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Are you struggling to repay your debts? You may need to declare bankruptcy. Society typically views bankruptcy negatively, but it can be a useful means for survival in certain situations. You (as an individual) can become bankrupt in two ways. You can volunteer to become bankrupt, or your creditors (the businesses or people you owe money to) can apply for you to be made bankrupt. If you wish to become bankrupt voluntarily, you can apply to become bankrupt by filing a debtor’s petition with the Australian Financial Security Authority (AFSA). This article will look at the requirements, processes and possible outcomes of making a debtor’s petition.

What Is a Debtor’s Petition?

A debtor’s petition is a short form provided by AFSA for individuals who wish to declare bankruptcy. You can lodge this form online using AFSA’s online services or via paper if unable to lodge it online. There is no fee associated with lodging this form.

Who Can Present a Debtor’s Petition?

A debtor’s petition can be presented to the Official Receiver by either an individual debtor, joint debtors or debtors in partnership. However, the Official Receiver cannot accept a debtor’s petition unless it meets the following requirements. The debtor:

  • was personally present or is ordinarily a resident in Australia; or
  • had a dwelling house or place of business in Australia; or
  • was carrying on business in Australia, either personally or using an agent or manager; or
  • was a firm or partnership member carrying on business in Australia, using a partner or partners or an agent or manager.

An Example

Tom is a sole trader whose frozen yoghurt business has not been doing well during the coronavirus pandemic period. As a result, his debts have been mounting, and he sees no viable way to repay his increasing debts. Likewise, he does not see his situation improving. 

Tom decides that he would like to declare bankruptcy. As Tom’s frozen yoghurt shop is in Sydney, Australia, he can present a debtor’s petition with AFSA.

In some cases, a debtor’s petition is presented around the same time as a creditor’s petition. This is a court application by a creditor or joint creditors aiming to place a debtor into bankruptcy. If this happens, the relevant date of bankruptcy will be from the date of the creditor’s petition.

Application Process 

A debtor in financial difficulty who wishes to become bankrupt will need to:

  1. be eligible to lodge a debtor’s petition (Bankruptcy Form) with the AFSA;
  2. satisfy proof of identification checks; and
  3. complete and lodge a Bankruptcy Form.

There are three potential outcomes once you complete and lodge a Bankruptcy Form. Either your petition will be:

  • accepted; 
  • rejected; or
  • referred to the Court for direction. 

If your petition is accepted, the AFSA will send you and your creditors confirmation of the acceptance. The acceptance will also contain an AFSA administration number that your creditors may ask for. Your bankruptcy will last for three years and one day from the date of acceptance. 

If your application is rejected, you will receive a letter explaining the basis of the rejection. 

Rejection of a Debtor’s Petition

The Official Receiver can reject a debtor’s petition for many reasons. These include (but are not limited to) administrative issues, abuse of process and improper purpose. We will explain this in further detail below. 

Administrative Issues 

The Official Receiver can reject a debtor’s petition if:

  • it fails to comply with the approved form;
  • it fails to include a statement of affair, which is any asset or liability that forms part of your financial position; or
  • the statement of affairs is inadequate.

For example, Tom forgot to fill out particular sections of his bankruptcy application. He also did not use the current version of the bankruptcy form. As a result, the Official Receiver will likely reject Tom’s petition for failing to provide all necessary information and for not using the current version of the form.

Abuse of Process 

A debtor may present a debtor’s petition for some purpose other than protection from creditors through bankruptcy. In that case, it is likely to be deemed an abuse of process, and the Official Receiver will reject the application.

Improper Purpose

If a debtor is not insolvent or does not believe they are insolvent and present a petition, this may constitute an ‘improper purpose.’ In such cases, the creditor must show that the debtor is making a petition for an improper purpose.

For example, Tom can pay off all his frozen yoghurt shop’s debts immediately if he was to dip into his cash reserves he had been holding onto for a rainy day. Insolvency is when a company or person cannot pay debts when they are due. In this situation, Tom is not insolvent as he can repay his debts. Therefore, Tom’s petition will be rejected for presenting his petition for the improper purpose.

Two or More Parties in a Bankruptcy

Joint Debtors

If you wish to lodge your petition jointly with someone else or as a partnership, you will need to:

  1. create separate accounts;
  2. complete separate bankruptcy forms; and 
  3. lodge these on the same day. 

You cannot submit one single form for both of you. Importantly, you must lodge the applications on the same day because your joint petition cannot be processed unless all joint parties lodge their applications together. 

Additionally, you must post or email your offline joint applications together to ensure they are processed together.

For example, Tom and his wife would both like to declare bankruptcy. They will need to lodge separate applications under separate accounts but lodge them on the same day together. If they lodge their petitions on separate days, the Official Receiver would not be able to process this joint petition.

Debtors in Partnership

A petition presented against a partnership must include:

  • a bankruptcy form from each partner that addresses their personal affairs; and 
  • a statement of the partnership affairs.

Creditors can pursue individual partners in a partnership as a partnership itself is not a separate legal entity. The Official Receiver administers the individual partners’ estates. However, the assets are available for joint and several debts.

Suppose any individual partners are parties to debt agreements with their creditors, such as a Part X personal insolvency agreement or Part IX debt agreement. In that case, they cannot participate in presenting the debtor’s petition to the Official Receiver.

Alternatives to Bankruptcy

There are other alternatives to bankruptcy that you should also consider before determining that declaring bankruptcy is right for you. There are:

  • debt agreements;
  • personal insolvency agreements; and
  • temporary debt protection.

Key Takeaways 

Bankruptcy is a tool for survival. If you are in a difficult situation and see no way out, bankruptcy may be an appropriate option. When completing a debtor’s petition, you must provide all necessary documentation and information in the correct and most up to date forms or risk rejection of your application. Additionally, joint petitions require all parties to submit separate bankruptcy forms, but you must lodge these on the same date. Bankruptcy lasts for three years and one day.

If you are a debtor or a creditor and require advice regarding bankruptcy or alternative debtor arrangements, contact LegalVision’s insolvency lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is bankruptcy?

Bankruptcy is a legal process that gives relief to people who are unable to pay their debts. It allows them to make a fresh start after a set period (usually, three years and one day). Bankruptcy can be either voluntary or compulsory.

What is a debtor’s petition?

A debtor’s petition is a short form provided by AFSA for individuals who wish to declare bankruptcy. You can lodge this form online using AFSA’s online services or via paper if unable to lodge it online.

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