Involuntary Bankruptcy (when your creditors make you bankrupt)

What is involuntary bankruptcy?

If you are unable to pay your debts, cannot come to an arrangement with your creditors and haven’t voluntarily made yourself bankrupt, a creditor to whom you owe $5,000 or more may apply to the court to have you made bankrupt.

What is the process by which a creditor can make you bankrupt?

Step 1: a creditor applies for a bankruptcy notice

The process for making you bankrupt may begin when a creditor applies for a bankruptcy notice and serves it on you, demanding that you pay the money owed to the creditor within 21 days.

A bankruptcy notice can only be issued if the creditor has obtained a court judgment against you within the last six years and the total amount owing under the judgement (or two judgments combined) is $5,000 or more.

Step 2: if you don’t pay the creditor, you commit an act of bankruptcy

If you don’t pay the creditor by the time given in the notice, you commit an act of bankruptcy.

Step 3: the creditor applies to the court to have you made bankrupt

The creditor can then apply to the court (this is called a creditor’s petition) to have you made bankrupt.

Step 4: a trustee is appointed and you are required to file a statement of affairs

A trustee is appointed to administer your bankruptcy. Within 14 days of being notified of the appointment, you are required to file a statement of affairs with the Australian Financial Security Authority (AFSA).

Failure to lodge your statement of affairs is an offence under the Bankruptcy Act 1966 and you could be prosecuted.

What is the role of the trustee?

In order to pay your creditors, your trustee can:

• sell your assets (although you will be able to keep certain types of assets)
• recover any income over a certain limit
• investigate your financial affairs and, in certain circumstances, recover property that you have transferred to someone else before your bankruptcy.

If you wish to arrange for a registered trustee of your choice to administer your bankruptcy, you must ask the trustee to fill in a trustee consent to act declaration form and lodge it with your debtor’s petition and statement of affairs. If a completed form is not lodged with your application, the official trustee (AFSA) will act as your trustee or arrange with your creditors to appoint a registered trustee. Your creditors may choose to change the trustee at any time.

What are the consequences of bankruptcy?

One consequence of bankruptcy is that creditors are unable to commence or continue any further action for recovery of their debts against the bankrupt.

The rights of most creditors are converted to a right of lodgement of a proof of debt in the bankruptcy and a right to receive distributions in the form of dividends from the trustee.

Your assets may be sold

You will be able to keep ordinary household goods, tools (up to a certain value) used to earn income and a vehicle (up to a certain value).

Your trustee can choose to sell your other assets, such as your home.

You cannot conceal, remove or dispose of any property inside or outside Australia. If you do, you may be subject to criminal prosecution.

Your income, employment and business may be affected

If your income exceeds a certain limit, you may be required to make contributions from it.

You cannot be a director of and/or manage a company.

Some professional/licensing bodies may restrict or prevent you from continuing in the relevant trade or profession.

You may not be released from all debts

You are released from most of your unsecured debts (for example, credit cards, personal loans, store cards) once you are discharged from bankruptcy.

However, some types of debt are not covered (for example, penalties, fines and child support debts), and you will remain liable to pay these.

If a debt that is covered in the bankruptcy is found to have been incurred by fraud, then you will still owe the balance remaining upon discharge.

Your ability to travel overseas will be affected

You will not be able to travel overseas without the trustee’s written permission and you may be asked to surrender your passport to the trustee.

Your name will appear on the National Personal Insolvency Index (NPII) forever

The NPII is a searchable public register.

Credit reporting organisations will keep a record of your bankruptcy for up to five years – or longer, in some circumstances.

Your ability to obtain credit will be affected

You may be unable to borrow money or to buy things on credit.

You may be required to pay a bond for connection of electricity, water or telephone services.

Some banks may not let you operate an account or may restrict how you can use it.

How long will you be bankrupt?

Generally, bankruptcy lasts for a period of three years but can be extended in certain circumstances.

What happens when your bankruptcy ends?

You will be due for discharge from bankruptcy three years and one day after you filed the petition and your statement of affairs with AFSA.

Your bankruptcy can be extended to five, or even eight, years if your trustee lodges an objection to your discharge.

You don’t have to apply for discharge. However, you or your trustee can obtain an extract of the NPII showing your date of discharge.

Your name will appear on the NPII forever.

• Do you need more information about personal insolvency?
• Do you need more information about bankruptcy?
• Do you need more information about voluntary bankruptcy?