupt;
(b) realize those assets;
(c) conduct investigations into the financial affairs of the bankrupt and any suspicious transactions;
(d) make appropriate recoveries;
(e) report to creditors;
(f) report offences to ITSA; and
(g) distribute surplus funds to creditors.
Can a trustee be changed?
Yes. The Bankruptcy Act allows the trustee to be changed. There are two ways of doing this.
- The creditors may change the trustee by voting for a change. This may occur at any time and for any reason. 2. The Court may replace a trustee if it is convinced that it is proper to do so. This usually only happens if the trustee has done something wrong, and the Court forms the opinion that a new trustee needs to take over the estate.
A replacement trustee is also appointed if the current trustee dies or retires etc.
Government Charges (ARC and IRC)
Bankrupt estates attract a government charge. This charge is payable at the rate of 3.5% of gross monies received into the estate, less payments to secured creditors, trade on costs and other minor amounts. Monies held by trustees for an estate must also be held in interest bearing accounts with any interest earned being payable to the government.
Do I have to go bankrupt if my company is liquidated?
No. The company and yourself are different entities.