Last updated 30 November 2022
Advantages of bankruptcy
Going bankrupt removes the immediate pressure of dealing with individual creditors as all creditors must communicate and lodge their claims with the trustee rather than directly with the debtor. Most unsecured creditors are not permitted to take any legal or other action to recover or enforce any claim against the debtor or their property for debts incurred prior to the debtor becoming bankrupt.
The rights of secured creditors (e.g. banks with mortgage) are not affected.
Disadvantages of bankruptcy
Except for a very restricted range of items, property of a bankrupt at the date of bankruptcy or acquired during the bankruptcy is collected and sold by the trustee.
Banks, building societies, credit unions and other financial organisations must inform the bankrupt’s trustee when they become aware that an undischarged bankrupt has an account with them, unless they are satisfied that the account is on behalf of some other person.
Payments must not be made out of that account without written instructions from the trustee.
A public record
The record of bankruptcy is added to a register, which can be accessed by the public. The Australian Financial Security Authority (AFSA) maintains a computerised database (the National Personal Insolvency Index (NPII)) on which all insolvency proceedings under the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) are recorded. If a debtor becomes bankrupt that will be a permanent record on the NPII. The public can access the NPII for a fee.
However, if a debtor or bankrupt believes that publishing their address and/or occupation on the NPII may put their safety at risk, they may apply to have their address and/or occupation suppressed. An application to have information suppressed must be made in writing to the Inspector-General.
The statement of affairs of the bankrupt, apart from the confidential Part A, can be searched by the public for a fee, and by a creditor without charge. Searches of the NPII database can be conducted through AFSA’s Bankruptcy Register Search or via an index search agent. Credit reporting businesses also record details of bankruptcies.
A bankrupt must deliver to the trustee all documents and papers in their possession that might relate to any of their business dealings, property and financial affairs.
Transactions, gifts or transfers of property that took place particularly during the past five years will be examined, and the trustee may seek to have certain transfers set aside resulting in the trustee taking the property for the benefit of the creditors.
The bankrupt may be made to appear at a public examination. Members of their family and their associates may be questioned concerning the bankrupt’s financial affairs to help identify property that may be recovered by the trustee for the benefit of creditors.
The bankrupt’s trustee will decide if the bankrupt must answer questions in front of either the Official Receiver or a court.
Income earned during bankruptcy
If the bankrupt earns above a threshold, the Bankruptcy Act imposes a liability on the bankrupt based on their income after tax and a formula in the Bankruptcy Act (s 139S Bankruptcy Act). They must make regular payments of the assessed amount to the trustee for the benefit of the creditors. the current threshold amount can be obtained from the AFSA’s website.
If the trustee informs the bankrupt of their contribution assessment and the bankrupt fails to make payments, the trustee is able to ask AFSA to use its powers to deduct those contributions directly from the bankrupt’s wages or other sources of income. It is an offence for an employer to dismiss a bankrupt because the employer is required to deduct amounts from the employee’s pay (s 139ZP Bankruptcy Act).
Approval needed to travel overseas
A bankrupt may be required to deliver their passport to the trustee and may not be permitted to travel overseas without the trustee’s permission.
Borrowing money—notification of potential creditors during bankruptcy
A bankrupt must not incur credit above an amount fixed by law or draw a cheque for more than that amount without first disclosing that they are an undischarged bankrupt. The current amounts referred to can be obtained from the AFSA’s website.
Prohibition on managing a company
The bankrupt is prohibited from managing a company without the permission of a court (s 206B Corporations Act 2001 (Cth)).
A bankrupt’s credit rating will be affected.
Who would benefit most from bankruptcy
Although there are significant disadvantages in becoming bankrupt, bankruptcy may be the most suitable course of action for some people. These people include:
- low-wage earners, especially those with large families, pressing debts or special expenditure requirements, such as a sick or disabled family member
- single parents who do not own a house, whose household goods have been purchased on credit (but not subject to a bill of sale), who are receiving a supporting parent benefit or pension, who are being harassed by their creditors and who are unlikely to earn any other income in the near future
- estranged spouses/partners who have debts of their own and who are otherwise in the same position as the single parents just described, although many debts for household goods may also be the responsibility of the other spouse
- pensioners (unless they own a house or goods other than household goods).