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Getting Out of Bankruptcy

How does a bankruptcy normally end?

A bankruptcy usually ends with the discharge of the bankrupt. This signifies the end of the legal process against the bankrupt. The bankrupt or trustee need do nothing to obtain a discharge, it is purely an operation of the Bankruptcy Act. The bankrupt estate may continue after discharge and the discharged bankrupt may have some ongoing obligations, but they will no longer be "bankrupt".

When is a bankrupt discharged?

A bankrupt is automatically discharged 3 years after their Statement of Affairs is filed with ITSA (Insolvency and Trustee Service Australia) - unless an Objection to the Discharge has been filed by the trustee. Objections to discharge are discussed on another Fact Sheet.

If the bankruptcy was started by a debtor's petition, the Statement of Affairs would have been filed with the debtor's petition and the bankruptcy will end 3 years after acceptance of the debtor's petition.

If the bankruptcy was started by a sequestration order (an Order of the Court), the Statement of Affairs would not be filed at that time. The bankrupt will have to complete a Statement of Affairs and send it to the trustee to file. The bankruptcy will end 3 years after the filing of the Statement of Affairs. The longer it takes for the bankrupt to send their Statement of Affairs to the trustee, the longer the bankruptcy will continue. If the Statement of Affairs is never filed, the bankruptcy will continue until the death of the bankrupt.

Can a bankrupt get out of bankruptcy before discharge?

Yes. The bankruptcy may be annulled.

What is an annulment?

An annulment is a complete undoing of the bankruptcy, as if the bankruptcy never happened. It will still appear on the public record, but as an annulled bankruptcy.

How is a bankruptcy annulled?

An annulment can only happen if the bankrupt:

1. pays to the trustee sufficient monies to pay all of the debts and costs of the estate;
2. has a section 73 proposal accepted by his or her creditors; or
3. convinces the Court that the bankruptcy should never have been commenced.

Once one of these occurs, the bankruptcy will be annulled and the trustee will forward the appropriate notices to ITSA.

What are the debts and costs of the estate?

The costs and debts are:

(a) all provable debts of the estate;
(b) the Asset Realization Charge (ARC) under the Act;
(c) the expenses and remuneration of the Trustee; and
(d) any other charges or statutory costs of the estate

The bankrupt has to provide the trustee sufficient money to satisfy all of their pre-bankruptcy debts, the costs of the bankruptcy and the statutory charges. This type of annulment generally happens when the the sale of some asset provides enough money to pay these costs, or when a friend or relative provides these funds.

What is a section 73 proposal?

This is a formal proposal put to creditors under section 73 of the Bankruptcy Act. It provides a mechanism for bankrupts to propose a compromise agreement to their creditors as an alternative to the continuation of the bankruptcy. It usually means that creditors will receive a better return than would have been available to them in the bankruptcy. In exchange for that better return, they agree to the annulment.

The bankrupt will forward a proposal to the trustee, who will call a meeting of creditors and issue a report making a recommendation on whether they should accept or reject the proposal. If the creditors accept the proposal, it is binding on all creditors and the bankruptcy is annulled. The bankruptcy is then effectively exchanged for an obligation under the section 73 agreement.

Why would the Court annul a bankruptcy?

Usually the Court will only annul a bankruptcy when it can be shown that the bankruptcy should never have been commenced. The reasons why this may happen are limited, but where the proper legal process was not followed in initially bankrupting the person, or if there was no debt outstanding at that time, or if the bankrupt is actually solvent, the Court may grant such orders.

Bankrupts seeking an annulment should be aware that the ex-trustee has the right to use assets in his or her possession to pay outstanding remuneration and outlays, and if insufficient, may seek payment from the ex-bankrupt.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

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Last Updated: 14.2.2008