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What is Bankruptcy?

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What is Bankruptcy?

Bankruptcy: A General Overview

Bankruptcy occurs where a person, unable to pay their debts, has a trustee appointed to control their assets and finances, in exchange for protection from legal action by their creditors. Bankruptcy also protects creditor’s interests by placing an independent person in control of investigating the bankrupt’s affairs to manage the collection and distribution of the bankrupt’s assets.

If a person is unable to pay their debts if and when they fall due, they will be legally insolvent. A person may be bankrupted if the person is unable to sell or borrow against their assets to pay their debts.

How Does a Person Become Bankrupt?

A person may bankrupt themselves by lodging a Debtor’s Petition and a Statement of Affairs to the Official Receiver. Once the Official Receiver processes the Debtor’s Petition and issues an estate number, the person will then be declared bankrupt.

Alternatively, a creditor may lodge a ‘Creditor’s Petition’ to the Federal Court to make a person bankrupt. Generally, a creditor must have obtained a Judgment on their debt and have served the debtor with a Bankruptcy Notice. The creditor may then file the Petition if the debt is not paid by the debtor before the expiration of the Bankruptcy Notice.

What Happens During Bankruptcy?

During the period of bankruptcy the person:

1. Cannot act as a company officer;
2. Cannot trade under a registered business name without advising people of their bankrupt status. Although the person may trade under their own name;
3. Must make available to the trustee all of their divisible assets;
4. Must not incur credit over an indexed amount without advising the lender of their bankrupt status;
5. Will have limitations on overseas travel and have an obligation to surrender their passport;
6. Are required to make all books and records of financial statements available, including books of associated entities such as companies and trusts.

What happens if the Bankrupt continues to generate income?

A bankrupt may, and is encouraged to, earn income. If the amount of income exceeds threshold limits then a contribution must be paid to their estate. This liability to pay a contribution continues after the bankruptcy ends and can be enforced by the trustee.

The Bankrupt’s Estate and Property

The trustee will administer the bankrupt’s estate and control all of the bankrupt’s divisible property. However, some property is not divisible. Non-divisible property may include:

1. Necessary clothing and household items;
2. Tools of trade to a particular indexed amount;
3. A motor vehicle to an indexed amount;
4. Life assurance or endowment policies;
5. Certain damages or compensation payments;
6. Sentimental property;
7. Superannuation payments.

In some circumstances, the trustee may recover property sold before bankruptcy. Transactions occurring within five years of the bankruptcy will be examined and if improper, undervalued, or made for the purpose of avoiding creditors, that property may be recovered. The trustee may also recover monies from creditors paid as preferential payments six months before the bankruptcy. Further, any property given or sold to a Family Trust at less than its market value may be recovered by the trustee. Where required, the trustee can force the sale of joint real property and the trustee’s name may be placed on the title deed in place of the bankrupt.

Powers of the Trustee

During the bankruptcy, the trustee will:

1. Find and protect the assets of the bankrupt;
2. Realize the bankrupt’s assets;
3. Investigate the financial affairs of the bankrupt and any transactions that appear suspicious;
4. Make appropriate recoveries;
5. Report to creditors;
6. Report any offences to ITSA; and
7. Distribute surplus funds received to creditors.

Creditor’s rights

Following a person’s bankruptcy, their creditors have a right to prove in the bankrupt estate for a dividend. The rights of secured creditors are not affected in relation to valid security.

Annulment of Bankruptcy

It is possible to receive a cancellation of the bankruptcy and the debtor may have their affairs reinstated as if no bankruptcy had occurred. An annulment may be obtained by:

1. An Order of the Court founded on the basis that the bankruptcy should not have occurred;
2. The full payment of the debts of the bankrupt and the administration costs;
3. A s 73 proposal is accepted by all creditors.

Discharge from Bankruptcy

Bankruptcy will automatically end three years from the date the bankrupt files their Statement of Affairs. However, where the trustee lodges an objection, the period of bankruptcy may be extended to five years. An objection may occur where the bankrupt fails to cooperate, leaves Australia without authorisation, manages a company without the Court’s leave or engages in misleading conduct regarding an indexed sum.

Office Location and Contact Details

Brisbane

Aitken Whyte Lawyers Brisbane
2/414 Upper Roma Street
Brisbane QLD 4000

Ph: 07 3229 4459
Fax: +617 3211 9311
E: enquiries@awbrisbanelawyers.com.au