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Bankruptcy in Australia is not designed as a debt recovery tool for creditors (the person or company that is owed money). Rather it is concerned with the change of status of an insolvent person, meaning they cannot pay their debts. An individual that is insolvent can be declared bankrupt either voluntarily or by court order. Bankruptcy will release a debtor from most debts. Further, it will provide them with some real relief in many instances. However, there are also some significant and far-reaching consequences for the bankrupt. This article looks at some of the consequences of bankruptcy, including the personal impact bankruptcy may have on a bankrupt’s property and family.

Personal Impact on the Bankrupt

Bankruptcy will generally last for a period of three years. However, the trustee can extend this timeframe in certain circumstances. The personal impact bankruptcy has on a bankrupt during this period can be onerous. The table below outlines some personal impacts on the bankrupt. 

Bankrupt loses control

A trustee in bankruptcy will be appointed to manage the bankrupt’s estate, which includes the bankrupt’s money and assets. A trustee in bankruptcy has the right to sell a bankrupt’s assets, including any real property owned by the bankrupt and can request the disclosure of personal information about the bankrupt from third parties. 

For example, banks and financial institutions must notify the trustee in writing of all accounts held by the bankrupt. Bankrupts are also prohibited from managing their own superannuation funds.  

Obligation to assist

A bankrupt is required to assist the trustee throughout the entirety of the bankruptcy period, must attend any creditor’s meeting the trustee requires and must deliver relevant documents to the trustee, including relevant records of any associated entities.  

Limitations and prohibitions

A bankrupt must not change their name or address without notifying the trustee. They are prohibited from being a director of a company and must not partake in the management of a company. A bankrupt who practices in certain professions and trades (i.e. lawyers, builders, real estate agents, veterinarians) may suffer licence/working restrictions.

Overseas travel

A bankrupt must request permission from the trustee to travel overseas. In addition, the trustee may ask the bankrupt to surrender their passport during the bankruptcy period. 

Public record

A bankrupt’s name will permanently appear on the National Personal Insolvency Index (NPII). The NPII is a public register listing all personal insolvency proceedings in Australia.  

Ability to obtain future credit

Credit reporting agencies will maintain a record of the bankruptcy on a bankrupt’s credit file for up to five years from the date bankruptcy commenced or two years from when the bankruptcy ends, whichever is later. Bankrupts are also obligated to disclose that they are an undisclosed bankrupt to any credit provider. 

Income contributions

A bankrupt inform a trustee of any changes to their employment or income (change of jobs, increase or decrease in pay). There is no limit to the amount of income a bankrupt may earn. However, if a bankrupt’s net income exceeds the indexed amount, they may have to make compulsory payments to the trustee, which are 50% of the amount they earn above the income threshold. The indexed amount is updated bi-annually and increases with the number of dependants a bankrupt has.

For example, the income threshold (as at Sept 2021) is:

  • $60,515 for zero dependants;
  • $71,407 for one dependant;
  • $76,854 for two dependants;
  • $79,879 for three dependants;
  • $81,090 for four dependants; and
  • $82,300 for more than four dependants. 
Not all debts are covered

Bankruptcy does not cover all debts. The types of debts that bankruptcy does not cover include court-imposed penalties and fines, child support, HECS and HELP debts, and debts incurred after bankruptcy commences.

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Impact on a Bankrupt’s Property

Before looking at the various ways bankruptcy will impact a bankrupt’s property, you must understand the distinction between ‘divisible property’ and ‘non-divisible property’. 

Divisible property is property a trustee can take and divide among creditors. Non-divisible property is property that the bankrupt can retain. Examples of non-divisible property include: 

  • household property that is reasonably necessary, having regard to current social standards;
  • items that have a readily identifiable connection with earning an income (up to a specified value);
  • a motor vehicle used primarily as a means of transport (up to a specified value);
  • life insurance and superannuations funds (although a lump sum contribution to a superannuation fund shortly prior to becoming bankrupt may be classed as divisible property); and
  • property paid for from an award of damages. 

A trustee is required to ascertain what property is owned by a bankrupt. This extends to ascertaining whether the bankrupt unfairly or improperly disposed of any property before the bankruptcy commenced and whether that property should be recovered. Accordingly, the impact bankruptcy has on a bankrupt’s property is far-reaching.  

After acquired property

This is property acquired by the bankrupt after commencement of the bankruptcy but before their bankruptcy has been discharged. That property will vest with the trustee as soon as it is acquired. Property in this context extends to an inheritance, gift or lottery win. The bankrupt has a positive obligation to disclose all such acquired property to the trustee. 

Obligation to sign documents

A bankrupt is required to sign all documents relating to the sale of their property at the trustee’s request. 

Search and seizure

A trustee may obtain a court warrant to enable a search and seizure of the bankrupt’s property. This power extends to the search and seizure of property in a third party’s possession.

Property held overseas

Depending on the law of the foreign country, property owned by a bankrupt overseas is recoverable by the trustee.    

Impact on a Bankrupt’s Family

Given the serious nature and consequences of bankruptcy, it is inevitable that a bankrupt’s family members are impacted both directly and indirectly. 

Public examination

As part of a trustee’s investigative powers, they can apply to the court for a summons to be issued to a bankrupt’s spouse, family member, friends or business associates, who must attend for public examination. Here they will be required to answer questions about the bankrupt’s financial dealings. 

Family home

Where a family home is owned by the bankrupt as one of two joint tenants, the joint tenancy will sever, and the interest of the bankrupt will vest in the trustee. A trustee will generally give the non-bankrupt homeowner an opportunity to purchase the bankrupt’s share of the property. However, if they are unable or refuse to, the trustee can seek an order from the court that the whole property be sold. The non-bankrupt party will be paid their share from the proceeds of sale after any mortgage has been satisfied.  

Key Takeaways

The consequences of bankruptcy are significant and far-reaching. Bankruptcy will impact the bankrupt directly, as well as their property and their family members. Accordingly, you should consider declaring bankruptcy as a last resort.

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

Frequently Asked Questions

What is bankruptcy?

Bankruptcy is the legal process where an individual who cannot pay their debts gives up their assets and the rights to control their own finances.

How long does bankruptcy last?

Generally, bankruptcy will last for a period of three years. However, the trustee can extend this timeframe in certain circumstances.


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