BANKRUPTCY AND YOU
Why would someone choose Bankruptcy?
Bankruptcy enables a financially distressed person to "re-set" his or her financial affairs — to provide a fresh financial start on discharge from bankruptcy. It serves both debtors and creditors (see below) — in the main, bankrupts are protected from being pursued by their current creditors and, with some exceptions, are released from those debts at the completion of their bankruptcy. However, in choosing bankruptcy you should be aware that there will likely be long term negative effects on your financial reputation, and wherever possible you should consider the alternatives.
How does Bankruptcy serve the interests of creditors?
The interests of creditors are served by having a Trustee in Bankruptcy, an independent person charged with investigating and controlling the bankrupt’s affairs, and overseeing the collection and distribution of the bankrupt’s assets.
Can I operate my business as a Bankrupt?
During the time you are either bankrupt or have entered into a personal insolvency agreement you will be disqualified under the Corporations Act from managing companies. Unless the Court gives you special permission, you will immediately and automatically cease to be a company director, alternate director or company secretary.
Can I continue working and earning income as a Bankrupt?
Bankrupts are encouraged to continue working and earning income.
How would I become a Bankrupt?
There are two ways in which you may become a bankrupt. The first is by way of a Debtor’s Petition, where you make a formal Statement of Affairs to the Official Receiver. The second is by Creditor’s Petition, where a creditor has obtained a judgement on their debt and has served you with a Bankruptcy Notice giving the required statutory period to pay. If you fail to pay the judgement debt, your creditor may choose to file a Creditor’s Petition with the Federal Court seeking a Sequestration Order, which is likely to result in the Federal Court declaring you to be a bankrupt.
How much must I disclose about my financial affairs?
Bankrupts are required by law to submit a formal "Statement of Affairs"; a written summary of their personal and financial information.
Can I be made Bankrupt even if my assets exceed my debts?
The liquidity of your assets is the main factor; being unable to meet the payment of your debts when they fall due is the definition of insolvency and may result in you being declared bankrupt. That said, the Official Receiver has a duty and the discretion to not accept your Debtor’s Petition if there is reason to believe that with some effort you could satisfy your creditors.
How would being a Bankrupt affect me?
From the time of being declared bankrupt until discharged by the trustee, you would be referred to as an “undischarged bankrupt”. As such you are restricted in that you cannot act as a company officer, or trade under a name other than your own (ie, a business name) without advising your customers or potential customers that you are bankrupt. You will be required to make all of your divisible assets available to the trustee; you cannot obtain credit over an indexed amount without advising the lender that you are bankrupt; you may be required to surrender your passport and will have limitations placed on overseas travel; and you must make available all your books, records and financial statements, including those of associated entities such as companies and trusts.
What part of my income would be paid to my Bankrupt estate?
Your income includes your personal earnings, certain benefits provided by third parties and income from superannuation or trusts; if the total exceeds certain indexed threshold limits, you will be required to make a financial contribution to your estate. Your assessed level of income is reduced by payable income tax, legitimate business expenses where applicable, and certain child support payments.
What happens if I fail to make the required financial contributions?
Your liability to make the assessed financial contributions survives beyond your discharge from bankruptcy and may be enforced by the trustee. The trustee’s collection options include garnishing your wages and using a supervised account regime. Not paying the required financial contributions can result in a discharged bankrupt being re-bankrupted.
How does Bankruptcy affect my ownership of property?
The trustee controls all of a bankrupt’s divisible property. This includes all of your property at the commencement of the bankruptcy, and all property that is received after the date of bankruptcy but before discharge.
What is “divisible property”?
Divisible property is property that can be divided amongst creditors. It does not include necessary clothing and household items, tools of trade to an indexed value, a motor vehicle to an indexed value, life assurance or endowment policies (subject to some limitations), superannuation payments (subject to certain limitations), certain damages and compensation payments, and sentimental property (as defined in the Bankruptcy Act).
Can the trustee recover property that was sold before the Bankruptcy?
The trustee is bound to consider any sale or transfer of property that took place within the five years before the bankruptcy. If any of these transactions seem to be undervalued, improper, or to have had the purpose of attempting to circumvent creditors, the sold property or its value may be recovered from the recipient. The trustee may also recover what are deemed preferential or preference payments, that is monies paid to any creditor in the six months prior to the bankruptcy.
Can Bankruptcy affect jointly owned real estate?
A bankrupt estate’s trustee is entitled to have his or her name entered on the title deed in place of the bankrupt. The trustee will then usually invite the co-owner of the property to either buy the bankrupt’s interest or join in selling the property. If the co-owner does not cooperate with the trustee, or cannot come to a satisfactory arrangement, the trustee can force the sale of a joint property by applying for the appointment of a Statutory trustee over the property.
Can Bankruptcy affect a family trust?
A trustee may recover any property that has been given or sold by the bankrupt at less than its true value. The trustee will also claim money that may be owed to the bankrupt by a trust in the form of a loan or outstanding entitlements, and will receive any distributions due to the bankrupt. On that basis, the trustee of a discretionary trust will not usually make distributions to someone while they are bankrupt, however trustees of unit trusts do not have that discretion.
How does Bankruptcy affect creditors?
Creditors exchange their right to enforce their claims for payment for a right to prove for a dividend in the bankrupt estate, at the time of bankruptcy. Any creditors at the date of bankruptcy with present or future claims, or with certain contingent claims, are entitled to prove for a dividend. Some debts, including those incurred after the start of the bankruptcy are not released by the bankruptcy, and generally cannot be proved in the estate.
What rights do secured creditors have in Bankruptcy?
Bankruptcy does not change the rights of secured creditors, who can enforce their securities or charges and prove for any deficiency in the estate. There are special provisions on how secured creditors may prove for shortfalls before the secured assets have been sold.
What are non-provable debts?
Certain debts cannot be proved and will not be released by the bankruptcy. These debts include the following: (1) some portion of a HECS debt, (2) Court imposed fines, and (3) Maintenance Agreements under the Family Law Act. You can find full details of provable debts in section 82 of the Bankruptcy Act.
Can a Bankruptcy Trustee pay dividends?
The ultimate role of the trustee is to distribute the bankrupt’s assets amongst proved creditors.
Are there priorities given to dividend payments?
Certain payments and debts take precedence over payments to unsecured creditors. These are set out in the Bankruptcy Act.
When does Bankruptcy end?
Bankruptcy ends automatically, and the bankrupt discharged, three years after the date on which the bankrupt files his or her Statement of Affairs.
Can a Bankruptcy period be extended?
The trustee may extend a bankruptcy for a period of either two or five years by lodging an objection to discharge. This may happen if the bankrupt fails to cooperate with the trustee, or leaves Australia without permission, or manages a company without the permission of the Court, or engages in misleading conduct in relation to an amount over an indexed sum.
What is an Annulment of Bankruptcy?
An annulment is the cancellation of the bankruptcy and reinstatement of the affairs of the debtor as if no bankruptcy had occurred. An annulment can be obtained: (1) by an Order of the Court on the basis that the bankruptcy should not have occurred, or (2) by the bankrupt’s debts and the costs of the administration being paid in full, or by a proposal under Section 73 of the Bankruptcy Act being accepted by creditors.
What is the Trustee in Bankruptcy’s role?
A trustee in Bankruptcy is an independent person appointed to administer the bankrupt’s estate. Trustees are appropriately qualified and registered specialist accountants who are either officer of the Federal Court (a Registered Trustee) or a senior public servant (the Official Receiver).The estate is comprise of the bankrupt’s assets, business interests and debts.
Who chooses the Trustee in Bankruptcy?
Consent from a trustee in Bankruptcy to act as the trustee of the estate may be obtained by debtor presenting a Debtor’s Petition, or by a creditor filing a Creditor’s petition. If no consent is obtained, the Official Receiver will be the trustee.
What are the Bankruptcy Trustee’s powers?
The trustee has the power to investigate the affairs of the bankrupt and examine the bankrupt and others under oath, conduct and sell any business of the bankrupt, admit debts and distribute dividends, and to distribute to creditors and divisible asset of the bankrupt. The trustee is empowered to exercise all of the rights and powers that the bankrupt would have had if they had not become bankrupt, plus recovery powers that the bankrupt does not.
What does the Bankruptcy Trustee do?
In summary, the trustee will find and protect the assets of the bankrupt, realise those assets, conduct investigations into the financial affairs of the bankrupt together with any suspicious transactions, make appropriate recoveries, report to creditors, report any offences to AFSA, and distribute surplus funds to creditors.
Can a Bankruptcy Trustee be changed?
The Bankruptcy Act allows the trustee to be changed. There are two ways of doing this: (1) the creditors may at any time and for any reason, change the trustee by voting for a change; (2) the Court may change a trustee if it is deemed to be proper to do so. The latter is likely to happen if the trustee has done something wrong and the Court is of the opinion that changing the trustee is warranted. A replacement trustee would also be appointed in the event that the current trustee dies or retires.
Does Bankruptcy incur Government Charges?
Bankrupt estates attract a government charge payable at the rate of 3.5% of gross monies received by the estate, less payments to secured creditors, trade-on costs and other minor amounts. Monies that are held by trustees for an estate must be held in interest bearing accounts with any interest earned being payable to the government.
If my company is liquidated, do I automatically become a Bankrupt?
No, not necessarily, because your company and you are separate entities.