What is bankruptcy?
Bankruptcy is a process where a trustee is appointed to administer an insolvent person’s estate. A person is insolvent if they are unable to pay their debts as and when they fall due.
How long does bankruptcy last?
Generally bankruptcy lasts three years from the date that the bankrupt files their Statement of Affairs, unless the trustee objects. A Statement of Affairs is a document completed by the bankrupt which discloses the bankrupt’s personal and financial information including their assets and debts. At the end of the bankruptcy the bankrupt is ‘discharged’.
Is going bankrupt the right option for me?
Do you have the requirements to file bankruptcy? Bankruptcy can provide a solution to debt problems for both the debtor and the creditors. The debtor is released from their debts at the end of the bankruptcy and can start afresh. Creditors have the benefit of an independent person (the trustee) administering the debtor’s estate and receiving some payment for the unpaid debts.
How does someone become bankrupt?
A person may make themselves bankrupt by filing a debtor’s petition and Statement of Affairs with the Official Receiver. The Official Receiver will then issue an estate number to the bankrupt. Although it may not be advisable to engage in do it yourself bankruptcy, it is better to get a professional to help with all of the complicated questions, such as when to file bankruptcy, and answering bankruptcy questions.
A creditor may apply to the Federal Circuit Court to make a person bankrupt. Generally, the creditor must have obtained a judgment on their debt and have served a bankruptcy notice on the debtor. The debtor then must pay the debt before the expiry of the bankruptcy notice. If the debtor fails to pay the debt before the expiry of the bankruptcy notice the creditor may file a creditor’s petition with the Court seeking a sequestration order, which will bankrupt the debtor. It is important to note that the Statement of Affairs must be completed by the bankrupt before the three years will begin to ‘run’ so it is essential that the bankrupt files this as quickly as possible.
What are the consequences of being made bankrupt?
There are a number of restrictions and obligations placed on a bankrupt person including:
- The bankrupt must surrender their passport and seek permission for any overseas travel;
- The bankrupt must make all financial records available;
- The bankrupt must make all their divisible assets available to the trustee;
- The bankrupt can’t act as a company officer;
- The bankrupt can’t trade under a registered business name without disclosing that they are a bankrupt;
- The bankrupt can’t incur credit over a set amount without disclosing to the lender that they are bankrupt.
A bankrupt’s assets will be realized by the trustee. Any asset that is able to be realized and divided among creditors is referred to as divisible assets. Divisible assets include:
- All property owned a the time of bankruptcy or acquired during the bankruptcy;
- Any rights or powers over property that existed at the date of bankruptcy or during the bankruptcy;
- Any rights to exercise powers over property.
Examples of divisible assets may include:
- Real estate including the family home;
- Contents of bank accounts;
The bankrupt’s assets which cannot be realized may include:
- Necessary clothing and household items;
- Tools of trade up to an indexed amount;
- Motor vehicle up to an indexed amount;
- Sentimental property;
- Superannuation payments;
- Life assurance or endowment policies;
- Certain damages and compensation payments.
Sentimental property must have sentimental value and be an award for sporting, cultural, military or academic achievement. This does not include monetary awards. The creditors must also resolve that the property is sentimental. Engagement and wedding rings are not considered sentimental property.
A bankrupt is still able to earn an income up to a certain amount. Any income in excess of this amount must be paid into the estate.
What are the duties of the trustee?
The trustee will:
- Find and realize the assets of the bankrupt;
- Conduct investigations into the financial affairs of the bankrupt;
- Make any recovery of assets necessary;
- Report to creditors;
- Report offences; and
- Distribute surplus funds to creditors, usually by way of dividends.
The assets and property of the bankrupt immediately ‘vest’ in the trustee once bankruptcy occurs. This means that the trustee automatically gains rights and control over the assets and property and does not have to take any special action.
How are creditors affected when a person becomes bankrupt?
Secured and unsecured creditors of the bankrupt are affected in different ways. If a creditor is ‘secured’ it means that they have a charge over a debtor’s asset; a common example of a secured creditor is a bank with a mortgage over the family home. A creditor is ‘unsecured’ if they do not hold a right to or charge over any of the debtor’s assets; a common example of an unsecured creditor is a bank who has issued a credit card to a customer.
Unsecured creditors exchange their right to bring a claim for a right to prove their debt in the bankrupt estate in return for a dividend. This means that the unsecured creditor gives up their right to bring a claim for the full amount of the debt owed by the bankrupt for the right to be paid a dividend by the trustee once all assets of the bankrupt have been realized.
Secured creditor’s rights generally remain the same. They can enforce their rights by having their secured asset sold or realized. They are then able to prove in the estate for the shortfall or difference between the amount recovered from the security and the original amount of their debt.
Creditors are able to vote to change the trustee.
What are void transactions and preferential payments?
Void transactions include undervalued transactions, transfers which were intended to defeat the debtor’s creditors and transfers where the consideration was paid to a third party within five years of the commencement of the bankruptcy. There are some exemptions including maintenance agreements or orders made in the Family Court or payment of tax pursuant to Commonwealth or State law. The trustee is able to void these transactions and recover the asset. It will then be available for distribution among the creditors.
Preferential payments are when a creditor of the bankrupt received an advantage over other creditors when compared to what they would have received in the bankruptcy. The payment has to have occurred when the bankrupt was insolvent and within a certain timeframe of the bankruptcy. The trustee is able to void these preferential payments and recover the payment in order to make a more fair and equitable distribution among the creditors.
Is there an alternative to going bankrupt?
Yes. A personal insolvency agreement (also known as a Part X agreement) allows a debtor to come to an agreement with their creditors in relation to their debts without being made bankrupt. In this process, a trustee is appointed by the debtor signing an authority under section 188, a Statement of Affairs is prepared by the debtor and a draft personal insolvency agreement must be provided to the trustee. A meeting of creditors is then held to decide whether the creditors will accept the proposal. Debtors should be aware that signing a section 188 authority is an act of bankruptcy and creditors may choose not to accept the proposal and bankrupt the debtor instead.
What is a section 73 proposal?
A section 73 proposal can be used to annul a bankruptcy. The bankrupt proposes an alternative arrangement for paying the debts to creditors.
An annulment has the effect of voiding the bankruptcy from the beginning. It is as if it never occurred.
What is a Part IX debt agreement?
A Part IX debt agreement is an agreement between the debtor and their creditor’s which provides for a sustainable plan for the debtor to pay off their debts.