Last updated 5 September 2016
A debtor’s bankruptcy is handled by a registered trustee who has agreed to administer the bankruptcy or, where no registered trustee agrees to do so, by the Australian Financial Security Authority (AFSA).
When a debtor becomes bankrupt, the trustee becomes the legal owner of all of the debtor’s property with some exemptions. The trustee has wide powers to deal with or dispose of the bankrupt’s property for the benefit of creditors.
Property includes anything of monetary value belonging to the bankrupt at the date of the bankruptcy or coming into the bankrupt’s possession during the bankruptcy. The AFSA publishes a quick guide of what assets a debtor is allowed to keep and what will be taken, including:
- property that once belonged to the bankrupt where it can be shown that the bankrupt sold, transferred or gave it to other persons such as family members or a trust, in certain circumstances if that took place within five years of the person becoming bankrupt
- property disposed of with an intent to defeat creditors and not for an adequate value at any time before the person becomes bankrupt
- property transferred within six months of the person presenting their own debtor’s petition or a creditor filing a creditor’s petition, without intent to defraud, to pay one creditor ahead of other creditors at a time when the debtor, although not yet bankrupt, was unable to pay all their debts
- contributions to superannuation funds made prior to bankruptcy, either by the bankrupt or a third party with the intent to defeat the interests of the bankrupt’s creditors.
When assessing whether property is exempt property, the trustee must have regard to the number and ages of members of the bankrupt’s household and any special health, medical or other needs of any of those members. The trustee must also have regard to whether the costs of seizure, storage and sale of the property would be likely to exceed the sale price of the property.
Interest in a house
A bankrupt’s interest in a house is not exempt. The trustee may take possession of it and sell it.
If the home is jointly owned by a married or de facto couple and the joint owner does not agree to a sale, the trustee is entitled to obtain an order from a court for the sale of the home.
The proceeds of sale are first paid to discharge any money owing to the financier and any other creditor holding a security registered over the home.
Any remaining proceeds are then divided between the trustee for the bankruptcy and the spouse/partner who is not bankrupt.
Companies and trusts
Companies and trusts in which the bankrupt has an interest, even indirectly, may be ordered by the court to pay an amount of money to the trustee which is equal to the value the court assesses to be the bankrupt’s interest.
Property acquired by the bankrupt during bankruptcy
During the bankruptcy, the trustee has the power to take money or other items that the bankrupt receives such as gifts, lottery winnings or money received under a will. If the bankrupt manages to save money and purchases some property, this also may be claimed by the trustee. Savings from income should be kept separate if the bankrupt is paying income contributions on their assessed income.
Jointly owned property
When one joint owner becomes bankrupt, the trustee will generally become registered, as quickly as possible, as a joint owner of the house in place of the bankrupt person.
If the difference between the debt to the financier of the house and the likely sale price is small, it is sometimes possible for the other joint owner (if not also bankrupt) to purchase the bankrupt’s interest.
Even though the trustee is registered as a joint proprietor, they will not be liable to make any payments under a mortgage, and registration of the trustee as a joint owner does not prevent the mortgage payments falling into arrears. If this happens, the mortgagee may exercise their legal rights against the property with the result that it may be sold by the mortgagee.
A trustee may not usually sell a home mortgaged to the Defence Service Homes because, under the Defence Service Homes Act 1918 (Cth), permission will only be given for a sale where there is misconduct by the bankrupt.
What fees and charges apply?
Bankruptcy trustees generally charge by the hour and debt agreement administrators charge a percentage of payments made by debtors.
There are no filing fees for bankruptcy at the AFSA but there are filing fees for submitting a debt agreement proposal or Part X application (personal insolvency agreement).
There is a charge payable to the government calculated as a percentage of the total receipts in a bankruptcy, Part X agreements and Part IX debt agreements (known as a realisations charge).
The realisations charge is used to pay for regulation of the personal insolvency system and preliminary inquiries into bankruptcies by the Official Trustee (AFSA).
The costs of administering a bankruptcy are usually taken from money received in the debtor’s bankruptcy.
In most cases this comes from selling the debtor’s property and from contributions the debtor may be required to make from their income.