I am a Creditor. Can I Bankrupt a Debtor?

If you are a creditor and for some reason, your debtor is showing no signs of repaying what they owe, what are your options? In some cases, you may be able to bankrupt your debtor. Once a court judgment has been entered against your debtor, you are entitled to take steps to have them declared bankrupt. Your judgment debtor must be an individual (not a company), and the judgment debt must be $5,000 or more. But is it worth it?

Below we look at whether the best course of action in this situation is to bankrupt your debtor, as well as the process that you will need to follow.

Is Bankruptcy Your Best Course of Action?

It won’t always be in the creditor’s best interests to bankrupt a debtor, and you should consider the following factors before doing so: 

• Are you aware of your debtor’s financial situation?
• What are the funds and assets available for your debtor to distribute? If your debtor has little or no funds or assets, there may be no benefit to making them bankrupt.
• What other creditors does your debtor have? Do they have any secured creditors (for example, banks or other lending institutions?) Secured creditors hold a charge over the debtor’s assets and therefore have priority in receiving repayments before unsecured creditors.  
• What costs are you likely to incur in making your debtor bankrupt? You should consider court filing fees, service fees and solicitor’s fees. In some instances, these costs may exceed the debt you are trying to recover, in which case doing so would be pointless. 
• Have you made an attempt to negotiate a payment plan with your debtor? In some circumstances, a debtor may simply be having cash flow issues and may need a little longer to pay off their debt. The advantage of negotiating a payment plan with your debtor is that legal costs are either not incurred or reduced.
• Have you exhausted all other enforcement options? Making an application for bankruptcy is not the only way to enforce a judgment debt. There are some enforcement options available to creditors. For more information on alternative enforcement options, you can read our article, ‘How do I Enforce a Judgment Debt in NSW?‘.

The Bankruptcy Process

Having your debtor made bankrupt is a multi-step process. Remember, even if you are successful in having your debtor made bankrupt, there is no guarantee that you will ever receive any payment. Regardless, the general process is set out below.

Bankruptcy Notice

You must apply to the Australian Financial Security Authority (AFSA) for the issue of a bankruptcy notice. Before lodging the application, conduct a search through the National Personal Insolvency Index to ascertain whether the debtor has already been made bankrupt.

The application to receive a bankruptcy notice must be lodged online and needs to include specific information including your details, the debtor’s details, information about the judgment debt, any interest calculation and your address for service. An application fee of $470 (as at 30 May 2019) is payable to AFSA upon lodgement of the application. You must make your application for a bankruptcy notice within six years from the date of judgment. Once lodged, AFSA will consider the application and if accepted, will issue the bankruptcy notice and provide you with a copy.

Service of the Bankruptcy Notice

A bankruptcy notice is essentially a formal demand for payment of a judgment debt. As such, it must be given directly to the debtor (or ‘served’). There are some ways in which service of notice can be effected:  

1. sent by post or courier to the debtor at their last known address;
2. left in an envelope at the debtor’s address;
3. delivered personally to the debtor; or
4. sent by facsimile or email to the debtor in a manner that the debtor should receive the bankruptcy notice (in the ordinary course of events).

While any of these methods of service are valid, having the documents personally served or delivered to the debtor is always the safest option as it prevents the debtor from claiming ineffective service down the track.  

The debtor must be served with the bankruptcy notice within six months from its date of issue. If your debtor is unable to be served for whatever reason, an application can be made to the court seeking an order for substituted service. An order for substituted service allows the debtor to be served by an alternate method. In appropriate circumstances, an extension can be granted allowing the bankruptcy notice to be served outside the six month period. A further application will need to be made to AFSA (including an additional application fee) if you wish to obtain an extension of time to serve your bankruptcy notice. Your application will need to include a detailed statement outlining your reasons for requesting an extension of time including details of previous service attempts. It is advisable that any application for extension of time should be made within the six months from the date of issue.

Once served with the bankruptcy notice, the debtor has 21 days to comply. If they fail to do so, you can submit a creditor’s petition to the court.  

Creditor’s Petition: an Overview

A debtor’s failure to comply with a bankruptcy notice is considered to be an act of bankruptcy. While there are other ways for a debtor to commit an act of bankruptcy, inability to comply with a bankruptcy notice is the most common.

A creditor’s petition is filed with either the Federal Court or the Federal Circuit Court. You will also be required to pay a court filing fee at the time of filing the creditors’ petition. The amount of the filing fee is dependent on whether the creditor is either: 

• a publicly listed company (currently $5,630); 
• a corporation (currently $3,755); 
• a public authority (currently $3,755); or
• an individual(currently $1,565). 

Once the creditor’s petition is filed, the court will set a hearing date. Before the hearing of the creditor’s petition, there is a whole host of documents that the creditor must file with the court per a standard timetable.  

Ultimately, if the court accepts your application, a sequestration order will be made, and your debtor is declared bankrupt.

What Happens Next and Will I Get Paid?

AFSA notifies the debtor of their bankruptcy status, and a trustee is appointed to manage the bankrupt’s estate. The trustee can be appointed by AFSA or, by the creditor who has made the bankruptcy application provided that the trustee gives consent.  

It is then the trustee’s role to deal with the bankrupt’s assets and make payments to creditors as funds become available. The bankrupt debtor is required to complete a statement of affairs, and once returned, the bankruptcy period commences.

Any funds to be distributed by the trustee are made in order of priority. Firstly, the trustee’s fees and charges are reimbursed, followed by secured creditors and then unsecured creditors.

Key Takeaways

Before commencing bankruptcy proceedings, it is important to look at the big picture and consider whether bankrupting your debtor is the right course of action for you. In some instances, issuing and serving a bankruptcy notice may be sufficient ammunition to get your debtor to pay your outstanding debt. 

If you have any questions about bankruptcy, or need assistance drafting and issuing a bankruptcy notice, get in touch with our litigation lawyers on 1300 544 755.