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Help … I’m being made bankrupt!

Fact sheet

This fact sheet is for information only. It is recommended that you get legal advice about your situation.

CASE STUDY

Eduardo was out of work for almost 6 months and fell behind on his strata management fees for the apartment he was paying off.

He had also been in dispute with the strata management company over complaints about his vehicle which leaked oil in the driveway. Every time he talks to someone, the amount he owes seems to have grown.

He received a whole lot of paperwork which he threw in the bin out of anger and frustration. Now his bank account has been frozen and he has received a letter from someone claiming to be his trustee in bankruptcy.

You can be forced into bankruptcy if you have committed an Act of Bankruptcy. Common Acts of Bankruptcy include failing to respond to a Bankruptcy Notice (see below), presenting a debt agreement proposal, or having the Sheriff try unsuccessfully to repossess your personal goods to pay a judgment debt.

Bankruptcy is a serious matter. It means all your property, apart from some protected items, will be sold for the benefit of your creditors.

If you own your home (including an apartment/home unit) or you are paying it off, it can usually be taken and sold by the trustee in bankruptcy. Any other property or valuables you own may also be taken.

You may also have to pay contributions from your income (depending on what you earn), and face other restrictions and consequences.

See our Fact Sheet: Should I consider Bankruptcy for more information or go to www.afsa.gov.au.

If you receive paperwork, such as a Statement of Claim, Bankruptcy Notice, or Creditor’s Petition you need to get advice urgently! The process is very difficult and expensive to undo if you leave it too late.

HOW DOES A CREDITOR MAKE SOMEONE BANKRUPT?

The most common way of making someone bankrupt is as follows:

  1. Serve a Statement of Claim on the debtor (service may be by post to your last known address in some cases)
  2. Apply to the court for a default judgment after 28 days (the creditor can do this if the debtor has not filed a defence). Different timeframes apply outside of NSW.
  3. Apply for and serve a Bankruptcy Notice on the debtor (which must usually be paid within 21 days)
  4. File and serve a Creditor’s Petition on the debtor.

The Court can then make a Sequestration Order. This means the person is bankrupt, if the creditor can show:

  • It is owed $10,000 or more; and
  • There has been an act of bankruptcy in the last 6 months (in this case failure to pay in accordance with a Bankruptcy Notice)

You can be made bankrupt without ever turning up to Court.

There are other acts of bankruptcy that a Creditor’s Petition can be based on. Some do not even require a judgment debt, such as proposing or terminating a Debt Agreement (see our Fact Sheet: Debt Agreements), filing for Temporary Debt Protection or a Declaration of Intention to File a Debtor’s Petition. In that case, a Creditor’s Petition will be the first document the debtor receives about the bankruptcy proceedings.

WHAT IF I RECEIVE A STATEMENT OF CLAIM?

Get urgent legal advice. If you are in NSW, see our Fact Sheet: Debt Recovery in the Local Court.

HOW WILL I KNOW IF THERE IS A JUDGMENT AGAINST ME?

In NSW, you will not be notified by the Court when judgment is entered. You can contact the NSW courts registry on 1300 679 272 to find out if there is a judgment listed.

APPLYING TO PAY BY INSTALMENTS

If you are not defending the debt (or lodging a claim in the Australian Financial Complaints Authority), and you cannot negotiate a repayment arrangement with the creditor, you can apply to the Court to pay by instalments. See our Fact Sheet: Applying to Pay by Instalments.

You should immediately begin making payments in accordance with your application, even before you find out whether the court has accepted it.

An instalment order will stop the creditor from being able to make you bankrupt, but only if you are paying exactly in accordance with the order. Being even one day late or one dollar short can leave you vulnerable to bankruptcy proceedings!

WHAT IF I RECEIVE A BANKRUPTCY NOTICE?

You have only 4 options:

  • Do nothing (and risk being made bankrupt)
  • Pay in full by the due date (usually within 21 days, or 6 months if issued within the COVID-19 temporary reprieve that ran from 25 March 2020 until 31 December 2020)
  • Negotiate with the creditor about repayments (and start paying if you haven’t already)
  • Get legal advice about opposing the Bankruptcy Notice. In most cases you will not have any grounds to challenge the Bankruptcy Notice and trying to do so will only add legal costs to your debt.

Failure to pay a Bankruptcy Notice is an Act of Bankruptcy which is easily proved by the creditor, and the most common way people are made bankrupt.

You can still apply to the Court to pay the debt by instalments but this won’t necessarily stop the bankruptcy proceedings. An instalment order will only prevent a creditor proceeding to make you bankrupt if you get it BEFORE a Bankruptcy Notice has been issued.

If you receive a Bankruptcy Notice and you never received a Statement of Claim, you should get urgent legal advice. If you dispute the debt, you may have grounds to apply to set aside the judgment. Or you may have a set-off.

This would require filing documents and appearing in the Federal Circuit Court as well as the court where the judgment was obtained. You should seek legal advice, as you could end up paying substantial costs, both your own and the other side’s court and legal costs, if you lose or something goes wrong.

GETTING THE DEBT BELOW $10,000

If at any time you can get the debt below $10,000, you can stop the creditor making you bankrupt. This can be difficult because the creditor may not accept any payments but it is worth trying if you can find the money.

There is a risk that another one of your creditors may be substituted in to make up the amount required. The same creditor can also add in other amounts owing that were not included in the judgment, but were outstanding prior to the act of bankruptcy (the non-payment of the Bankruptcy Notice).

For example, if there were further unpaid strata fees after the statement of claim was issued, but before the Bankruptcy Notice, in the case study above, these may be added to make up the $10,000.

BUT IT’S NOT FAIR!

It is not uncommon for people to be upset about a judgment debt because in their view they should not owe the money claimed. If you feel this way you should get legal advice, but if you have no legal defence, then you need to pay or face the consequences, which may include bankruptcy.

It is very hard to accept something that is not fair and move on, but if you can possibly pay a judgment debt, you need to do so unless you are not concerned about being made bankrupt (some people own nothing, have very little income and don’t care about the other consequences of bankruptcy).

If you are made bankrupt when you could have paid the debt, it will cost you many thousands of dollars more than the amount of the debt to annul the bankruptcy. This is because you will have to pay all the costs of the creditor’s legal representatives, and the trustee, in addition to your debt(s).

If you own your home or other significant assets, you need to get legal advice immediately.  In most cases, assets including your home can be forcibly sold if you end up bankrupt. See our Fact Sheet: Should I consider Bankruptcy for more information.

WHAT IF I RECEIVE A CREDITOR’S PETITION?

If you receive a Creditor’s Petition, this is very serious. Get legal advice urgently.

There will usually be a Court date within a few days. It is very important that you turn up to the Court. If this is absolutely impossible, you need to send something to the court explaining why you cannot come and, if possible, arranging to attend by telephone.

On the first appearance you will probably be able to get an adjournment to either:

  • Get legal advice; or
  • Raise the money to pay the debt (for example, by selling your home or another asset, or applying for a loan).

An adjournment means you will be required to attend court again. Unless you want to be made bankrupt, the next time you attend court you will either need to:

  • Have filed paperwork opposing the Creditor’s Petition (you will need legal advice to do this and you will need to have legal grounds for doing so); or
  • Be prepared to argue for another adjournment with evidence, for example, that your house is on the market (the contract for sale and agency appointment), or that a loan has been conditionally approved, or whatever it is you are doing to raise the money as quickly as possible. The Court will only adjourn the matter a limited number of times and may require you to file an affidavit attaching your evidence to support your application.

You should continue to negotiate with the creditor at all times. You may be able to convince the creditor to discontinue the proceedings by consent, but usually only if you can pay the debt plus their legal costs.

I HAVE JUST FOUND OUT I’VE BEEN MADE BANKRUPT – WHAT NOW?

Sometimes the first a person knows about being made bankrupt is that their bank account is frozen or they get a letter from the trustee in bankruptcy. If this happens, get urgent legal advice. If you have any grounds to challenge the bankruptcy, there are time limits for having the decision reviewed or appealed.

If you intend to try to oppose or annul the bankruptcy (by paying out all the debts and expenses to date) you need to let the trustee know immediately in writing so that they can minimise the work they do in relation to the bankrupt estate (which will help reduce the amount you may ultimately have to pay).

FILE A STATEMENT OF AFFAIRS!

Once you have been made bankrupt (that is a Sequestration Order has been made against you) you must file a Statement of Affairs. There are several very good reasons to do this:

  • You are obliged to by law – it is an offence not to
  • Even if you are thinking about applying to set aside or annul your bankruptcy, a completed Statement of Affairs may be necessary for the Court to make a decision about that
  • The usual 3 years and 1 day until discharge from bankruptcy does not start to run until you have filed your Statement of Affairs.

WARNING: IF YOU DO NOT FILE A STATEMENT OF AFFAIRS YOU MAY REMAIN BANKRUPT FOREVER!

REMEMBER: Always get legal advice if you receive a Statement of Claim, Bankruptcy Notice or a Creditor’s Petition. There are serious consequences if you do not take action after receiving one of these documents.

A free financial counsellor can assist you if you are having trouble completing the Statement of Affairs – call 1800 007 007 for a referral to a service near you.

For legal advice in NSW contact Financial Rights on 1800 844 949.

This is only a brief guide and it is recommended that you GET LEGAL ADVICE to discuss the best option for you in your circumstances. See Fact Sheet: Getting Help for a list of additional resources.

Last Updated: January 2021