The latest statistics released by the Australian Financial Security Authority (AFSA) reveal that personal insolvencies across Australia are on the rise. Bankruptcy is the most prevalent form of personal insolvency options, providing relief to individuals unable to manage their debts. While it offers a pathway to a financial reset, it also carries strict obligations and long-term consequences that must be carefully considered.
This article outlines how bankruptcy works in Australia, the statutory requirements that apply and the practical implications for individuals considering or entering bankruptcy.
Initiating bankruptcy
Voluntary bankruptcy
Individuals may initiate bankruptcy by lodging a Debtor’s Petition together with a Statement of Affairs. These forms disclose a complete picture of the individual’s financial circumstances and commence the bankruptcy period, which generally runs for three years and one day.
Creditor-Initiated bankruptcy
Alternatively, a creditor can apply to the Court for a sequestration order where debts remain unpaid. Once the order is made, the individual is declared bankrupt and is required to complete a Statement of Affairs. If the form is accepted by AFSA, the individual will be discharged from bankruptcy 3 years and 1 day from the date the form is lodged. If an individual fails to submit this form, their bankruptcy will continue indefinitely.
The Statement of Affairs
The Statement of Affairs is central to both voluntary and court-ordered bankruptcy. It requires disclosure of:
- Income and employment details
- Assets and liabilities
- Business, company or trust involvement
- Court proceedings and other financial information
This form enables the trustee to assess the estate and administer assets and obligations in accordance with the Bankruptcy Act.
Statutory framework and key considerations
Treatment of debts
Most unsecured debts, including credit cards, personal loans, unpaid rent, utility bills and professional fees, are released upon bankruptcy.
Certain debts remain payable, such as:
- Court fines and penalties
- Child support and maintenance
- HECS-HELP and other government loans
- Debts incurred after bankruptcy begins
Secured debts
Secured creditors (e.g., mortgage or car finance lenders) retain the right to repossess secured assets if repayments are not maintained.
If the asset is sold and a deficiency remains, the shortfall becomes an unsecured claim in the bankrupt estate.
Joint and Overseas debts
- For joint debts, the non-bankrupt party becomes liable for the entire amount unless they are also bankrupt.
- Overseas debts form part of the Australian bankruptcy; however, creditors may still pursue repayment if the individual returns to the originating country.
Income assessment
Under section 139W of the Bankruptcy Act, bankrupt individuals may be required to make income contributions if their after-tax income exceeds the statutory Base Income Threshold Amount (BITA) The BITA is currently $74,064.90 (adjusted for dependents) and is updated on 20 March and 20 September every year.
Trustees reassess income annually and changes in employment or financial position must be reported.
Vesting of assets
All assets vest with the trustee upon bankruptcy, with limited exceptions such as:
- Ordinary household goods
- Tools of trade (up to statutory limits)
- A vehicle with less than $9,600 in equity
Assets continue to vest for six years following bankruptcy and up to twenty years if they were not disclosed to the Trustee. Trustees may sell vested assets where sufficient equity exists.
Practical impacts of bankruptcy
Travel restrictions
Passports must be surrendered to the trustee and overseas travel requires written approval during the bankruptcy period.
Public record and employment
A bankrupt’s details are permanently recorded on the National Personal Insolvency Index (NPII). This public listing may affect certain professions, registrations and licences.
For example:
- Lawyers cannot manage trust accounts
- Bankrupt individuals cannot manage companies without Court approval
- Public office roles such as Member of Parliament or Senator are restricted
Business operations
A bankrupt may continue trading as a sole trader but must trade under their personal name or otherwise disclose their bankrupt status to suppliers and customers.
Access to credit
Bankruptcy remains on a credit report for at least two years after discharge, impacting the ability to obtain finance.
Restrictions on Company Directorship
Under section 206B of the Corporations Act, bankrupt individuals are automatically disqualified from acting as company directors, limiting involvement in corporate management until discharge.
Bankruptcy can provide meaningful relief for those experiencing overwhelming financial distress, but it brings significant obligations and long-term impacts. Understanding the statutory requirements, along with the consequences for assets, income, credit and employment, is essential before taking this step.
Given the complexity of the insolvency regime, professional advice should be sought to ensure all options are considered and obligations are clearly understood.
If you need help managing your affairs, speak to your local William Buck advisor.
