Personal Services FAQ
- How and why does a person become bankrupt?
If a person has debt that has become unmanageable, bankruptcy is one option that is available whereby an independent registered trustee is appointed to administer your financial affairs.
A person can voluntarily lodge a petition to become bankrupt or a creditor may take action by issuing a Bankruptcy Notice (where the debt exceeds a threshold) and apply to have a Court order to declare you bankrupt. See resource links for current threshold amounts.
- What is the process of bankruptcy and who is involved?
A registered trustee is appointed to administer the bankruptcy. The role of a registered trustee is to realise divisible property, recover income contributions (if applicable), conduct an investigation into the bankrupts affairs including voidable transactions and if sufficient funds are realised, make a distribution to creditors.
- How long does bankruptcy last for?
Bankruptcy lasts for three years. This period may be extended in certain circumstances.
- Can I get out of bankruptcy quicker than three years?
Yes, during the course of the bankruptcy a bankrupt has the ability to put forward a proposal to creditors, usually by way of a third party payment, in full and final satisfaction of their debts to have the bankruptcy annulled.
- What assets are realisable by a trustee?
Divisible property (i.e. real estate, shares, plant and equipment, cash at bank) is available to be realised for the benefit of creditors subject to certain exemptions, limiting conditions and threshold amounts. See resource links for current threshold amounts.
Assets that are exempt and not available for the benefit of creditors include but are not limited to:
- Property held on trust
- Tools of trade (subject to indexed thresholds)
- Motor vehicle where the value of the equity is less than the threshold amount
- Certain damage and compensation payments
- Funds properly contributed and held in a regulated superannuation fund
- Items of sentimental value, subject to creditor agreement
After acquired property, that is assets that you acquire after the date of bankruptcy, are also realisable by a trustee, examples include a lotto win or an inheritance.
- What about my house?
Divisible property available for realisation by a trustee includes your house. The realisation of the house will be influenced by the amount of equity in the property and whether it is jointly owned. The rights of the secured creditors such as bank mortgages are not affected by bankruptcy. In circumstances where the house is held jointly and only one of the owners becomes bankrupt a trustee will generally deal with the solvent owner to buy the bankrupts interest in the property. Houses sold prior to bankruptcy for less than market value can be void against the trustee resulting in the transaction being overturned.
- What about divorce?
Family law agreements that deal with the distribution of assets are generally binding. However if it is found that an agreement disadvantages creditors, the trustee can apply to have the order set aside.
- What happens to my income?
Where a bankrupt earns over a threshold amount, then half of the excess over the threshold amount must be paid to the trustee for the benefit of the creditors. The threshold varies depending on the number of dependants, income tax, work related expenses, child support payments all of which can be deducted from the bankrupts income when determining the amount assessed. See resource links for current threshold amounts for your after tax income.
- Can I still travel overseas?
You are required to obtain your trustee’s consent to travel overseas. Subject to complying with your obligations (i.e. paying income contributions) such consent should not be unreasonable withheld.
- Does bankruptcy satisfy all my debts?
Bankruptcy will satisfy all debts subject to the following exceptions:
- Court imposed fines or penalties (traffic infringements)
- Child support debts
- HECS or HELP debts
Further, whilst the outstanding debt to the Australian Taxation Office is resolved by bankruptcy, if at any time during the course of the bankruptcy you become entitled to an income tax refund, the Australian Taxation Office will retain the refund and offset it against your outstanding liability.
- What are the immediate and long term consequences?
You may continue to work and earn while bankrupt but earnings over a certain amount may be recovered by the trustee. See resource links for current threshold amounts.
You cannot be the director of a company whilst bankrupt. However you are permitted to trade as a sole trader, subject to disclosures that you are an undischarged bankrupt when seeking to obtain credit in excess of the threshold amount. See resource links for current threshold amounts.
The bankruptcy will be recorded on the National Personal Insolvency Index (NPII) and a record of bankruptcy may also be recorded on your personal credit report.