Last updated 30 November 2022
There are two main ways a debtor may become bankrupt:
- voluntarily—a debtor becomes bankrupt when their debtor’s petition is filed with the Official Receiver of the Australian Financial Security Authority (AFSA) and accepted
- through a court order—a debtor becomes bankrupt when a sequestration order is obtained by a creditor.
To become bankrupt voluntarily, a debtor must fill out two forms:
These forms are available from the AFSA. On the statement of affairs, the debtor must show all debts owed to creditors. The debtor becomes bankrupt when the Official Receiver accepts the debtor’s petition. This will only occur if the statement of affairs is also adequately completed.
Bankruptcy by a creditor
In order for a creditor to obtain a court order making a person bankrupt, that creditor must go through a number of steps. These steps include showing that the debtor:
- owes a debt of at least $5000 and
- has committed an act of bankruptcy in the six months before the filing of a creditor’s petition.
Section 40 of the Bankruptcy Act 1966 (Cth) sets out a long list of conduct by which a debtor may commit an ‘act of bankruptcy’. Failure to comply with a Bankruptcy Notice is the conduct that is most commonly relied upon as the act of bankruptcy.
If the creditor satisfies the court that at least one act of bankruptcy has occurred, the court may make a sequestration order (an order for bankruptcy) against the estate of the debtor. Once the sequestration order is made, the debtor becomes bankrupt and continues to be until they are discharged or the bankruptcy is annulled.
How long does bankruptcy last
A bankruptcy usually lasts for three years and a day from the date on which the bankrupt files their statement of affairs with the AFSA.
At the end of this time the bankrupt is discharged, unless the trustee has objected and extended the bankruptcy to either five or eight years as a result of misconduct by the bankrupt.
The most common reason why bankruptcy is extended beyond the three-year period is failure to cooperate with the trustee by disclosing all of the bankrupt’s debts and assets, or non-payment of income contribution assessments.
Can bankruptcy be ended
In some cases, a bankruptcy can be brought to an end by annulment (cancellation).
The bankrupt’s trustee can issue a certificate of annulment if and when the bankrupt’s:
- debts and the bankruptcy’s administration fees and expenses have been paid in full
- offer of composition or arrangement to settle for a lesser sum has been accepted by the creditors
- application to the court to have the bankruptcy annulled was successful.