Getting Out of Bankruptcy
How does a bankruptcy normally end?
A bankruptcy usually ends with the bankrupt being discharged from bankruptcy. 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 three years after the Statement of Affairs is lodged.
The bankrupt estate may continue after discharge while the trustee finalises the estate, 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.
For more information: Fact Sheet: Objections to Discharge
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 have been filed at that time. The bankrupt will have to complete a Statement of Affairs and send it to ITSA. As the bankruptcy ends 3 years after the filing of the Statement, the longer it takes for the bankrupt to file it, 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. An annulment is a complete undoing of the bankruptcy, as if the bankruptcy never had happened.
How is a bankruptcy annulled?
A bankruptcy will be annulled if:
1. the trustee has sufficient monies to pay all of the debts and costs of the estate;
2. a section 73 proposal accepted by the bankrupt's creditors; or
3. the bankrupt convinces the Court that the bankruptcy should never have been commenced.
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) payable to ITSA under the Act;
(c) the expenses and remuneration of the Trustee; and
(d) any other charges or statutory costs of the estate.
To be annulled under these provisions, the trustee has to have sufficient money to satisfy all pre-bankruptcy debts, the costs of the bankruptcy and the statutory charges. This type of annulment generally happens when 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. If the creditors accept the proposal, the bankruptcy is effectively exchanged for an obligation under the section 73 agreement.
For more information: Fact Sheet: Section 73 Proposals
For more detailed information: Insolvency Resource Page: Section 73 Proposals
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. This may happen where the proper legal process was not followed in initially bankrupting the person, if there was no debt outstanding to that creditor at that time, or if the bankrupt is actually solvent.
Bankrupts seeking an annulment through the court should be aware that the ex-trustee has the right to use the assets in his or her possession to pay outstanding remuneration and outlays, and if insufficient, may seek payment from the ex-bankrupt.
For more detailed information:
Insolvency Resource Page: Discharge and Annulment
Insolvency Resource Page: Section 73 Proposals
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: 26.2.2010