Bankruptcy

About bankruptcy

Bankruptcy is a legal process where a person is declared unable to repay the money they owe. Bankruptcy involves giving up control of your assets and income to a trustee. The trustee will divide your assets to people you owe money to (creditors).

You can become bankrupt:

• voluntarily, by asking to be declared bankrupt, or
• involuntarily, by your creditors applying for you to be declared bankrupt.

If you are declared bankrupt, it means that you are protected from further legal action against you by creditors.

A bankruptcy lasts for three years and one day from when:

• your Statement of Affairs is accepted by the Australian Financial Security Authority (AFSA), or
• the date the Statement of Affairs was filed for an involuntary bankruptcy. 

Consequences of bankruptcy

Becoming bankrupt is a big decision that can have serious consequences for you. Although it can release you from paying most debts, a trustee will be appointed to manage your bankruptcy. Your trustee will be in control of your income and assets - the assets you own when you are declared bankrupt and during the bankruptcy. You won’t be able to deal with your assets.

Your trustee may:

• manage or sell your property and assets
• recover any income you earn over a certain limit
• investigate your financial affairs, for example, if property has been transferred into another person's name
• sell your assets to pay your debts.

Your name will permanently appear on the National Personal Insolvency Index and appear in your credit report for five years. 

Other consequences include:

• losing your passport
• not being able to be a director of a company
• not being able to administer a trust account.

For more information, see Consequences of bankruptcy on the AFSA website. 

Who can apply

If you have multiple debts, you can enter into voluntary bankruptcy. 

There is no fee to apply for bankruptcy. 

For more information, see Check my eligibility on the Australian Financial Security Authority (AFSA) website.

What debts are not covered by bankruptcy?

Some debts still need to be paid even if you are made bankrupt. These include:

• court imposed penalties and fines
  
• child support & maintenance
  
• HECS & HELP debts (government student loans)
  
• debts you incur after your bankruptcy begins
  
• unliquidated debts – a debt where the amount owed hasn’t been determined.

This means you are still liable for these debts. You need to contact your creditors directly to discuss payment options.

For more information, see What happens to my debts? on AFSA website.

Protected property

There are certain things that your trustee can't sell, including:

• your motor vehicle (car or motorbike) worth up to $9,400
• tools you use to earn income (tools of trade) worth up to $4,350
• ordinary household items, such as, furniture, fridge and washing machine – this doesn’t include antiques
• superannuation held in a regulated superannuation fund
• life insurance or endowment payments that you receive after you are declared bankrupt
• compensation for personal injury or wrong done to you or your family
• total and permanent disability insurance payments from a superannuation fund paid after you are declared bankrupt
• money you hold in trust for someone else.

For more information, see Indexed amounts and What happens to my money? on the Australian Financial Security Authority website.

Alternatives to bankruptcy

There are a number of alternatives to bankruptcy, which fall into two categories:

• pre-bankruptcy arrangements, such as debt agreements and personal insolvency agreements, and
• post-bankruptcy arrangements.

Debt agreement

A debtors agreement is a legally binding agreement between you and your creditors to settle your debts without becoming bankrupt. It is also known as a Part IX debt agreement. The agreement sets out how much money you will pay the creditors and stops them from taking any legal action against you to recover the debts.  

To propose a debt agreement:

• your unsecured debts must be less than $144,235
• your divisible property must be less than $288,470
• your after-tax income must be less than $108,176.25.

Before considering a debt agreement, you should speak to a financial counsellor and get independent legal advice. A debt agreement can have serious consequences for you. It will appear on your credit report and be listed on the National Personal Insolvency Index (NPII).

For more information, see What is a debt agreement? on the Australian Financial Security Authority website. 

Personal insolvency agreement

A personal insolvency agreement (PIA) is a legally binding agreement between you and your creditors to settle your debts without becoming bankrupt. It is also known as a Part X (10). A PIA sets how much money you will pay the creditors to satisfy your debts. This may include a lump sum or periodic payments.

A PIA is negotiated by a trustee who is appointed to take control of your property. It must be agreed to by a majority of creditors when it is voted on.

A PIA is different to a debt agreement as there are no income, property or debt limits.

Before considering a PIA, you should speak to a financial counsellor and get independent legal advice. It can have serious consequences for you. It will appear on your credit report and be listed on the National Personal Insolvency Index (NPII). It you don’t follow the terms of your PIA, your creditors can apply to the court to make you bankrupt.

For more information, see What is a PIA? on the Australian Financial Security Authority website. 

Get financial advice

A financial counsellor can help you assess your financial position and work out what you can do to manage your debts. They can:

• advocate for you in some circumstances, for example, by negotiating with your bank or creditors for payment arrangements
• help arrange instalment plans
• identify other appropriate options, for example, hardship programs for electricity, gas and water suppliers
• talk to you about other options to manage your debts, instead of going bankrupt
• discuss whether bankruptcy is the best option in your circumstances.

Before considering bankruptcy, you should speak to a free financial counsellor from the National Debt Helpline on 1800 007 007 and discuss your options.

Aboriginal and Torres Strait Islander peoples can call the Mob Strong Debt Helpline on 1800 808 488. The helpline is open Monday to Friday, 9:30am to 4:30pm.

Family law and bankruptcy

Bankruptcy can affect your ability to negotiate a property settlement with your ex-partner.

If you or your ex-partner are bankrupt, you don’t have to follow the pre-action procedures before you apply to the court for property orders. However, you should still make a genuine attempt to negotiate a property settlement before applying for court orders.

The Federal Circuit and Family Court of Australia can deal with a bankruptcy in certain property matters.

Bankruptcy can also affect your binding financial agreement.

For more information, see Bankruptcy and property settlements.