What is Bankruptcy
What is Bankruptcy? When a person cannot pay their debts they are called a debtor. The person that the debtor owes the debt to is called a creditor.
A debtor and a creditor can both file petitions forcing the debtor into bankruptcy, the debtor with a debtor’s petition and a creditor with a creditor’s petition.
When a debtor goes into bankruptcy, the property of the bankrupt and any property that was acquired during the bankruptcy become controlled by a trustee, and distributed to satisfy debts owed to the creditors.
What is Bankruptcy Trustee
A trustee can be a person or a company appointed to administer a bankrupt person’s estate. A trustee will negotiate with all of the creditors, making the determination if the estate has any property of value available to be distributed, and then distributing the property efficiently to satisfy any debts owed by the debtor.
Any monies gained by selling the bankrupts property is distributed to the creditors by the trustee. This is done on a pro-rate basis calculated on a percentage of overall debt owed.
Why does Bankruptcy Exist
The Statute of Bankrupts 1705 (UK) is the first instance where bankruptcy as we know it today is seen. In Fowler v Padget Lord Kenyon states that “Bankruptcy is considered a crime and a bankrupt in the old laws is called an offender.” In modern day bankruptcy the estate of the bankrupt is administered to pay the debts so that the debts are legally dealt with effectively enabling the debtor can essentially make a new start.
Restrictions on a Bankrupt Person’s Life
The Australian Financial Security Authority (formerly ITSA) have an extensive list of obligation and consequences of a breach of those obligations. Some of those obligations include:
- Remaining in bankruptcy for a number of years;
- Restrictions in overseas travel;
- Not being able to receive credit over certain amounts; and
- Not being able to hold certain jobs or positions.
There are a lot more obligations and restrictions to becoming a bankrupt. It is a really good idea to follow the links on this page and fully familiarise yourself before thinking about bankruptcy.
When does a Bankruptcy End
After declaring bankruptcy, a bankruptcy will continue until a discharge of its obligations. A discharge of bankruptcy will automatically happen after three years unless the trustee lodges a notice of objection pursuant to section 149D of the Bankruptcy Act 1066.
At the end of the bankruptcy (except in certain circumstances) any debts remaining unpaid by the debtor are cancelled, and the bankrupt person is no longer obliged to pay the creditors.
The Bankruptcy Act 1966
The main purpose of the Australian Bankruptcy Act 1966 is to:
- Help insolvent debtors to be released from their debt;
- Assist in the payment of debts to creditors;
- Facilitate and foster the use alternatives to bankruptcy;
- Ensure that debtors who are in a position to pay their debts, do pay their debts;
- Restrict the commercial enterprise and business activities by insolvent debtors throughout the duration of the bankruptcy period;
- Allows for the prosecution of insolvent debtors who do not strictly adhere to bankruptcy laws to be prosecuted; and
- Ensure that the integrity of the bankruptcy system, legislation and framework in upheld and for regulating bankrupts, administrators and trustees.