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Bankruptcy

How does someone become bankrupt?

There are two ways that a person can become a bankrupt;

(a) they bankrupt themselves by signing a debtor's petition, or
(b) one of their creditors can have the court bankrupt someone through a creditor's petition.

To bankrupt yourself, you file a debtor's petition and a statement of affairs with ITSA, the government body that oversees the Bankruptcy Act. Once the petition has been accepted, you are given an estate number and are officially bankrupt.

A creditor's petition is an application to the Federal Court to have a sequestration order made against a person thereby declaring them bankrupt. This application is made by a creditor of the person.

Does a bankrupt have to file a statement of affairs?

Yes. A debtor's petition will only be accepted by ITSA if it is accompanied by a properly completed, executed and dated statement of affairs. A bankrupt that has been bankrupted by a Sequestration Order must lodge a statement of affairs within 14 days after the bankruptcy. A bankruptcy will never end if a SOA is not lodged.

Will a bankrupt loose all their assets?

Not all. Most of a bankrupt's assets will vest in the trustee. These are called 'divisible assets' or 'divisible property'. These assets may be sold by the trustee and the funds distributed to the bankrupt's creditors. Some assets are not divisible.

Are there exceptions to divisible assets?

Yes. Some personal effects such as household furniture and clothing, some financial assets like superannuation and life assurance policies, and claims for personal injuries are not 'divisible'. Monetary limits apply to some other assets like tools of trade and motor vehicles. Assets with values less than the statutory limits are not divisible. This allows a bankrupt to retain some necessary items that allow them to maintain employment and a certain standard of living.

Can a bankrupt keep assets bought during the bankruptcy?

Usually. Any assets bought with income earned after the date of bankruptcy generally may be retained by the bankrupt. On the other hand, assets obtained through a bequest, gift or a prize win will be 'after-acquired property' and will vest in the trustee. The distinction is that exempt assets are acquired from the efforts of the bankrupt after bankruptcy and usually from income that has been assessed for contributions.

Can transactions be overturned?

Yes. The Bankrupt Act will void certain transactions undertaken before the bankruptcy, and may require that assets or money be returned to the trustee. These transactions are usually ones that the bankrupt entered into to try to protect assets from their creditors or transactions that gave some creditors advantaged over other creditors.

Can a bankrupt run a business?

Yes. Bankrupts are allowed to run a business, with some restrictions. Any business must to be traded in the name of the bankrupt not under a registered business name, unless the bankrupt's name also accompanies it. This allows people dealing with the business to immediately know who is running it and to search the bankruptcy register. There are also restrictions on incurring credit (see below)

What are income contributions?

Income earned over a certain statutory threshold will result in the bankrupt becoming liable to pay income contributions from that income. The threshold is calculated on a sliding scale based upon the number of the bankrupt's dependents.

What if a bankrupt does not pay income contributions?

Nonpayment of income contributions could lead to the lodgment of an objection to the bankrupt's discharge from bankruptcy, and the possibly re-bankrupting of the bankrupt after the objection period expires. Wages may be garnisheed and other income may become subject to the Supervised Account Regime.

Can a bankrupt borrow money?

Yes. However, if the borrowings exceed a certain statutory amount, the bankrupt must inform the credit provider of the bankruptcy before borrowing the money.

Do creditors need to attend meetings?

No. Creditors can ignore the meeting process and still prove for a dividend. Creditors can appoint proxies to represent them if they do not want to attend but want their voice heard. Attendance is purely voluntary. But creditors are bound by any resolution passed at a meeting, whether they attend or not.

When does a bankruptcy end?

A bankruptcy usually ends three years after the filing of the statement of affairs. A statement of affairs is filed with a debtor's petition, so the bankruptcy will end three years after the filing of the petition. In the case of a sequestration order, the bankruptcy will start at the date of the Order, but end three years after the statement of affairs is lodged.

The bankruptcy may also end at any time by an annulment. This can happen either by:

• paying all of the creditors and costs of the estate;
• having a proposal under section 73 accepted by the creditors; or
• the court terminating a sequestration order if they think that it was obtained unjustly.

Can a bankruptcy be extended?

Yes. If the bankrupt does certain things, or omits to do certain things, or refuses to cooperate with the trustee or undertake certain actions required of them, the trustee may object to the bankrupt's discharge.

An objection will extend the term of the bankruptcy to either 5 or 8 years from the normal 3 year limit. The time period of the extension will depend on the reason for the objection. The objection may be withdrawn by the trustee and the term of the bankruptcy may return to normal.

Can assets be returned to the bankrupt?

Yes. Certain assets can be revested 6 years after discharge. This provision only applies to assets that were both disclosed in the bankrupt's statement of affairs, and have not been realized at the end of the 6 year period.

What is a Section 73 proposal?

This is a proposal made by a bankrupt to their creditors under section 73 of the Bankruptcy Act. If accepted it will replace the bankruptcy and the ex-bankrupt will be bound by the terms of that agreement.

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: 7.1.2008