What is voluntary bankruptcy?
If you are unable to pay your debts and cannot come to an arrangement with your creditors, you may decide voluntarily to lodge a petition to become bankrupt (a debtor’s petition).
If you are facing financial difficulties, is it possible get some time to consider your options?
If you have unmanageable debt and need time to consider your options, you may apply for temporary protection from enforcement action by lodging a declaration of intention (DOI) to present a debtor’s petition.
A DOI allows you up to 21 days to decide whether to proceed with bankruptcy or pursue another option.
During the 21-day period, unsecured creditors cannot take any action to recover debts, including recovering money or seizing unsecured assets.
During this period, you can:
- consider your financial circumstances
- negotiate with your creditors, and/or
- make arrangements to avoid entering a formal option under the Bankruptcy Act 1966.
A DOI is not recorded on the National Personal Insolvency Index (NPII).
What is the process for declaring bankruptcy?
Step 1: lodge a petition to become bankrupt (a debtor’s petition) and a statement of affairs
If you are unable to pay your debts and cannot come to a suitable arrangement with your creditors, you may voluntarily choose to lodge an application to lodge a debtor’s petition to become bankrupt.
When you lodge your application, you must also lodge a ‘statement of affairs’.
Step 2: if the Australian Financial Security Authority (AFSA) accepts your application, you become bankrupt
Generally, AFSA processes the debtor’s petition and the statement of affairs within 24 to 48 hours.
When AFSA accepts the forms, you become bankrupt. You cannot change you mind after lodging your application.
Step 3: a trustee is appointed to administer the bankruptcy
A trustee is appointed to administer your bankruptcy.
If you become bankrupt, all your property automatically vests with the trustee. This includes property acquired during the bankruptcy period.
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 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.
Are you or your company facing an uncertain financial future? David Clout leads a team of highly regarded experts in insolvency. They are experienced negotiators and strategic thinkers. David is a registered Liquidator and Bankruptcy Trustee, he is qualified to accept a range of insolvency appointments. Call +61 7 3129 3316 to arrange a consultation.