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Are you in debt? Have you gone out of business? Are you a sole trader who has run out of money? If any of these situations apply, you may be considering bankruptcy. As with any legal decision, it is important for you to understand the consequences of bankruptcy if you do decide to declare yourself bankrupt. This includes the obligations and the rights that will apply when you become bankrupt. This article will discuss what bankruptcy is, the process, and the benefits and risks of bankruptcy.

What is Bankruptcy?

Bankruptcy is the legal process where individuals who can no longer pay their debts give up their assets and the rights to control their own finances. These types of legal proceedings are governed by federal law, particularly the Bankruptcy Act 1966 (Cth). Further, bankruptcy will only apply to individuals and not companies

How Do I Become Bankrupt?

There are two main ways you can become bankrupt. These include voluntarily entering bankruptcy or receiving a bankruptcy notice and proceedings.

Voluntary Bankruptcy
Bankruptcy Notice and Proceedings
  • If you cannot pay your debts, you may choose to become bankrupt voluntarily.
  • You will need to complete a bankruptcy form with the Australian Financial Security Authority, and they will assess your application.
  • Once your application has been accepted, a trustee will be appointed to manage your finances and pay out your remaining debts.
  • If you cannot pay your debts, your creditors may choose to take action against you.
  • Your creditors will issue a bankruptcy notice. If you do not respond within 21 days, you are committing an act of bankruptcy, and your creditors can commence legal proceedings.
  • The creditors will issue a bankruptcy petition to the Court, and the Court may then choose to make Sequestration Orders over your assets and finance.
  • Sequestration Orders will typically vest your assets to a trustee, who will distribute these assets according to the money owed. 

What Are the Benefits of Bankruptcy?

While bankruptcy is often perceived in a negative light, it does have some positive impacts if you cannot pay your debts. The table below outlines the benefits:

Release from debts

Essentially, once you are discharged, you are released from most provable debts incurred before the bankruptcy.

Relief from harassment, litigation and execution from creditors

Bankruptcy will generally prevent any harassment from unsecured creditors. Additionally, all communications are transferred to your nominated trustee.

Legal proceedings

In the event that legal proceedings against you have commenced, the proceedings can only continue through the trustee. However, claims that are considered very personal are exempt, e.g. personal injury or death of a family member claims.

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What Are the Risks of Bankruptcy?

Indeed, there are a number of negative impacts associated with bankruptcy. These include:


Bankruptcy does not necessarily release you from all debts owing.

Ownership of property

As a bankrupt, you will lose your property which will then be vested in the trustee. The trustee will then nominate to sell your property to repay your creditors.


Generally, bankruptcy will last for three years and one day. This means you will have to live with the consequences of bankruptcy for at least this period of time.


If you earn over a certain amount in the course of your employment, you may need to continue making payments to your trustee.

Travelling Restrictions

There are also restrictions on travelling. You must be granted permission from the trustee for you to exit the country and go overseas.

Impact on your reputation

Due to the general stigma the public has of bankruptcy, your bankruptcy will be recorded in the National Personal Insolvency Index (NPII). The NPII is a permanent record of bankruptcies that have occurred since 1928. Your bankruptcy may even be published in trade journals and local papers.

Restrictions on getting credit

If you apply for credit over $6,017, you will need to disclose that you are a bankrupt for five years after the date you are declared bankrupt or two years after your bankruptcy ends, whichever date is later.

Obligations to comply

You are also obligated to assist the trustee in winding up your estate. This will include producing relevant documents, undergoing an examination of your financial affairs and notifying changes to earnings and income, just to name a few. If you do not comply with these duties and obligations, you may incur penalties from the court, such as an extension of your bankruptcy for five or eight years (instead of the standard three years).

Limitations on involvement in a company

According to the Corporations Act 2001, you are prohibited from being a director, promoter or manager of a company without leave (i.e. permission) from the court. This prohibition is generally for at least the period of your bankruptcy.

Limitations in employment opportunities

Further restrictions apply in terms of certain types of employment and occupations. For example, you cannot sit in Parliament. More realistically, there are industry restrictions in professions such as barristers, solicitors, chartered accountants, security licence holders and tradespeople.

Key Takeaways

Bankruptcy is a legal process and legal status available for individuals who cannot pay their debts. If an individual becomes bankrupt, a trustee will be appointed to distribute and control a bankrupt’s assets. Additionally, a decision to enter bankruptcy should not be made lightly, you should carefully consider the consequences. There are positives and negatives to this decision that must be weighed up.

LegalVision cannot provide legal assistance with this topic. We recommend you contact your local law society.

Frequently Asked Questions

What is bankruptcy?

It is the legal process where an individual who cannot pay their debts gives up their assets and the rights to control their own finances. Additionally, there are often significant consequences for bankruptcy that you must consider.

What is the difference between voluntary bankruptcy and a bankruptcy notice? 

If you cannot pay your debts, you may choose to become bankrupt voluntarily by completing a bankruptcy form. Alternatively, your creditors may choose to take action against you by issuing a bankruptcy notice and commencing legal proceedings. 


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