Written byBankruptcy is a legal status for an individual who cannot pay their debts, under which a trustee takes control of their affairs and deals with creditors on their behalf.
Also known as: personal bankruptcy, sequestration, going bankrupt
Key points
- It applies to individuals, including sole traders and directors who are personally liable; companies go through liquidation or administration instead.
- You can enter bankruptcy voluntarily with a debtor's application, or a creditor can petition the court once you owe at least the statutory minimum.
- It normally lasts three years and one day, can end early by annulment, and can be extended for non-compliance or non-disclosure.
- Most unsecured debts are released at discharge, but HELP and other study loans, child support and maintenance, and court fines and penalties are not.
- It is recorded on the National Personal Insolvency Index (NPII), severely affects your credit rating and bars you from managing a company.
How bankruptcy works
Bankruptcy starts either with your own debtor's application to AFSA or with a creditor's petition that leads to a court sequestration order. A trustee, either a registered trustee or the Official Trustee, is appointed and the bankruptcy is entered on the NPII. The trustee reviews your assets, income, records and liabilities and can sell non-exempt assets to pay creditors.
If your income is above the statutory threshold you must make compulsory contributions for the life of the bankruptcy. While bankrupt you must disclose your affairs fully, report income and changes of circumstances, tell any lender you are bankrupt before borrowing over the set limit, and stay out of company management.
Which debts are covered
Bankruptcy covers most unsecured debts that exist at the date of bankruptcy: credit card balances, personal loans, store accounts and business debts you are personally liable for. Secured lenders keep their rights over the asset, so whether you keep your home or car depends on the equity, the mortgage or security arrangements and the trustee's assessment.
Some debts are not released at all: HELP and other study loan debts, ongoing child support and maintenance obligations, and court fines and penalties. Joint debts remain payable by the co-borrower who is not bankrupt. AFSA publishes the definitive list.
How bankruptcy ends and the alternatives
Most bankruptcies end by automatic discharge after three years and one day, provided you have complied with your obligations. Annulment ends it earlier if all debts, interest and trustee costs are paid or a court orders it, and the trustee can apply to extend it, to as long as eight years, for serious non-disclosure or dishonesty. The NPII record remains searchable afterwards.
Because the consequences are serious, the alternatives are worth comparing first: a debt agreement, a personal insolvency agreement, informal negotiation or a hardship variation with each lender, consolidating or refinancing debts, and free financial counselling. Each has different effects on your assets, credit record and future borrowing.
Not to be confused with
- Liquidation
- liquidation winds up a company; bankruptcy applies to individuals, including sole traders and directors who are personally liable
- Default
- a default is a breach of one credit contract; bankruptcy is a legal status that deals with all of an individual's provable debts at once
- Debt adjusting
- debt adjusting is negotiating with creditors on your behalf to make debts manageable; bankruptcy is the formal legal status that follows when that fails
Frequently asked questions
How long does bankruptcy last in Australia?
Normally three years and one day from the date of bankruptcy. It can end earlier by annulment if all debts and trustee costs are paid or a court orders it, and the trustee can apply to extend it for up to eight years if you fail to comply or hide assets or income.
What debts are not cleared by bankruptcy?
HELP and other study loan debts, ongoing child support and family maintenance, and court fines and penalties are not released by bankruptcy. Secured debts are not wiped either: the lender keeps its rights over the asset. AFSA publishes the definitive list of excluded debts.
Can I keep my house or car if I go bankrupt?
It depends on who owns the asset, how much equity there is, the mortgage or security arrangements and whether the trustee decides a sale is necessary. Some assets are protected, jointly owned assets are more complicated, and secured lenders keep their rights. Discuss your specific position with the trustee.
Does bankruptcy stop creditors taking legal action?
It stops many types of creditor action, because the trustee takes over dealing with provable debts, but it does not erase every form of enforcement. Debts that are excluded from bankruptcy can still be pursued, and secured creditors can still deal with their security. The trustee manages creditor claims.
How does bankruptcy affect my credit rating?
Severely. Bankruptcy is recorded on the National Personal Insolvency Index, which lenders and others can search, and it appears on your credit file. It will substantially limit your ability to get credit during the bankruptcy and for some time afterwards, so rebuilding usually means small products and on-time payments.
Related terms
Liquidation
Liquidation is the process of winding up a company: a liquidator takes control, sells its assets, pays creditors in a set order of priority and the company is deregistered.
Read definitionAdministration
Administration is a formal insolvency procedure where an independent administrator takes temporary control of a company to rescue it or get creditors a better result than immediate liquidation.
Read definitionDebt adjusting
Debt adjusting is any arrangement that changes what a debtor owes or when they pay it, from an informal hardship variation through to a debt agreement or bankruptcy.
Read definitionDefault
A default is a borrower's failure to meet the terms of a credit contract, usually by missing repayments, which lets the lender demand the balance and enforce its security.
Read definitionHardship
Financial hardship is when a change in your circumstances, such as job loss or illness, means you cannot meet your loan, credit or bill repayments on time.
Read definitionSole trader
A sole trader is the simplest Australian business structure: one person owns and runs the business, keeps the profits, and is personally liable for its debts.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.