Bankruptcy

What is bankruptcy? A guide to Australian Bankruptcy

What is Bankruptcy – and why that can sometimes be a loaded question.

There’s a lot to understand if you’re going to answer the question what is bankruptcy? adequately. But don’t worry, that’s where we come in.

Let’s start with the basics. In Australia, we use the term ‘insolvent’ to describe when an individual, like yourself, becomes personally unable to pay their debts as and when they fall due.

For people who are insolvent, bankruptcy may be an appropriate solution.

When you become bankrupt, your provable unsecured debt is no longer payable. Unsecured debt includes credit cards, personal loans, shortfalls and even tax debt. That means no more anonymous phone calls or threatening letters from creditors after you become bankrupt.

A Trustee in bankruptcy (like us) will be appointed to manage what will be known as “your bankrupt estate”. Bankruptcy generally lasts for 3 years and 1 day, and then you’re automatically discharged.

Whether or not your creditors receive any money from your bankruptcy will depend on how much you earn. It’ll also come down to the type of assets that you own.

It’s important to understand that bankruptcy impacts everyone on an individual level because everybody’s situation is different.  Knowing “what is bankruptcy” is to understand the process and how your individual circumstances might determine how bankruptcy will affect you.

Who is the trustee, and what is their role?

In Australia, there are two types of trustee; a Registered Trustee and the Official Trustee.

A Registered Trustee is a qualified personal insolvency practitioner who is registered with AFSA and permitted to administer bankrupt estates and Personal Insolvency Agreements. As with the Official Trustee, they’re responsible for ensuring that your bankruptcy is fair for you, your creditors, and any other parties involved.

Meet our Trustees

The Official Trustee is one of the many roles administered by the Australian Security Financial Authority (ASFA). They are also responsible for the administration and regulation of:

  • The personal insolvency system in Australia
  • Proceeds of crime,
  • Trustee services, and
  • The administration of the Personal Property Securities Register (PPSR).

Presently, AFSA administers more than 80% of bankrupt estates in Australia every year.

How does someone become bankrupt?

There are two ways for you to become bankrupt.

You make yourself bankrupt: This a voluntary process. It involves you completing the relevant bankruptcy paperwork. From there you supply the completed forms and any supporting documents to a registered trustee like Aravanis, or to the Official Trustee (AFSA). In fact, more than 90% of our clients lodge their Debtors Petition and Statement of Affairs voluntarily.

You’re made bankrupt by a creditor: A creditor to whom you owe money can make you bankrupt by lodging a Creditor’s Petition through the Federal Court of Australia. The petitioning creditor who makes you bankrupt will also determine who your bankruptcy trustee is.

How long does bankruptcy last?

Bankruptcy typically lasts for three years and one day. You’re then automatically discharged, although if you don’t meet your obligations, your bankruptcy can be extended for a further 2 to 5 years.

What debts are covered in bankruptcy?

When you’re discharged from bankruptcy, you‘ll be released from your provable unsecured debts.

Unsecured creditors: An unsecured creditor doesn’t have a hold over any possessions, assets or property purchased with the credit they provided. A good example of an unsecured debt is a credit card. Because the creditor has no security, they don’t have the right to repossess any goods that you’ve purchased.

Once you’re bankrupt, any legal action being taken by an unsecured creditor (like a summons, garnishee order, or recovery action by a sheriff or bailiff) must end. You’ll also stop making payments to your unsecured creditors.

Some unsecured debts such as child support, fines and HECS-HELP debt aren’t provable in bankruptcy. So you’ll need to keep making your payments to these creditors.

Other debts that aren’t covered include unliquidated damages, which as an example, can result from a motor vehicle accident.

Secured creditors: A secured debt is where a creditor has a mortgage, lien or charge over an asset until the debt is paid off.  Examples of this are mortgages, car loans, hire purchase agreements and secured business loans.

If you default on your payments, bankruptcy doesn’t affect the right of a secured creditor to repossess and sell the asset (ie a mortgagee repossessing a property if the mortgage payments aren’t made). They’d do this to reduce your debt to them. If this happened and there was an amount left owing after a secured creditor sold an asset, the left over amount (shortfall) will be covered in your bankruptcy as a provable unsecured debt.

What happens when I become bankrupt?

When you become bankrupt, your unsecured creditors are immediately notified, and they should cease chasing you for payment.

Your trustee will then begin the process of administration. Their main objective is to ensure that your bankruptcy is fair to both you and your creditors.

Whether or not your unsecured creditors receive any money from your bankrupt estate typically comes down to two key components:

  • Do you earn enough money to have to make a payment towards your debt, and
  • Do you own or have a financial interest in any assets that are not protected in bankruptcy

What assets can I keep?

Assets are anything of value you own when you become bankrupt, as well as anything you buy or receive before the end of your bankruptcy.

The Bankruptcy Act states that certain assets are protected, which means you may keep them. This includes your household items, normal/ordinary furniture and personal effects as well as tools used to earn an income and motor vehicles (to a limit). It also includes some life insurance and superannuation policies as well as some compensation, superannuation and life insurance payouts received after the date of bankruptcy.

Will I lose my car or house in bankruptcy?

Vehicles (mainly used for transport) are protected under the Bankruptcy Act, where the total value of the vehicles minus the sum owing under finance (if applicable) is less than a set limit.

If you own or have an interest in any assets that are not protected in bankruptcy, these assets will “vest” in your bankruptcy trustee. ‘Vest’ is another way of saying ‘come into ownership of’ so when used in a bankruptcy context, it means that your interest in any unprotected asset will belong to your trustee after you become bankrupt. When an asset vests in your bankruptcy trustee, he or she will need to realise the value of your interest in this asset for the purpose of making some money available to your bankrupt estate.

Some of the most common assets to vest in bankruptcy are real property, vehicles worth more than the set limit, and other assets like caravans, boats and trailers. Other types of assets that can vest include shares and other managed investments, as well as intellectual property.

Owning or having an interest in an asset that is not protected in bankruptcy doesn’t always automatically mean that you have to lose it. There can be options available depending on your circumstances.

MORE ON HOW BANKRUPTCY WILL AFFECT YOU

What can a mortgagee or other secured creditor do when I become bankrupt?

A secured creditor holds a charge over a particular asset(s) which you own. Some common examples of secured credit contracts are:

  • a house subject to a bank mortgage;
  • a motor vehicle subject to a bill of sale;
  • goods under hire purchase, chattel mortgage, lease or bill of sale with a finance company.

It’s often mistakenly believed that a secured creditor can just take possession of their asset because you filed for bankruptcy. This just isn’t true.

While bankruptcy does not alter the rights of a secured creditor, the secured creditor is not able to repossess an asset just because you’re bankrupt. But if you do fall behind in your payments or commit some other kind of contractual default – that’s a different story. If that happens, the secured creditor may repossess and sell their security, but that would also be the case regardless of you being bankrupt or not.

How long will bankruptcy be listed on my credit file?

5 years in total. After that, your credit file will be free of any bankruptcy listing.

MORE ON BORROWING AFTER BANKRUPTCY

Will my bankruptcy be listed anywhere else?

Yes, there will also be a listing on the National Personal Insolvency Index (NPII). It’s a computerised database of all personal insolvencies in Australia, both past and present, managed by the Australian Federal Government.

How much does it cost to become bankrupt?

Nothing.

Some organisations will charge you a fee for the preparation and lodgement of your bankruptcy paperwork. We’re not one of them.

If you’re voluntarily filing for bankruptcy, you may want to choose your own registered trustee, like Aravanis. If the registered trustee consents to administer your bankruptcy, then they’ll typically help you with the preparation and lodgement of your bankruptcy paperwork. At least, that’s what we do – free of charge.

If you’re unable to find a registered trustee who’ll agree to act for you, then the Official Trustee (AFSA) will likely handle your bankruptcy and you can lodge your bankruptcy paperwork directly with them for free.

If you’ve made enquiries with any organisation charging fees for paperwork lodgement, read our post on FREE BANKRUPTCY before you pay anything! You can become bankrupt for free, and it’s not nearly as difficult as it’s made out to be.

If you’d like more information on how to file for bankruptcy for free just call 1300 369 168 or make an online enquiry and we’ll contact you.

How are my bankruptcy trustee’s fees worked out?

The trustee is entitled to a fee for administering your bankruptcy, whether that trustee is AFSA or a registered trustee, like Aravanis.

The fees are not recoverable from you directly unless you’re seeking an annulment of your bankruptcy. Instead, the trustee’s fees are paid using the funds recovered in your bankruptcy administration. These funds generally come from income contributions and the realisation of vesting assets.

The trustee’s fee is typically based on an hourly rate and usually needs to be approved by a resolution of your creditors.

There’s still a lot more to understand before you can answer the question what is bankruptcy?, but a great place to start is to learn about how bankruptcy might affect you.

Or you could just give us a call on 1300 369 168 or make an online enquiry and we’ll contact you. 

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