Bankruptcy is a legal process that gives individuals a chance to resolve their debt problems and get a fresh financial start. While you are bankrupt, a bankruptcy trustee is appointed to look after your finances and deal with your debts and assets. The bankruptcy period is limited, usually to three years and one day. During that period, you are known as an undischarged bankrupt. Once undischarged bankruptcy ends, you are called a discharged bankrupt. The bankruptcy process, and the language around it, can be confusing and complex if you have not experienced it before. This article will explain the: 

  • difference between a discharged and an undischarged bankrupt; and
  • key stages of bankruptcy, including what happens during those stages. 

Undischarged Bankruptcy is the period during which a person is bankrupt and their financial affairs are managed by a bankruptcy trustee. The person is known as an undischarged bankrupt.

Discharged Bankruptcy is a bankruptcy that has ended or been discharged under the legal bankruptcy process. Once bankruptcy, has ended a person is known as a discharged bankrupt.

How Does Bankruptcy Start? 

Bankruptcy starts when an individual is insolvent, meaning they cannot afford to pay their debts. Bankruptcy can be triggered by: 

  1. you: you can voluntarily enter bankruptcy to resolve your debt problems. This means preparing and filing a Debtor’s Petition with the Official Receiver, a role the Australian Financial Security Authority (AFSA) administers; or
  2. a company or individual: If you owe money to a company or individual, they are a creditor and can file a Creditor’s Petition in court to make you bankrupt. 

The bankruptcy period starts when either AFSA accepts a Debtor’s Petition or a court makes a bankruptcy order, known as a sequestration order. Once the period starts, you become an undischarged bankrupt. This period is undischarged bankruptcy. 

How Long Does Bankruptcy Last?

Bankruptcy, or undischarged bankruptcy, usually lasts for three years and one day. It ends when AFSA discharges the bankruptcy, which will occur automatically after three years and one day if there are no extensions. Bankruptcy can be extended for up to eight years if you fail to comply with all required steps, such as: 

  • disclosing all assets and debts to the bankruptcy trustee; and 
  • making the required payments. 

If you do not meet these steps, your bankruptcy trustee can object to the discharge and request an extension. The length of the extension will depend on the extent and number of compliance failures. 

Bankruptcy can also:

  • end early; or
  • be annulled or cancelled.

This will occur if you pay your debts in full or prove to a court that you should not have become bankrupt. 

For example, this may be the case if someone stole your identity. 

Undischarged Bankruptcy 

What Happens During Bankruptcy?

At the start of bankruptcy, you will need to provide your bankruptcy trustee with a Statement of Affairs that:

  • sets out all your personal and financial information; and 
  • gives full disclosure of all debts and liabilities. 

Once you have a bankruptcy trustee, they will take over management of your financial affairs. Most of your debts will be released during the bankruptcy or paid from your bankruptcy estate following sale of any available assets. Your bankruptcy trustee has a wide range of powers, including to: 

  • investigate your affairs; 
  • sell your properties; and 
  • run or sell any business.

During the bankruptcy period, they may: 

  1. investigate and identify all saleable assets; 
  2. sell or realise those assets; 
  3. investigate your affairs; 
  4. recover any debts other people owe to you; 
  5. report to creditors and distribute any funds available; and
  6. report to AFSA. 

Some of your assets are protected from sale by your bankruptcy trustee and are therefore not ‘divisible’ by the trustee. These include ordinary household items of reasonable value, such as

  • furniture;
  • TV, computer and appliances; and
  • other items worth less than a certain amount indexed under the bankruptcy laws, such as a car or tools used for work. 

What Can I Do During Undischarged Bankruptcy? 

While you are bankrupt, or an undischarged bankrupt, you can keep earning an income. However, you are limited in the activities and business roles you can do.

For example, you: 

  • must give any income above a fixed amount to your bankruptcy trustee; 
  • must request permission from your bankruptcy trustee to travel overseas; 
  • may not act as a company officer; 
  • cannot obtain credit above a certain amount without telling the lender you are an undischarged bankrupt; and
  • must give all information to your trustee regarding your finances, such as income and mortgage statements. 

Discharged Bankruptcy

What Happens When Bankruptcy Ends? 

Once you are discharged from bankruptcy, you can take back control of your financial affairs. Even though you are a discharged bankrupt, the bankruptcy will be permanently recorded on a national record called the National Personal Insolvency Index. This record is publicly available. 

You may have difficulty obtaining credit, such as a home loan, after your bankruptcy ends. Credit reporting agencies keep a record of your bankruptcy for five years from the date you became bankrupt or two years from when your bankruptcy ends, whichever is later. 

You may not repay some debts during bankruptcy, and so may have to deal with these once the bankruptcy ends. These include:

  • any penalties or fines;
  • student debts;
  • any debts you incurred by fraud; or
  • debts under maintenance agreements, such as child support debts. 

Key Takeaways

The aim of bankruptcy is to give individuals who cannot pay their debts the chance to reset their financial affairs. During the period of bankruptcy, the individual is an undischarged bankrupt and a bankruptcy trustee manages their financial affairs. Once the bankruptcy ends, they are known as a discharged bankrupt. Life can mostly get back to normal. However, there may be some lingering impacts from the bankruptcy, such as a permanent public record of the bankruptcy. If you have any questions about the process of bankruptcy or dealing with debts, contact LegalVision’s litigation lawyers on 1300 544 755 or fill out the form on this page.  

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