Author
Gavin KingDirector, ASIC Registered Liquidator & AFSA Registered Bankruptcy Trustee
The Australian Financial Security Authority (AFSA) defines bankruptcy as a legal process where you’re declared unable to pay your debts. It can release you from most debts, provide relief, and allow you to make a fresh start.
Whilst this definition is accurate, there are a number of pros and cons to consider because it’s not quite as simple as wiping the slate clean. It's important to remember that bankruptcy is a case-by-case approach,where each individual experiences a tailored process.
Is bankruptcy the right option for me?
Seeking professional advice prior to taking any action is critical if you suspect you are facing significant financial issues. A Registered Trustee will meet with you, discuss your situation and provide the most effective pathway to alleviate your financial difficulties.
They will support you through the bankruptcy process if it’s the best path forward. If not, they can help you explore alternative solutions that may better suit your situation.
If you're noticing any of the following issues, bankruptcy might be worth considering:
- Unable to pay creditors by due date (bank, bills, invoices)
- Asking to borrow money from family or friends
- Applying for further credit or finance
- Receiving letters of demand or late payment notices
- Receiving calls from debt collectors
- Court notices
What causes bankruptcy?
When an individual is unable to pay all their debts, bankruptcy can often be the result. Common causes of bankruptcy include:
- Loss of income or unemployment
- Excessive personal or business debt
- Poor financial management
- Unexpected medical bills
- Business failure
- Economic downturns or market shifts
- Natural disasters affecting income or assets
- Divorce or relationship breakdown
Creditors, debt collectors, or lawyers may send a variety of notices and summonses to you indicating that they are experiencing financial difficulties. Bankruptcy proceedings may be initiated if an individual fails to respond to these notices. Similarly, bankruptcy may occur if a company’s debt is guaranteed by an individual.
If creditors can prove that an individual has at least $10,000 in debt and that a bankruptcy notice has expired, the Court may declare the individual bankrupt.
How long does bankruptcy last?
Bankruptcy typically lasts for three years and one day.
Consequences of bankruptcy during this time (and sometimes long afterwards) include:
- Your ability to get credit
- Travel overseas
- Gain employment
The bankrupt person is ‘discharged’ at the end of the bankruptcy period.
Credit agencies will keep a record of your bankruptcy for five years from the date you became bankrupt or two years from when your bankruptcy ends, whichever is later. In other words, your ability to secure credit will be impacted beyond the three-year term of your bankruptcy.
Your name and personal details will also be permanently recorded on a public register called the National Personal Insolvency Index (NPII).
What is a Trustee?
A Trustee is the person appointed to manage your Bankrupt Estate when you enter bankruptcy. They handle the administration of your bankruptcy, which includes dealing with your creditors, managing your assets, and ensuring all legal requirements are met. The Trustee can be a Registered Trustee you nominate or the Official Trustee from AFSA.
What do you need to do before declaring bankruptcy?
First and foremost, you need to seek professional help from an independent financial adviser who can be either someone of your choosing (like a Registered Trustee) or assigned to you through the National Debt Helpline. They can advise you of your options based on your circumstances.
The main types of bankruptcy options in Australia include:
- Temporary debt protection (TDP): This provides a 21-day protection period from being pursued by unsecured creditors while you seek help and decide how to proceed.
- Voluntary Bankruptcy: Apply through AFSA to become bankrupt, which lasts just over three years and at the end, you are released from most debts.
- Debt Agreements: Pay a sum you can afford, which are binding agreements between you and your creditors.
- Personal Insolvency Agreements: These are made between you and your creditors to pay an agreed amount in instalments or a lump sum.
It's important to note that not all options are available to everyone. A registered Trustee or financial adviser will discuss the viable options for your circumstances. You should always ensure you speak with a qualified professional.
What is the bankruptcy process?
A person with unmanageable debt can enter into voluntary bankruptcy by filling out and submitting a Bankruptcy Form. A creditor (person or business you owe money to) can also apply to have you declared bankrupt through the court system if you owe them $10,000 or more.
See below for the process of applying for voluntary bankruptcy:
- Seek advice from an insolvency professional so you understand the process and what is required.
- Complete a bankruptcy form to be lodged with AFSA, detailing your personal information and financial affairs including your current assets and liabilities. You must include all debts when applying for bankruptcy. Notify your trustee straight away if you forget to include any.
- Once you are declared bankrupt, you must provide details of your debts, income, and assets to your trustee.
- Your trustee will notify your creditors that you’re bankrupt, which stops most creditors from contacting you about your debt.
Do you still need to pay off your debt if declared bankrupt?
Your trustee may sell certain assets to help repay your debts or require you to make compulsory income contributions if your after-tax income exceeds a set threshold determined by AFSA*. Thresholds are updated every six months on 20 March and 20 September.
They can also recover any money in your bank account to meet your debt obligations (but will allocate you enough for modest living expenses).
Bankruptcy will cover the following types of debt:
- Unsecured debts like personal loans and payday loans
- Gas, electricity, phone and internet bills
- Credit cards and store cards
- Overdrawn bank accounts and unpaid rent
- Medical, legal & accounting fees
Bankruptcy will not cover:
- Penalties and fines issued by a court
- Child support & maintenance
- Government Student Loans
- Debts created after you have been declared bankrupt
- Unliquidated debts, where the amount has not been specified
Key considerations:
- You must continue making repayments on secured debts such as your house, car, or any hire/purchase agreements, where an asset is the collateral of a loan.
- If you don’t make repayments, a creditor has the right to sell that asset. You must contact your secured creditors to discuss your intentions with the debt and the asset subject to their security.
- If you have a joint debt with another person and become bankrupt, the other party assumes 100% responsibility for the debt.
- Guarantors for a loan also take on the full liability of any outstanding debt if you have been declared bankrupt.
- If your debts are overseas, your creditors can’t pursue you in Australia, but if you return to the country of the debt, then it may be possible for them to take further action.
Can I keep my car or house in bankruptcy?
The Bankruptcy Act states that vehicles used primarily for transportation are protected, assuming that the value of the vehicles, minus what is owed under finance (if applicable), is not greater than a predetermined limit.
If you own or have an interest in any assets that are not protected in bankruptcy, they will be vested in your bankruptcy trustee after you declare bankruptcy. ‘Vesting’ and ‘coming into ownership of’ are synonyms, so when a bankruptcy matter has commenced, it means that your interest in any unprotected assets will form part of the bankrupt estate and your trustee may sell them.
When your bankruptcy trustee acquires an asset, they must sell the asset and collect the proceeds for the benefit of your bankrupt estate.
It is possible to retain an asset that is not protected in bankruptcy if you own it or have an interest in it. Your circumstances may determine the options available to you.
How to bounce back from bankruptcy
Whether you’re dealing with personal bankruptcy or a company insolvency, you can recover and achieve success in your personal and professional life by following these comeback strategies.
1. Co-operate with your trustee in personal bankruptcy
Comply with the bankruptcy process and fully cooperate with your trustee. You’ll need to declare details of your income, assets, and debts to your trustee.
Your trustee will contact your creditors and inform them you’re bankrupt. They can help sell your assets to cover your debts. If you earn above a certain amount, you might need to make compulsory repayments, so comply with these requirements as well.
2. Don’t borrow until your bankruptcy has been discharged
While you can apply for loans while bankrupt, it’s probably best to limit loans until you can live within your means while paying off new debt. If you must apply for a loan, make sure you can meet the repayments. Be careful about submitting multiple applications. Your loan applications are recorded on your credit file and they can affect your credit score.
3. Start saving
Your savings were probably drained when you filed for bankruptcy, so one essential strategy for rebounding is to start saving again. Pay yourself first, and set up a nest egg for emergencies and unexpected events. It can seem difficult but saving as little as 5% of each paycheque can add up quickly.
Explore strategies to reduce the temptation to overspend. For example, limit yourself by using cash to pay for daily expenses. Once you’ve spent the allocated amount, you can’t withdraw more cash until next week.
4. Set up a budget
Follow a realistic budget as you get back on track. You need to know where your money is going. Tracking your expenses makes you aware of how you’re spending your income and where you can save.
Here are some practical tips to support better budgeting:
- Your budget should cover recurring expenses like utilities and phone bills.
- Assign fixed, realistic amounts for groceries and variable outgoings.
- Subtract your expenses from your income.
- If you’re left with a positive number, you’re on the right track.
5. Rebuild your credit
Rebuild your credit history by checking your credit file at least once a year. You’re eligible for one free credit report per year from the three credit reporting agencies.
Check your credit report for any errors, and contact the agency to raise a dispute if there are any errors. Your credit file affects your future eligibility for loans such as mortgages, so you’ll want to ensure it’s accurate.
Take the following advice to help rebuild your credit:
- Pay your bills on time to help you build a good credit history.
- Set up automatic payments so you don’t forget to pay bills.
- Budget and track spending to ensure you can cover utilities and phone bills.
- Live within your means.
6. Share and reflect
Share your story with family and friends. Consider what you’ve learned from the experience. While sharing and talking about bankruptcy might be the last thing on your mind, you might be less likely to make the same mistake again if you’re open about it. Family might hold you accountable, and disclosing the experience could help you understand how it happened so you can prevent it from occurring again.
If you’ve experienced bankruptcy, you probably know major financial challenges aren’t resolved overnight. It can take years to rebound, but you can do it if you follow a budget and set financial targets. Take ownership of your recovery and start making proactive moves today.
Where can I find help?
Many clients come to us with unsustainable personal debts — often from using personal loans or credit cards to keep their business running. If your personal debt exceeds $100,000, repaying it can be extremely difficult and take years. However, by proactively entering voluntary bankruptcy, there may be options to protect your family home and other assets.
We understand unmanageable debt is a stressful experience. Bankruptcy is just one option to help manage personal insolvency and should only be considered after consulting a qualified and registered professional.
If you have a business at risk of insolvency, call our experts at Mackay Goodwin for an obligation-free discussion of your situation.
References:
https://www.afsa.gov.au/professionals/resource-hub/indexed-amounts#income-contributions (https://www.afsa.gov.au/professionals/resource-hub/indexed-amounts#income-contributions)
Get in touch
Speak to one of our experts now for a free consultation. Enter your details below or call 02 8001 6520.