Bankruptcy is a process declaring that a person is insolvent because they are unable to settle their outstanding debts. The process provides legal protection to individuals who are insolvent and unable to agree on a repayment arrangement that is acceptable to their creditors.
The bankrupt is no longer expected to settle most debts and will not be pursued by creditors.
The interests of creditors are protected by having a Trustee appointed to investigate, and control, the bankrupt’s financial affairs.
If the trustee recovers sufficient funds they will pay a dividend to creditors
What is the role of the Trustee?
The Trustee will conduct investigations into the bankrupt’s affairs, recover any property into the estate, report any offences that may have been committed by the bankrupt to AFSA and report to creditors on their findings.
Certain assets of the bankrupt are controlled by the trustee when bankruptcy occurs. This means that the trustee has rights and control over the assets.
The trustee will attempt to realise, ‘divisible’ assets. These include property, vehicles, money, jewellery and shares. Some assets are not divisible. These include some clothing and household goods, superannuation and life insurance policies and sentimental property.
The trustee is able to void certain transactions and ‘preferential’ payments that occur within a certain timeframe of the bankruptcy.
The bankrupt person may have conducted undervalued transactions or the transfer of assets with the intention of defeating the bankruptcy process. In this event, the trustee is able to recover the asset, for the benefit of the creditors.
A creditor of the bankrupt may have received a ‘preferential’ payment, giving them an advantage compared to what all creditors received by way of the bankruptcy process. The trustee has the right to recover such payment and distribute it to all the creditors.
If sufficient funds are recovered by a Trustee, they will pay a dividend to creditors.
How are creditors affected?
The effect on creditors is dependent on whether they have secured or unsecured debts.
Creditors with secured debts are often banks and financial institutions. debts that are tied to assets such as mortgages, car loans and hire purchase deals on furniture or equipment. Secured creditors are able to recover assets to settle part of the outstanding debt.
Unsecured debts may include credit cards, water and electricity bills and invoices for suppliers of services or trades. unsecured creditors agree that they will not pursue full repayment of their debt. They will accept a percentage of their outstanding debt, via the bankruptcy proceedings.
How does the process begin?
To be declared bankrupt, a person must be present in Australia with a residential or business address.
If someone is unable to pay their debts or come to a suitable arrangement with their creditors, they can choose to make themselves bankrupt.
There is no minimum or maximum amount of debt or income. The insolvent person files a Statement of Affairs and a debtor’s petition. An estate number will be issued to the bankrupt by the Official Receiver.
A creditor may apply to make a person bankrupt. This will happen when debts remain unpaid even after extending trading terms. The creditor may become concerned if the insolvent person is believed to be disposing or transferring property.
What is the duration of a Bankruptcy?
Normally bankruptcy lasts for 3 years and 1 day. Throughout the bankruptcy term, there are obligations and responsibilities that a bankrupt needs to abide by. These include the provision of financial information to the trustee. The bankrupt should disclose details of income and expenses, assets and debts, in full. Your Trustee may lodge an ‘objection to discharge’ if it is thought that you have not complied with your obligations and responsibilities. This may extend the term of the bankruptcy up to 8 years.
What are the Consequences of Bankruptcy?
- Unsecured Debts, including electricity and water bills plus credit cards, are covered and the bankrupt will not need to pay these. Voluntary payments may be made. Electricity bills may be paid to ensure continued supply, for example.
- Secured Debts are debts that are tied to assets. Typically, this includes mortgages, car loans and hire purchase deals, on furniture or equipment. The bankrupt will need to pay these debts or surrender the secured assets back to the creditor.
Income and employment
The bankrupt is able to continue working but can’t be involved as the manager, or director, of a business. There is no limit on income, but if the income exceeds a certain threshold, the bankrupt must inform the trustee and may have to make compulsory payments.
The bankrupt must make all financial details available to the trustee. This includes bank accounts and details of assets held. Any changes in financial circumstances, such as a pay rise, must be reported to the trustee.
It is an offence for the bankrupt person to travel overseas without written consent from the trustee.
When applying for credit over a certain value, the provider of the credit must be notified of the bankruptcy.
Credit reporting agencies keep a record for 5 years from when the person becomes bankrupt or 2 years from when the bankruptcy ends (whichever is later).
The bankrupt will have a permanent record on the National Personal Insolvency Index (NPII), maintained by the Australian Financial Security Authority. The NPII shows details of insolvency proceedings in Australia, including bankruptcy.
The NPII includes personal details, including name, date of birth and residential address. Certain personal details may be removed from the NPII if the bankrupt is part of a witness protection programme or at risk of personal violence.
What is an annulment of Bankruptcy?
Annulment is the cancellation of the bankruptcy. There are three ways to annul the bankruptcy:
Pay debts in full
- Including any interest or other charges, plus fees and expenses incurred by the trustee.
Prove it in court
- Prove that the bankruptcy was in error. An incidence of identity theft, for instance.
Section 73 proposal
- The creditors agree to accept a composition or arrangement. This is an agreement to accept less than full payment.
A successful annulment will be recorded on the National Personal Insolvency Index. The original bankruptcy record will be annotated as ‘annulled’.
What is a section 73 proposal?
A composition or arrangement made by the bankrupt and approved by the trustee. The trustee must deem the section 73 proposal to be more beneficial than proceeding with the bankruptcy. The offer may include assets or money that was not available previously, such as funds from third parties. The proposal may include funds to be paid to the trustee for additional work in preparing the proposal. The creditors vote on whether to accept the offer. If accepted, the bankruptcy is annulled.
The trustee will collect funds from the bankrupt for distribution to the creditors and ensure that all obligations under the proposal are completed.
In the event of non-compliance with the proposal, the creditors or trustee may bankrupt the person again.
What are the alternatives to bankruptcy?
According to the Australian Financial Security Authority, there are two agreement options as alternatives to bankruptcy:
Personal Insolvency Agreement (PIA)
- A Personal Insolvency Agreement, also known as a ‘Part X’ is a legally binding agreement to settle outstanding debts without a person becoming bankrupt. The agreement may be to pay off debts by instalments or a one-off payment.
- A debt agreement, also known as a ‘Part IX’ is an agreement, between an insolvent individual and creditors. The creditors agree to receive a percentage of the debt owed to them, paid over an agreed period.
What is a Personal Insolvency Agreement (PIA)?
A Personal Insolvency Agreement (PIA) is an agreement to settle outstanding debts without becoming bankrupt.
The insolvent individual appoints and negotiates the terms of the PIA with a trustee. the agreement may be to pay off all, or part of, your debts by a lump sum or over a period using instalments.
If the PIA is accepted by the creditors, the individual will avoid bankruptcy. Most unsecured debts will not have to be paid if declared as part of the agreement. Creditors will have the right to recover assets in settlement of secured debts.
Creditors may receive a greater percentage of their outstanding debt compared to the expected returns if the debtor was to be declared bankrupt. They may also receive payments sooner.
If the debtor doesn’t meet the terms of the PIA, the trustee and creditors may terminate the agreement and they may restart the bankruptcy process.
What are the consequences of a Personal Insolvency Agreement?
Although not bankrupt, entering into a PIA is an act of bankruptcy. The insolvent individual’s details will be permanently recorded on the National Personal Insolvency Index (NPII) and the personal credit record will reflect the PIA for up to 5 years.
The trustee must consent to any financial deals regarding assets such as property or cars. As in the case of bankruptcy, the trustee may request financial information, which must be provided.
What is a Debt Agreement?
A debt agreement is an arrangement between the debtor and creditors to settle debts without bankruptcy. The debtor nominates a debt agreement administrator. Any payments are made to the debt agreement administrator, who will distribute the funds as determined by the agreement.
The debt agreement should include plans for unsecured debts, even if the plan is not to settle a particular debt. As with a PIA or bankruptcy, creditors may recover assets as part settlement of secure debts.
There are no restrictions on the terms of a debt agreement. Normally it will specify a lump sum payment or settlement of debts over a period of time. It may offer the proceeds from the sale of assets.
Details of the debt agreement are recorded on the National Personal Insolvency Index (NPII). Unlike bankruptcy or a PIA, the details are held for a certain amount of time depending on certain criteria, as determined by the Australian Financial Security Authority.
Financial advice and assistance
Entering bankruptcy or one of the alternatives is a major financial decision and can have long-lasting and severe consequences. It is highly recommended that you consult with Corporate Lifestyle for advice, information and to help you throughout the process.