© Financial Rights Legal Centre | 2024 ABN 40 506 635 273 This toolkit is copyright. Non-profit community groups have permission to reproduce parts of this book as long as the original meaning is retained, and proper acknowledgement is given. All other persons and organisations wanting to reproduce material from this book should obtain permission from Financial Rights Legal Centre. This 2024 publication is updated from the first 2014 edition which was written by Karen Cox of Financial Rights Legal Centre and Steve Snelgrove of Lismore and District Financial Counselling, with input from Bob Cruickshanks, formerly of the Insolvency Trustee Service of Australia, as it was then known. The 2024 publication is again a collaborative work, led by Karen Cox, CEO of Financial Rights with substantial input from Alexandra Kelly, Director of Casework with Financial Rights. Karen also received support and contributions from Loretta Kreet, Senior Lawyer at Legal Aid Queensland who did significant second round editing of all the chapters, together with members of her team. Thanks particularly to: Catherine Uhr and Bryony Walters on issues relating to social security legislation Alex Nielson, Kristy Bloomfield and Charo Weldon for their first-round edits Lucinda Jodrell Sweeney for the provision of administration support on the project Loretta was also assisted with information from: Zoe Watson, from LAQ, for providing family law expertise on property settlements Narelle Ferrier from the Australian Restructuring Insolvency & Turnaround Association on estimated costs of PIAs Ana Oertel from the Caston Legal Centre for information on hosting online John Fisher, from AFCA for providing access to bankruptcy authority form. Disclaimer The Financial Rights Legal Centre disclaims all liability for errors or omissions of any kind whatsoever, or for any loss or damage in whole or in part, arising from any person relying on any information in this handbook. Bankruptcy law is a dynamic area with frequent developments. Although this online resource will be updated as new information becomes available, readers should make their own enquiries to ensure information is up to date. May 2024

Updated: 1 May 2024 Introduction In the last few years financial counsellors have increasingly found themselves working with clients who have a whole range of complex issues. At the same time the regulatory landscape has evolved rapidly, with new laws and amendments affecting the financial counsellor's work occurring with considerable frequency. The pressure on financial counsellors to keep abreast of all these new demands has led to the need for resources which give support to financial counsellors and allow them to develop the necessary skills required to meet these challenges. After the success of the Credit Law Toolkit and the Mortgage Stress Handbook there was a clear need for the development of a Bankruptcy Toolkit. As a result of a chance conversation an opportunity arose to develop such a resource and thanks to the assistance of FAHCSIA (now the Department of Social Services) funds were made available to write this toolkit. The help, knowledge and insights of a then recently retired deputy official receiver, Mr Bob Cruickshanks, were also drawn upon to produce a practical guide to bankruptcy. This toolkit is now updated as at 2024. The purpose of this toolkit is to assist financial counsellors to be able to explain to their clients the consequences of bankruptcy, the alternatives, the process and the practical details of completing the forms. It also covers problems that may arise during bankruptcy and even beyond discharge. Financial counsellors and bankruptcy Bankruptcy is a major part of financial counselling. These clients deserve access to the information that will allow them to make educated and considered decisions. The role of the financial counsellor in assisting clients with bankruptcy is to provide comprehensive support and information. Financial counsellors should not allow themselves to be limited to giving assistance to 'fill out the forms'. Financial counsellors should strongly resist pressure from clients to reduce their role to this as it raises major issues of duty of care and professional practice. The financial counsellor's role is one of: Ensuring clients have considered all the available options. Making sure clients understand all the potential consequences. Supporting clients to enable them to cope more easily with the consequences of their decision (including the emotional impact and practical challenges). Assisting clients to understand the forms including why particular questions are being asked, what will be done with the information provided, and the consequences of omitting information or providing wrong or misleading information. Supporting clients through the lodgement process. Ensuring clients understand what is expected of them during bankruptcy and beyond (some financial counsellors may also respond to questions during the bankruptcy and advocate for the client to creditors and/or the trustee should that be appropriate). It is almost impossible to do this properly in the course of one interview and it should therefore be a rare situation where bankruptcy forms are completed at a first interview. Even when the situation seems urgent, there may be other options to buy time. Some services have a policy of not completing bankruptcy forms at the first interview and this position is clearly communicated to clients. Clients who say they only want help with the forms and do not want to discuss the options and consequences not only miss an important opportunity to make sure they are taking the best course of action from their own perspective, but also put financial counsellors at risk of falling short of their professional obligations. It is rare that the client will not listen if it is stated that the service requires the client to be informed of their other options as part of considering bankruptcy, and to be fully informed of the consequences of bankruptcy before proceeding with that option. About this toolkit This kit is designed for use by financial counsellors and other caseworkers (such as community lawyers) who assist clients with bankruptcy. As the law of bankruptcy is very complex and no two clients are the same, it is important to work through both the decision-making process with the client - whether to go bankrupt - and the completion of the forms, thoroughly and systematically. Unfortunately, bankruptcy is also an area that leads to fairly frequent consumer complaints. Some of these complaints may be justified, such as where a caseworker has failed to explain an important consequence to the client, but in other cases it may be that the client was simply not prepared to listen and with the benefit of hindsight is now disappointed. In the interests of both better client outcomes and to protect yourself professionally you need both: Systems which help you avoid mistakes and oversights, and Records that explain and justify what you have done. Many financial counsellors and financial counselling services have already developed their own forms and procedures for assisting clients with bankruptcy. In this kit we try to pool the benefit of this vast experience to develop a convenient source of information and tools to help achieve best practice in this area. We encourage you to use this resource as a starting point, supplemented by other things that are useful, such as updates from the Australian Financial Security Authority ('AFSA') or handouts from further training. While newer financial counsellors and community lawyers may wish to read some sections of this kit entirely, others may simply use it as a reference to look up in the event of unusual problems. If you are completely new to bankruptcy law you might want to start by reading Chapter 3 and Chapter 6. Another possible way of using this kit is to refer to Chapter 7 question by question as you complete a client's Statement of Affairs and use the cross references to other parts of the kit as particular issues come up relevant to the particular client. The Structure of the toolkit This resource is divided into 12 Chapters. Chapters 2 - 9 roughly following the bankruptcy process and consequences from beginning to end. Chapter 2 How did I get here? Chapter 3 Bankruptcy in a nutshell - a very skeletal summary of the consequences of bankruptcy Chapter 4 The A-Z of Bankruptcy, a format for working out if a client really should be considering bankruptcy Chapter 5 Formal alternatives including a Declaration of Intention to Present a Debtor's Petition, Part IX Debt Agreements and Personal Insolvency Agreements Chapter 6 The consequences of bankruptcy in detail (the real guts of the issue) Chapter 7 Completing the forms (a practical guide with lots of cross references to the previous chapter) Chapter 8 Life in Bankruptcy dealing with issues that commonly arise during bankruptcy Chapter 9 Post Bankruptcy, the ongoing ramifications. Chapter 10 covers entering involuntary bankruptcy via the Creditor's Petition process and what options clients have at each stage, from receiving a Bankruptcy Notice to finding out there has been a sequestration order made (an order making someone bankrupt). Chapters 11 and 12 cover trouble-shooting for clients who are already in Part IX Debt Agreements and Personal Insolvency Agreements respectively. Chapter 11 also covers the situation where clients have signed up to complete a Debt Agreement proposal but have now changed their mind.

Updated: 1 May 2024 How did I get here? Bankruptcy is a very serious step which can have major consequences for clients. People often approach financial counsellors in a very emotional state and see the issue as requiring urgent assistance and resolution. Sometimes the first role of the financial counsellor is to slow the client down and determine whether the urgency is real or imagined. Bankruptcy is a serious decision requiring detailed consideration. Bankruptcy can happen in two ways - initiated by the debtor by lodging a Debtor's Petition, or by a creditor or creditors using a Creditor's Petition. The latter way (initiated by creditors) usually occurs at the end of a whole series of processes to recover the debt and although creditors often threaten their clients/customers with bankruptcy during the early stages of negotiation, they cannot force the client into bankruptcy without going through a number of steps. Occasionally clients consider bankruptcy prior to any enforcement action being taken at all. This may be appropriate in some circumstances (a permanent change of circumstances making it impossible to pay outstanding debts or a large debt from a single event such as a car accident or court case). In practice, however, clients usually opt for bankruptcy after at least one creditor has or is taking enforcement action against them. In an ideal world clients would approach us in the early stages of their financial stress, but the reality is that often we do not get contacted until the situation has become more difficult and recovery action has commenced. Sometimes the clients have been advised by other services, family and friends, creditors or professional advisers to go bankrupt. Financial counsellors are in unique position due to their professional practice to be able to inform their clients of a range of alternatives, the consequences, both long-term and short-term, and give them time to reflect. Clients in financial stress have a range of options available to address their financial issues (although these reduce significantly as enforcement processes progress). As financial counsellors we encourage our clients to pursue these options but, in some circumstances, they feel so disempowered, stressed or pressured by their debt situation that the only option they wish to pursue is bankruptcy.   Before legal action has commenced there are a number of options available to clients, these include: Keep paying as per contract (if possible). Pay out the debt in full (by selling property or getting assistance from family members, for example). Refinance (noting the dangers of going to lenders of last resort who charge high interest and fees). Seek hardship assistance from the creditor, and if declined consider applying to the Australian Financial Complaints Authority (AFCA) an independent external dispute resolution scheme if available for the debt. Offer a lump sum to settle - a reduced full and final settlement offer. Seek a release (a waiver) from the creditor on compassionate grounds. Ignore the debt and let the creditor take enforcement action (this may be an attractive option if the client receives Centrelink payments only and has no property except personal property that would be protected from the Sheriff (depending on which State and whether what is protected from the Sheriff is better or worse than bankruptcy)). The client will need to be armed with information about dealing with debtor harassment.   Where legal action has commenced the options include: Negotiate with creditor. Pay out in full. Refinance (noting again the dangers of lenders of last resort). Defend the debt if the client doesn't believe he or she owes all or part of the debt (including where the debt may be statute barred). Go to AFCA if available and no judgment entered. Make a repayment arrangement directly with the creditor prior to judgment. Apply to pay by instalments through the Court (warning - this may create a judgment debt in some states and should only be done once all else has failed). Let the creditor enforce (see point 7 above).   A financial counsellor needs to be aware of timelines for debt recovery. Even if legal action has commenced there will often be time to consider a range of options including bankruptcy. A person's circumstances need to be carefully considered before advising that bankruptcy is a viable (or palatable) option. Chapter 4 discusses this decision-making process in more detail. Chapter 5 goes through the other formal options under the Bankruptcy Act. Chapter 6 considers the consequences of bankruptcy in greater detail. To force someone into bankruptcy the creditor usually has to have obtained judgment for a debt of $10,000 or more (or two or more judgment debts totalling this amount) and the person has to have committed an 'act of bankruptcy' (see Chapter 10). Usually there will also be a Bankruptcy Notice (this is the most common way to establish an act of bankruptcy on which to base a Creditor's Petition). This means that there will have been a lengthy legal process before the Creditor's Petition has been served. Where clients have ignored all these warning signs their options are very limited. Chapter 10 covers what can and can't be done at every stage of the process. A creditor can rely on where a debtor has formerly lodged a Debt Agreement Proposal in relation to a debt to force bankruptcy, although this is unusual - see Chapters 5 and 11 for more information in relation to the consequences of proposing a Debt Agreement.  

Updated: 17 December 2024 Bankruptcy in a nutshell For those who are new to this area it is important to understand the concept of bankruptcy so that you can communicate this to your client. Bankruptcy is a complex topic with many, many rules and fairly frequent developments. However, at its core there are some fairly simple concepts. Bankruptcy law provides important rights for debtors who are in so much debt they can't realistically meet their obligations. It can present an opportunity to wipe the slate clean and move on. When a debtor decides to go bankrupt, he or she presents a legal document called a Debtor's Petition. How to do this is covered in Chapter 7. The consequences of doing this are covered in very brief form in this Chapter and then in detail in Chapter 6. It is also a mechanism for creditors to force an insolvent person to submit to the authority of a trustee who then acts to recover money, usually by the sale of the debtor's assets, for the creditors on a pro rata basis. While this is a necessary mechanism, it can have disproportionate and punitive consequences for debtors if used too readily as a substitute for ordinary debt collection. The process for forcing someone into bankruptcy by an order of the Court is called a Creditor's Petition. This aspect of bankruptcy, and what rights and options your client may have once this process is started, is explored in detail in this toolkit in Chapter 10. When a person is bankrupt (either voluntarily or otherwise) they effectively lose control of some aspects of their finances for a set period of time (usually 3 years and 1 day but it can be longer), at the end of which they are released from most, but not all types of debts. At the end of the bankruptcy, the debtor is discharged. Any property of the debtor, apart from certain protected items and property, is taken and sold for the benefit of their creditors, and to recover the costs of administering the bankruptcy. Income above a designated amount is also taken for the creditors as income contributions. These contributions are assessed and payable for as long as the debtor remains an undischarged bankrupt or until their debts and the costs of administering the bankruptcy are paid (whichever occurs first). Contributions that are assessed during bankruptcy but not paid may prevent discharge or can be pursued even after discharge (even if this means that a bankrupt's trustee becomes their creditor, and potentially pursue a fresh set of proceedings that may result in the client's bankruptcy again!) Permission may be required to travel and there may be limitations on certain types of employment for the period of the bankruptcy. There are ongoing ramifications for the person's ability to obtain credit and sometimes insurance which outlive the bankruptcy itself. The details of what debts are forgiven at the end of the bankruptcy, what property is protected, what income contributions may have to be paid and other restrictions are included in Chapter 6. At the point of entering bankruptcy certain property, and rights to recover money and property, automatically vest in the trustee in bankruptcy. The role of the trustee in bankruptcy may be performed by the Official Trustee or a private trustee known as a registered trustee and will be referred to throughout this kit as 'the Trustee'. Property acquired during bankruptcy will also vest in the Trustee. This property (whether owned at the beginning of the bankruptcy or acquired during bankruptcy) becomes known as the bankrupt estate. The bankrupt estate may continue after the bankrupt has been discharged from bankruptcy. This means that the bankrupt is then free to acquire more property but cannot claim any ownership in property pre-dating their discharge (such as in a family law settlement or legal action for a breach of contract that occurred before or during the bankruptcy (see Chapter 6 Part 2 for exceptions where an action for breach of contract may be protected)) because this property will also vest in the Trustee and form part of the bankrupt estate. Some property may eventually re-vest in the bankrupt if it has not been claimed by the Trustee after many years, or be purchased back by the bankrupt after discharge, but this is relatively rare. The law of bankruptcy in Australia is largely found in the Bankruptcy Act 1966. References to sections of legislation in this toolkit refer to the Bankruptcy Act 1966 (as amended) unless otherwise specified. In some instances, it is also necessary to refer to the Bankruptcy Regulations 1996. Again, any reference to the regulations in this toolkit refers to the Bankruptcy Regulations 1996. The Australian Financial Security Authority plays the role of Official Receiver and the Official Trustee and is referred to throughout this toolkit as 'AFSA'. AFSA also regulates private bankruptcy trustees (registered trustees who perform the role of trustee in bankruptcy) and Part IX Debt Agreement Administrators. AFSA is also responsible for the administration of the Personal Property Security Register (PPSR). AFSA publishes a range of information that is vitally important for financial counsellors on its website. The consequences of bankruptcy in brief The good The client will be discharged from the majority of debts and will get a fresh start. It will stop harassment by unsecured creditors. It will stop legal action by unsecured creditors to recover their money through the courts. It will stop seizure of goods by sheriff's officers. It will stop the garnisheeing of the client's wages and the garnisheeing of his or her bank accounts (with the exception of the ATO) but note that the client is required to make contributions if their income is above a certain threshold. It will protect some of the client's property, including: ordinary clothing most ordinary household furniture and effects tools of trade (where value under the prescribed amount) superannuation that has not been accessed prior to bankruptcy life insurance and endowment policies compensation payments for personal injury received by the bankrupt (TPD payments however may not always be protected - see Chapters 6 & 8) possessions of a non-bankrupt person who the client lives with motor vehicle that is not secured or leased and is valued under the relevant threshold vehicle under finance where equity is under relevant prescribed amount threshold and the client can maintain payments property held in trusts (get legal advice) wedding rings depending on value defence service loans rural assistance grants (get advice). Income up to the relevant threshold is protected. Travel throughout Australia is unrestricted. Overseas travel is allowed if the client has received permission from the Trustee prior to travel. The client can operate as a sole trader, under certain conditions. The bankruptcy usually ends after 3 years and 1 day There is generally no criminal sanction (unless the borrower breaches an obligation or acts dishonestly). There may be a great sense of relief and/or a reduction in stress. The bankrupt may have more income available for living expenses once relieved of the requirement to pay some debts. The Bad Fraudulent debts will not be discharged by bankruptcy. It will not clear HELP/HECS debts. It will not discharge child support debts. Unliquidated debts will not be discharged (see Chapter 6 Part 1 for an explanation of unliquidated debts). It will not get rid of fines imposed by the court - Traffic and other infringements may be discharged but their non-payment may cause the suspension of the client's driver's licence or car registration. Valuables not protected in bankruptcy will be part of the estate administered by the Trustee (for example antiques, high value car, etc). If the client has an interest in any real estate this will be part of the estate administered by the Trustee. Gifts and winnings (during bankruptcy) will be part of the estate administered by the Trustee. If the client's income is over the bankruptcy threshold, he or she will have to contribute to the bankrupt estate from that income. The client may be required to surrender his or her passport and will need to seek permission to travel outside Australia (which attracts a fee and is not guaranteed to be approved). If clients breach their obligations during the bankruptcy, it may be extended (for 5 or 8 years) and there may be penalties. The client cannot be a director of a company. Past financial affairs may be investigated. Preferential payments to creditors or undervalued transactions may be subject to trustee investigation (see Chapter 6, for an explanation of preferential payments and undervalue transactions. Overseas real estate also vests in the bankrupt estate. A bankrupt cannot be a trustee of a trust. A bankrupt cannot have a self-managed super fund. The ugly The bankruptcy will be listed on your client's credit report until 5 years from the commencement of bankruptcy, or until 2 years have passed from discharge - whichever is later. Impacting the ability to get credit. For example: if the bankruptcy is accepted on 1 January 2025, the bankrupt will be discharged on 2 January 2028 and it will come off their credit report on 1 January 2030 if the bankruptcy is extended, and the bankrupt is not discharged until 9 February 2029, it will remain on their credit file until 9 February 2031. The client's name will be on the National Personal Insolvency Index (NPII) forever. The client may have trouble getting credit in the future (even after the credit report listing has expired). The client may have difficulty getting insurance, or have special conditions imposed. It may affect the client's ability to rent property in which to live. Property that has vested in the Trustee during the bankruptcy will continue to be vested with the trustee after discharge (if not already sold). It can affect employment opportunities for the client.. It can affect the client's ability to work in certain professions for life. It may affect the client's ability to connect to utilities and other services. Inheritances (where the person dies during or prior to bankruptcy) will be part of the estate administered by the Trustee. These issues are all covered in more detail in Chapter 6.

Updated: 18 September 2024 Summary This Chapter suggests that you work through 26 questions (A-Z) with your clients to determine: Do they have options other than bankruptcy? Are they likely to be seriously affected by the consequences of bankruptcy? Are there compelling reasons to go bankrupt even if there may be other options? This is a preliminary decision-making tool, not a complete exploration of the consequences of bankruptcy which is covered in Chapter 6. A sheet containing the questions with spaces for answers that could be downloaded and used when interviewing clients and kept as a file note is included in the separate section of this chapter. Should my client consider bankruptcy? People's attitude to debt and bankruptcy can differ enormously. This may be influenced by many things including cultural factors, religious beliefs, perceptions about the reaction of families and friends, and personal ethics and self-esteem. Financial counsellors play a vital role in guiding debtors through the complex range of options, consequences and emotions that bankruptcy raises. Clients who own or are paying off their home, or who work in certain professions, have to be made aware of the very serious consequences of deciding to go bankrupt. By contrast, clients with no property apart from essential household goods may find that bankruptcy has very little practical impact on their lives. Nevertheless, the financial counsellor needs to make the client aware that their circumstances may change during the period of the bankruptcy, for example inheriting money under a will or winning money or goods. Clients who claim to have little concern about the consequences of bankruptcy may change their minds later if they receive an unexpected windfall and find they have to pay not only their debt but thousands of dollars in trustee fees in order to annul the bankruptcy. It is necessary and almost always possible for the financial counsellor to give the client time to reflect on the consequences of bankruptcy, which may entail negotiating with creditors to buy time even if the client is pretty sure that bankruptcy is their preferred option. The A to Z of bankruptcy Clients should generally be encouraged to explore other options in coming to an informed decision. Should a client refuse to do so, with or without good reasons, counsellors should explain their concerns about the consequences and make careful notes. However, in some circumstances bankruptcy may be urgent and necessary to prevent detrimental enforcement action. Certain protocols, like a set period of working with a client before considering bankruptcy, may be inappropriate and thus disregarded. A full explanation of the consequences is still required. When a client understands the limitations of bankruptcy and has nevertheless made an informed decision to go bankrupt, the bankruptcy is more likely to be a positive development in their lives. a. Is there any urgency (for example imminent enforcement action - garnishee of wages, seizure of goods etc)? The imminent enforcement of a judgment debt can often be the driver for going bankrupt. A judgment debt is a court or tribunal order confirming that money is owed by one party (the debtor) to another (the creditor). In some circumstances a client may have their wages garnished or their household or professional assets seized. These can seriously affect the client's standard of living and earning capabilities. In these circumstances the client needs to get the protection of bankruptcy quickly. However, counsellors should attempt to buy clients time to reflect on what is happening and going to happen. These clients may be candidates for a Declaration of Intention to Present a Debtor's Petition, keeping in mind the consequences of that course of action (see Chapter 5). b. Does your client have a judgment debt of over $10,000? A debtor cannot be forced into bankruptcy unless they have a judgment debt or debts totaling over $10,000. A debtor can nevertheless choose to go bankrupt for debts of $10,000 or less. However, clients should be warned that can be expensive to annul the bankruptcy later if their circumstances change (for example, trustees' fees can amount to tens of thousands of dollars). Bankruptcy is therefore generally best avoided for small debts. Although it is relatively rare for a Creditor's Petition to force someone into bankruptcy for a small debt, financial counsellors are encountering the issue more frequently. This is especially the case where there is an ulterior motive, for example forcing someone out of business or getting someone out of strata title housing when there are strata fees in arrears. If your client has received a Bankruptcy Notice or a Creditor's Petition, they need urgent legal advice (see Help I'm being made Bankrupt in Chapter 10). c. Is your client's current financial problem permanent or long term? Whether a client's problem is likely to be long term will depend on their individual circumstances. Where a client's financial problems are long term, bankruptcy may be a suitable option, particularly if they are unable to reduce expenditure, increase income, reduce repayment arrangements or consolidate debts. In limited circumstances, a Part IX Debt Agreement or a Personal Insolvency Agreement may be suitable options (see Chapter 5). Sometimes long term or even permanent problems can be solved without resorting to bankruptcy, particularly if the client's debts are small or there are compelling compassionate reasons. Where a client's financial problems are temporary - for example due to illness or unemployment - there may be other options available such as a temporary reduction in repayments, a repayment arrangement for lump sums owed, a temporary respite from any payments at all (a moratorium), rights to a hardship variation under the credit law or in relation to essential services, and using the available External Dispute Resolution schemes (refer to question e. below). d. Are most of your client's debts legally owed? If the client already has a judgment debt, he or she may seek legal advice about whether there is any realistic chance of setting that judgment aside. If not, the debt is 'legally owed' whether the client has a defence or not. If there is no judgment debt, counsellors may be able to use External Dispute Resolution (EDR) in some circumstances to argue the client's defence (see question e. below). A client should get legal advice if they receive court documents commencing legal proceedings (such as, a statement of claim) and consider lodging an urgent complaint in EDR if available. The client may have a common sense defence, such as that they did not order the goods, or take out the loan (mistaken identity or fraud), or the work/goods/services were faulty. They may also have a technical legal defence or cross claim such as that the debt is statute barred, there was unconscionable conduct by a lender or service provider, or the lender failed to comply with its responsible lending obligations. Sometimes a client will have a defence or cross claim in relation to only some of the alleged debts. Consider whether the client has capacity to pay or make suitable arrangements in relation to the remaining debts that are legally owed. Where the remaining debts will still be insurmountable there may be little point in investing time and resources in raising a dispute if bankruptcy is inevitable. Also consider that some defences and cross claims will only reduce the debt, leaving a residual amount to pay. Where there is doubt about whether a client has a defence to a debt, get legal advice or encourage your client to do so (see Useful Contacts). e. Are your client's debts covered by the National Credit Code? If so, has your client (or someone acting on behalf of your client) applied for a hardship variation or lodged a complaint in the Australian Financial Complaints Authority (AFCA)? For consumer credit debts (including investment loans for residential property), the Australian Financial Complaints Authority (AFCA) may be available free of charge. AFCA is an option if there is no judgment debt and the alleged debtor has not taken a step in any legal proceedings beyond lodging a defence (and/or cross claim), even if the debtor has received a notice commencing legal action. Starting the AFCA process may help counsellors establish contact with people within the lending organisation that can make real decisions to resolve long term debt problems. If the debt is relatively small, lenders may agree to a permanent reduction in repayments and an extension of the loan term. This is still a hardship variation under the law and is available using AFCA. AFCA can assist counsellors looking to gain time for their clients. A temporary stay of enforcement may be sought through the AFCA website. It is important, however, not to mislead the creditor or any other interested party into accepting a settlement if the client does not seriously intend to attempt to meet their obligations under the settlement. In other words, if the client has made an informed decision to go bankrupt, counsellors should notify the other parties and withdraw the AFCA complaint or other settlement negotiations promptly. Remember: Energy and Water debts can also be taken to the appropriate EDR service in each state (for example EWON in NSW or EWOV in Victoria) and telecommunications debts can be taken to the Telecommunications Industry Ombudsman. f. Has your client (or someone acting on behalf of your client) tried to come to a suitable informal arrangement with creditors? (including reduced amount settlements). Has anyone sought a compassionate release? Financial counsellors can be invaluable in facilitating arrangements between clients and their creditors. Despite this, the client may want to let the enforcement process play out in the hope that something comes up to save them from what looks like inevitable bankruptcy. Counsellor's still need to ensure the client understands the consequences of this choice before they lodge their Debtor's Petition (see Chapter 6). Serious health issues can also be a driver for the consideration of bankruptcy. The financial counsellor may be able to get the creditors to stay action while a compassionate waiver is considered as an alternative. If it is not possible to get a compassionate waiver, then the financial counsellor needs to explain the impact of bankruptcy on any co-borrowers, guarantors or even beneficiaries under a will. g. Will your client be released from their debts (or most of them) as a result of going bankrupt? Not all debts are provable in bankruptcy. Some debts are provable but the debtor is not released from the debt after the bankruptcy. Bankruptcy may not be productive course of action if the client will not be released from a significant proportion of his or her debts upon discharge. Which debts are provable, which are not, which debts may have to be paid regardless for practical reasons, and which will survive the bankruptcy, is covered in Chapter 6 Part 1. h. Has your client considered accessing any available superannuation? Is this a good idea in the circumstances? While superannuation remains in a superannuation fund it is protected in bankruptcy. A client may be eligible for early access to his or her superannuation to assist with the payment of debts including mortgage. Early access to superannuation may be appropriate if it will pay all the client's debts, or reduce the debts to a manageable size, or if the client is meeting their current repayments but cannot catch up on arrears as a result of a past period of hardship that has now ended. If bankruptcy is inevitable, however, early access to the client's superannuation is an obvious waste and may cause financial hardship in the future. More information on when early access to superannuation is available at the Services Australia website (see also Chapter 8). Remember: the amount your client can access will be limited by the relevant rules and tax will be deducted. i. Are there joint debts with another person who is not going bankrupt? Is there a guarantor? Where there are joint debts, the other person will be left exposed to the whole of the debt after their joint debtor becomes bankrupt (not half the debt as many clients mistakenly believe). Bankruptcy can cause difficulties for debtors hoping to maintain a familial or working relationship. Clients should be strongly encouraged, where possible and only if there is no imminent risk of family violence, to discuss their plans with the joint debtor. Clients must be told of the consequences for the guarantor who, like a co-debtor, is likely to be pursued for the whole debt in the event of the primary debtor's bankruptcy. It should be strongly advised that the guarantor gets legal advice. j. Has your client claimed on any insurance policy that could assist to meet their financial commitments? Is your client expecting any type of insurance claim to be paid out in the near future? Check whether the client has any insurance policies that would assist him or her to pay their debts - for example income protection, consumer credit insurance, accident insurance, or total and permanent disability policies attached to the client's superannuation. In some cases, clients may have multiple superannuation accounts, each of which holds separate insurance policies. Counsellors should inspect any paperwork the client may have in relation to insurance or superannuation. Counsellors can assist their clients to look for lost super using the ATO website and then obtain the client's authority to seek details of any insurance policies. For other insurance (not attached to super) that the client may not be aware of, search their bank and credit card statements for evidence of premiums being paid. If the client has tried to claim on an insurance policy and has been rejected, they may seek free legal advice from the Insurance Law Service on 1300 663 464. Counsellors may wish to make a call themselves with the client's authority. Any policy paid out after the date of the bankruptcy will vest in the trustee unless it is the proceeds of a life insurance or endowment policy received on or after the date of the bankruptcy (where the insured person is the bankrupt, his or her spouse or de facto partner), or it is a claim for property that would have been protected in bankruptcy. Total and permanent disability claims may also vest in the trustee - see Chapter 8. If the insurance claim covers property that was secured by a loan (such as a motor vehicle or home) then the proceeds of the policy must be paid to the lender. Keep in mind that if the client is unlikely to avoid bankruptcy as a result of such a claim, it is probably not worth the time and effort. Bankruptcy and insurance is covered in more detail in Chapters 6 & 8. k. Does your client own (or partly own) any assets other than household furniture and personal possessions (real estate, cars, boats, caravans, shares, pedigree breeding animals, livestock etc)? Is your client considering selling any available assets to meet their debt? First, the client should consider whether these assets could be liquidated to meet the debts (or make lump sum offers) as an alternative to bankruptcy. If these assets will not produce enough money to avoid bankruptcy, clients should be made aware that any assets not protected in bankruptcy will vest with the Trustee and are likely to be sold. For a detailed description of property that is protected in bankruptcy see Chapter 6 part 2. Where the client is considering selling goods or property, they should be informed of what is protected property so that they understand what they will be allowed to keep in bankruptcy. Clients must sell their property or goods for market value, or else face the possibility of the Trustee declaring it an undervalue transaction if they end up bankrupt regardless. Personal injury compensation paid to the bankrupt, and the property wholly purchased with that compensation, is protected in bankruptcy. Compensation paid to other members of the family, such as the bankrupt's partner, and the property purchased with it, is not protected if it is in the bankrupt's name, or the bankrupt has a claim to it. More details on protected property are contained in Chapter 6 Part 2. Where your client owns real estate or other assets jointly with others, the implications for the other owners will need to be considered (see Chapter 6 Part 3). If the house is owned jointly, the co-owners will be asked to buy out the bankrupt's share or join the Trustee in the sale. In some cases, there may be someone (such as another family member) who could buy out the client's share (for full market value) to assist the client pay their debts and try to avoid bankruptcy. Cash is also an asset. While clients in financial difficulty rarely have savings, it is important to ask the question specifically and warn clients that the Trustee will also take any available cash apart from a modest amount for living expenses (see Chapter 8 - Freezing of Accounts). l. Are there secured debts? Is your client paying off a mortgage on a house/home unit or investment property? Clients should consider whether, on bankruptcy: the asset will be sold by the Trustee due to its equity (now or later); the client can afford to maintain payments on the loan to keep the asset; the secured debt is a joint liability; and/or the secured asset is the family home. Where the client needs the secured vehicle to travel to work or access services, bankruptcy will only allow them to keep the car if they can make the repayments (or a payment arrangement) under the secured loan and there is insufficient equity for the Trustee to sell up the car. Where the secured car loan is the major debt, bankruptcy may make little difference to the client's overall financial position. Where there is a mortgage over a house, the issues are even more complex. If the client has sufficient equity, the house will be sold by the trustee. If there is not sufficient equity now, there may be sufficient equity later - the trustee has many years in which to take action. Secured debts are covered in more detail in Chapter 6 Part 1 and, if the client has a mortgage Chapter 6 Part 3. m. Has your client ever made a substantial gift of assets or money or sold/transferred any property for less than its market value (for example, to family or friends)? Where your client has given away money or property in the last five years or sold or transferred property for less than its market worth, the transaction may be voidable. The Trustee may take and sell the property and will only reimburse the person to whom it was given the amount that person paid for it (if anything). This is particularly an issue for clients who have transferred property into the name of their spouse or children, or who purchased property in the name of someone else while providing a substantial amount (or all) of the purchase price. The many ways in which the Trustee can undo past transactions to recover money for the bankrupt estate are covered in Chapter 6 Part 3. n. Has your client withdrawn any superannuation or been paid out under any life insurance or total and permanent disability (TPD) policy in the last few years? Have they made any substantial extra payments into their superannuation fund? Any money that has been withdrawn from superannuation or paid out under a life insurance policy prior to the date of the bankruptcy is not protected in bankruptcy. The money itself, or property purchased with that money, can be taken by the Trustee. This includes amounts given to family or associates to improve their property or provide a deposit for a home. For a detailed description of the circumstances in which the Trustee can claw back property which has been sold or given away, see Chapter 6 Part 3. Superannuation money taken out of the fund, or a life insurance claim paid, on or after the date of the bankruptcy is protected. This is in contrast with property that has been received by the bankrupt by way of compensation for personal injury, which can be kept whether received before or after the date of the bankruptcy. Extra payments into a superannuation fund prior to bankruptcy may be recovered by the Trustee if it can be established that those payments were made to defeat creditors. More detail on this can be found in Chapter 6 Part 2. o. Does your client have any legal proceedings on foot, or are they likely to be involved in legal proceedings in the near future? Generally, a creditor cannot enforce any remedy against the person or property of a bankrupt in relation to a provable debt (s 58(3) Bankruptcy Act). This does not affect a secured creditor's right to enforce against property that is security for a loan. Enforcement action can also be taken in relation to a maintenance agreement or maintenance order under the Family Law Act 1975 or Child Support (Assessment) Act 1989. Proceeds of crime proceedings and orders are also unaffected by bankruptcy. Any legal action commenced by a person who subsequently becomes a bankrupt is automatically stayed until the Trustee elects in writing whether to continue the proceedings (s 60(2) Bankruptcy Act). Clients generally cannot continue or commence court proceedings during bankruptcy without the permission of the Trustee, because the right to recover property or money owed to the bankrupt vests in Trustee (s 116(1)(b)). Normally, any money recovered will vest in the Trustee (s 58(1)), though there are exceptions (s 60(4)) for proceedings in relation to: any personal injury or wrong done to the bankrupt, his or her spouse or de facto partner, or a member of his or her family; and the death of the bankrupt's spouse or de facto partner, or of a member of his or her family. See more on legal proceedings in Chapter 6 Part 5. p. Is your client separated/divorced? Have they already done a property settlement? Bankruptcy can have serious consequences for non-bankrupt spouses and de facto partners (or ex-spouses/partners) and their children. Ideally both partners to a relationship should seek family law advice (from different lawyers) prior to one of them going bankrupt, but even after bankruptcy has been declared it is not too late to get independent legal advice. Family law applications for a property settlement or maintenance can be made in relation to property that has already vested in the Trustee as a result of the bankruptcy. However, the Trustee can seek to set aside Family Court orders in certain circumstances, or to set aside Binding Financial Agreements under the Family Law Act, particularly where it was clear one of the parties was insolvent (unable to pay their debts as they fell due) and the effect of the orders or agreement is to deprive those creditors of their ability to recover their debt. This is less likely to occur with Court Orders than agreements, provided the Court was fully informed of the relevant facts when the orders were made. See Family Law & Bankruptcy in Chapter 6 Part 7. q. Has your client ever received an inheritance? Is your client likely to receive an inheritance in the next 3 to 5 years? A client's inheritance may be money or property available to the Trustee. This includes small interests in property that may have been forgotten because the client is one of a group of owners, or the property is occupied by someone-else, or the client has an interest that they can only claim after a life tenant has died. Where this is the case the Trustee will find the property upon conducting routine searches. This may cause embarrassment to the bankrupt and inconvenience to the occupant when the Trustee seeks to claim the bankrupt's share for the estate. In addition, any inheritance received by your client during bankruptcy will also vest in the Trustee. Where there is sufficient money in the inheritance, the bankruptcy can be annulled but this will mean paying out the creditors (including post-bankruptcy interest which may have accrued) plus the Trustee's costs, which can be substantial. It is important to note that it is the date of the death of the benefactor that matters, not the date the client receives the money. The money will vest in the Trustee even if the person dies only days before discharge and the money will be distributed many months after discharge. r. Does your client manage a company or hold a directorship? Are they a partner in a business? Bankruptcy and businesses pose particular challenges. For a start, a bankrupt cannot hold a position as a director of a company. Where your client is in a partnership the partnership will usually be dissolved as a result of the bankruptcy and the bankrupt's interest in the business will vest in the Trustee. Where your client is a sole trader and wants to keep trading, they will face a range of practical problems. Small Business and Bankruptcy is covered in Chapter 6 Part 6. s. Is your client in a licensed profession or required to be a member of a professional association? Some professions and licensed trades exclude bankrupts or require people to show cause why they should be permitted to continue in their trade or profession while bankrupt. This is covered in more detail in Chapter 6 Part 5. Clients should contact their own professional association or licensing body to ensure they get accurate and up-to-date information about their own circumstances. This can be done anonymously for initial enquiries at least. t. Does your client earn more than the prescribed limit for making contributions during bankruptcy? Bankrupts must contribute from their income while bankrupt if they earn more than the prescribed limit ('threshold amount'). The limit increases with each dependent. Essentially, the bankrupt will pay 50c in every dollar earned above the threshold amount in any given year until they are discharged, or the bankruptcy is annulled (s 139K Bankruptcy Act). Non-payment of contributions is a common reason for bankruptcy to be extended beyond three years. For a detailed description of how the income contributions provisions work, see Chapter 6 Part 4. u. Does your client want/plan to travel overseas in the next few years? Bankrupts may travel if they have permission. Permission can be obtained by making an application and payment of a fee. In some limited cases a bankrupt may be asked to hand in their passport (if they have one) to their Trustee and they will not be permitted to travel outside Australia without the Trustee's permission. Even if the Trustee does not take the passport, if the bankrupt is considered a 'flight risk' his or her name may be placed on a Ports Watch List which could result in the bankrupt being accosted upon trying to leave the country. More details on travel restrictions is contained in Chapter 6 Part 5. Chapter 8 covers how to apply for permission to travel and the circumstances in which it is likely to be granted. v. Does your client have long term plans to buy a home or start a business? Buying a home or starting a business as a bankrupt, or even a discharged bankrupt, can be difficult. The bankrupt's credit report is affected by bankruptcy. Bankruptcy will be listed on a credit report for 5 years from the date of bankruptcy or 2 years from discharge - whichever the longer. and there is a record on the National Personal Insolvency Index forever. This can make it much harder to obtain credit and insurance. The bankrupt is also prohibited from being a company director until discharge and must disclose their bankrupt status if they want to borrow more than a specified amount during the period of the bankruptcy. More details on small business and bankruptcy are contained in Chapter 6 Part 6. There is also a detailed description of the other consequences of bankruptcy (apart from the impact on debts, property and income) in Chapter 6 Part 5. w. Has your client been bankrupt before? The Official Receiver in Bankruptcy has the discretion to refuse a Debtor's Petition in certain circumstances where a client has been bankrupt before in the last 5 years or has already been bankrupt 3 times previously (s 55(3AA) Bankruptcy Act). This is covered in Chapter 7 about the process of going bankrupt. Second and subsequent bankruptcies also attract greater scrutiny. The client becomes more likely to have their financial affairs investigated or to face prosecution for offences such as gambling and hazardous speculation if there is evidence to suggest these factors may have been at play in causing the client's insolvency (see below). x. Were your client's debts acquired through gambling and hazardous speculation, fraud, or are they non-provable? It is an offence under the Bankruptcy Act for a person to cause or exacerbate their insolvency by gambling or hazardous speculation in the 2 years prior to becoming a bankrupt (s 271 Bankruptcy Act). While not often used, there have been prosecutions under these provisions. This is covered in Chapter 6 Part 8. Debts incurred by fraud are not extinguished by bankruptcy. The risk of investigation and prosecution under criminal law increases if the debt is not paid. y. Is your client physically or mentally ill? Consider whether the client is physically or mentally ill to a significant degree. Sometimes a client may have other options but does not have the physical or mental fortitude to see them through. Stress can cause serious setbacks for people trying to recover from mental illness or serious physical illness. Bankruptcy may be a legitimate way of relieving stress, but the client may see their present circumstances differently if and when they recover in the future. Determine whether the client has the 'capacity' to understand and file for bankruptcy and, if not, refer them for specialist assistance. Capacity is a legal test, not a medical test. Legal Aid may be able to assist with a capacity assessment. Several jurisdictions have developed a local Capacity Toolkit which can be a useful resource (for example, NSW Department of Communities and Justice and Victorian Government Department of Human Services). z. Will bankruptcy make a positive difference to your client? This is often the cornerstone question for the financial counsellor: How will bankruptcy make a positive difference in my client's life? This is usually linked to the physical, mental and emotional health of your client. The relief of the pressure of the debts will only be positive if the stress and consequences of bankruptcy are less onerous than the consequences of not going bankrupt.   The A to Z of bankruptcy questionnaire Your clients' answers to these questions will help them make an informed decision as to whether they are a suitable candidate for bankruptcy. You should explain the consequences of bankruptcy in detail as there may be things your client has forgotten or failed to disclose. Clients should be encouraged to explore other, viable options. Clients need to understand that there can be legal and financial implications if their circumstances change. a. Is there any urgency (for example imminent enforcement action - garnishee of wages, seizure of goods etc)? b. Does your client have a judgment debt (or judgment debts) of over $10,000? c. Is your client's current financial problem permanent or long term? d. Are most of your client's debts legally owed? e. Are your client's debts covered by the National Credit Code? If so, has your client (or someone acting on behalf of your client) applied for a hardship variation or lodged a complaint in the Australian Financial Complaints Authority (AFCA)? f. Has your client (or someone acting on behalf of your client) tried to come to a suitable informal arrangement with creditors? (Including reduced settlements)? Has anyone sought a compassionate release? g. Will your client be released from their debts (or most of them) as a result of going bankrupt? h. Has your client considered accessing any available superannuation? Is this a good idea in the circumstances? i. Are there joint debts with another person who is not going bankrupt? Is there a guarantor? j. Has your client claimed on any insurance policy that could assist to meet their financial commitments? Is your client expecting any type of insurance claim to be paid out in the near future? k. Does your client own (or partly own) any assets other than household furniture and personal possessions (real estate, cars, boats, caravans, shares, pedigree breeding animals, livestock etc)? Is your client considering selling any available assets to meet their debt? l. Are there secured debts? Is your client paying off a mortgage on a house/home unit or investment property? m. Has your client ever made a substantial gift of assets or money or sold/transferred any property for less than its market value (for example. to family or friends)? n. Has your client withdrawn any superannuation or been paid out under any life insurance or total and permanent disability insurance policy? Have they made substantial extra payments into their superannuation fund? o. Does your client have any legal proceedings on foot, or are they likely to be involved in legal proceedings in the near future? p. Is your client separated or divorced? Have they already done a property settlement? q. Has your client ever received an inheritance? Is your client likely to receive an inheritance in the next 3 to 5 years? r. Does your client manage a company or hold a directorship? Are they a partner in a business? s. Is your client in a licensed profession or required to be a member of a professional association? t. Does your client earn more than the prescribed limit for making contributions during bankruptcy? u. Does your client want/plan to travel overseas in the next few years? v. Does your client have long term plans to buy a home or start a business? w. Has your client been bankrupt before? x. Were your client's debts acquired through gambling and hazardous speculation, fraud or are they non-provable? y. Is your client physically or mentally ill? z. Will bankruptcy make a positive difference to your client?  

Updated: 1 May 2024 The A to Z of bankruptcy questionnaire Your clients' answers to these questions will help them make an informed decision as to whether they are a suitable candidate for bankruptcy. You should explain the consequences of bankruptcy in detail as there may be things your client has forgotten or failed to disclose. Clients should be encouraged to explore other, viable options. Clients need to understand that there can be legal and financial implications if their circumstances change. a. Is there any urgency (for example imminent enforcement action - garnishee of wages, seizure of goods etc)?       b. Does your client have a judgment debt (or judgment debts) of over $10,000?       c. Is your client's current financial problem permanent or long term?       d. Are most of your client's debts legally owed?       e. Are your client's debts covered by the National Credit Code? If so, has your client (or someone acting on behalf of your client) applied for a hardship variation or lodged a complaint in the Australian Financial Complaints Authority (AFCA)?       f. Has your client (or someone acting on behalf of your client) tried to come to a suitable informal arrangement with creditors? (Including reduced settlements)? Has anyone sought a compassionate release?       g. Will your client be released from their debts (or most of them) as a result of going bankrupt?       h. Has your client considered accessing any available superannuation? Is this a good idea in the circumstances?       i. Are there joint debts with another person who is not going bankrupt? Is there a guarantor?       j. Has your client claimed on any insurance policy that could assist to meet their financial commitments? Is your client expecting any type of insurance claim to be paid out in the near future?       k. Does your client own (or partly own) any assets other than household furniture and personal possessions (real estate, cars, boats, caravans, shares, pedigree breeding animals, livestock etc)? Is your client considering selling any available assets to meet their debt?       l. Are there secured debts? Is your client paying off a mortgage on a house/home unit or investment property?       m. Has your client ever made a substantial gift of assets or money or sold/transferred any property for less than its market value (for example. to family or friends)?       n. Has your client withdrawn any superannuation or been paid out under any life insurance or total and permanent disability insurance policy? Have they made substantial extra payments into their superannuation fund?       o. Does your client have any legal proceedings on foot, or are they likely to be involved in legal proceedings in the near future?       p. Is your client separated or divorced? Have they already done a property settlement?       q. Has your client ever received an inheritance? Is your client likely to receive an inheritance in the next 3 to 5 years?       r. Does your client manage a company or hold a directorship? Are they a partner in a business?       s. Is your client in a licensed profession or required to be a member of a professional association?       t. Does your client earn more than the prescribed limit for making contributions during bankruptcy?       u. Does your client want/plan to travel overseas in the next few years?       v. Does your client have long term plans to buy a home or start a business?       w. Has your client been bankrupt before?       x. Were your client's debts acquired through gambling and hazardous speculation, fraud or are they non-provable?       y. Is your client physically or mentally ill?       z. Will bankruptcy make a positive difference to your client?

Updated: 1 May 2024 Content Part 1: Declaration of Intention to Present a Debtor's Petition Part 2: Debt agreements Part 3: Personal Insolvency Agreements Important: The options covered in this Chapter are formal arrangements under the Bankruptcy Act. An informal agreement with creditors is almost always better than a formal option under the Bankruptcy Act where it is possible. Financial counsellors can sometimes achieve fantastic results for clients with advocacy skills and perseverance.   Part 1: Declaration of Intention to Present a Debtor's Petition Summary A Declaration of Intention to Present a Debtor's Petition (also known as Temporary Debt Protection) is a formal process under the Bankruptcy Act to give the debtor 21 days in which their creditors, the bailiff or sheriff cannot take action to recover unsecured debts. Once a Declaration of Intention to present a Debtor's Petition is accepted, debts cannot be enforced against the client during this period, although action can be taken to repossess the security property for secured debts (it will not stop a car or house being repossessed). Lodging a Declaration of Intention to Present a Debtor's Petition is an act of bankruptcy and will only be appropriate in narrow circumstances. The purpose of a Declaration of Intention to present a Debtor's Petition is to protect a debtor whilst they are either preparing to file debtors petition and to give the debtor the opportunity to consider their options, such as entering into debt agreements. The relevant form is similar to a Debtor's Petition, to encourage creditors to proactively assist the debtor whilst also protecting assets from being disposed of in the stay period. After the protection period the debtor can decide not to proceed to bankruptcy. However, creditors may rely on this act of bankruptcy as grounds to force the debtor into bankruptcy (where they owe more than $10,000) via a Court process (explained in Chapter 10 Parts 1 to 3) even if the debtor does not proceed with filing a Debtor's Petition themselves. What is a Declaration of Intention to Present a Debtor's Petition? An insolvent debtor who is considering bankruptcy or its alternatives has the option of first presenting to the Official Receiver at AFSA a Declaration of Intention to Present a Debtor's Petition (s 54A - also referred to in this kit by the abbreviated phrase 'Declaration of Intent'). This has the effect of stopping enforcement action by the debtor's unsecured creditors for a period of up to 21 days. Warning: Presenting a Declaration of Intent is an 'act of bankruptcy' (s 40(1)(da)). This means that even if your client decides not to proceed with the bankruptcy by way of a Debtor's Petition, one of his or her creditors could use that act of bankruptcy to request a court order declaring your client bankrupt. The debts must exceed the statutory minimum and the creditor only has 6 months from when your client files the Declaration of Intention to pursue a Creditors Petition. This is not a likely scenario (usually a Bankruptcy Notice would be issued in any event) but clients must understand that it is a possibility. There is also the issue of the disclosed information to consider. Should the bankrupt not proceed immediately to lodge a Debtor's Petition there will be a record of their position at this point in time which could be compared to a subsequent Statement of Affairs. This means that any differences between the debts and assets listed in the Declaration of Intent compared to the later Statement of Affairs will be immediately apparent to the Trustee and could lead to money and/or property being recovered as preferential payments, undervalued transactions or transfers to defeat creditors. When is a Declaration of Intent an option to consider: There is current or imminent enforcement action such as a garnishee on wages, or the sheriff has, or is about to, seize goods under a writ for levy of property; and The enforcement action will cause your client serious detriment (for example, they will have insufficient income for rent and food or will lose essential household goods that would be protected in bankruptcy); and Attempts to negotiate with the creditor to prevent or delay enforcement action have failed or are impracticable; and There is insufficient time to pursue a more formal procedure such as an application to pay by instalments (if the debt is admitted) or an application to set aside the judgment (if the debtor may have a defence), or such applications have already failed; and The debt is provable in bankruptcy (see Chapter 6 Part 1 for debts that are not provable in bankruptcy). It is pointless to submit a Declaration of Intent to prevent the enforcement of a court imposed fine, for example, as such debts are not provable in bankruptcy and would not be frozen. A Declaration of Intent will not be recorded on the National Personal Insolvency Index, despite being an act of bankruptcy. A Declaration of Intent will not affect the rights of secured creditors to take action in relation to their security. For example, your client's car may still be repossessed if he or she is in default under a secured car loan despite the presentation of a Declaration of Intent. A creditor can still commence a legal proceeding during the stay period. The Declaration of Intent has most relevance in States or Territories where the bankruptcy laws and debt enforcement laws are not aligned, leaving clients vulnerable to having goods repossessed by the debt enforcement process that would be protected in bankruptcy. Garnishees are also used commonly in many jurisdictions and could result in a Declaration of Intent being useful in such jurisdictions unless a stay of enforcement can be urgently obtained. The latter would always be preferable if it is practically possible. One advantage of lodging a Declaration of Intent is that creditors usually realise that the client is serious about bankruptcy, giving you one last chance to negotiate an arrangement which might assist the client to avoid bankruptcy. It is not compulsory to proceed with a Debtor's Petition at the conclusion of the 21 days. This must be weighed against the disadvantages, including the risk that the client may be forced into bankruptcy as a result of the Declaration of Intent itself. Case example A First Nations worker had been informed by his employer that his wages were to be garnisheed pursuant to a court order. The employer was reluctant to do this as he did not want to risk losing the worker if he complied with the order but he would have no choice but to comply. The worker attended a financial counsellor to discuss the bankruptcy process, as without his full income he could not pay for rent and food for his household. The worker said that it was a very old debt. This old debt had been taken to court and judgment entered but the worker said that he had no knowledge of the court process or any paperwork relating to it. The last time he heard from the creditor was over 10 years ago and he hadn't paid or spoken to them since. In this case, where the worker was considering bankruptcy and had an imminent threat of a garnishee of his wages, the Declaration of Intent gave him the opportunity to: Stay enforcement of the garnishee Get specialist legal advice on whether the judgement could be set aside and a defence entered based on the Statute of Limitations Become better informed of the consequences of bankruptcy before lodging a Debtor's Petition should that prove necessary. Remember: If your client's creditor is registered with Australian Financial Complaints Authority (AFCA), you can prevent legal action, or the progress of legal action, by lodging a dispute with the scheme (such as an application for a variation of the contract on grounds of financial hardship). Generally, you cannot do this if the creditor has obtained a court judgment. If there is a garnishee or a writ for levy of property (order that the Sheriff can seize goods) then there is already a judgment and so AFCA may decline jurisdiction. By lodging in AFCA the creditor may agree, even though they do not have to, stop enforcement. Given the consequences of a Declaration of Intention lodging in AFCA simultaneously may mean you do not need the Declaration of Intention. Will a Declaration of Intent always be accepted? A debtor is not entitled to present a Declaration of Intent in the following circumstances: If the debtor has had a previous Declaration of Intent accepted within the last 12 months. When a Creditor's Petition has already been presented against the debtor and served on the debtor (unless it has been withdrawn or lapsed). After a Debtor's Petition has been presented by the debtor (unless it has subsequently been rejected). If the debtor has formally proposed a Personal Insolvency Agreement (by signing an authority appointing a controlling trustee) within the preceding 6 months, or is subject to a control order under Part X of the Act. If the debtor would not be entitled to lodge a Debtor's Petition without the leave of the Court (for example, because he or she is in a Debt Agreement). If any of the above applies the Declaration of Intent will not be accepted by the Official Receiver (AFSA) (s 54B). If your client has decided to proceed with a Declaration of Intent, instructions for completing the forms and what happens next are included in Chapter 7.

Updated: 27 October 2025 Content Part 1: Declaration of Intention to Present a Debtor's Petition Part 2: Debt agreements Part 3: Personal Insolvency Agreements Important: The options covered in this Chapter are formal arrangements under the Bankruptcy Act. An informal agreement with creditors is almost always better than a formal option under the Bankruptcy Act where it is possible. Financial counsellors can sometimes achieve fantastic results for clients with advocacy skills and perseverance. Part 2: Debt agreements Summary This section is for financial counsellors wanting to know more about Informal Debt Agreements and Part IX Debt Agreements ('Debt Agreements') so they can better advise clients about this option. If your client is already in a Debt Agreement and is having problems or has complaints, you should refer to Chapter 11. Chapter 11 also deals with the issue of fees that may be payable where someone has either changed their mind about entering a Debt Agreement or their proposal has not been accepted. If you have a client who has lodged a Debt Agreement Proposal and is having second thoughts, urgent action may be required to stop the process - see Chapter 11. A Debt Agreement is a formal alternative to bankruptcy for low-income debtors. They allow debtors to reach a compromise on their debts with their creditors without the debtors having to go through the formal processes of bankruptcy. The consequences of Debt Agreements are serious and are similar to bankruptcy itself, especially in circumstances where the debtor does not have any real estate (such as an apartment, home or land) that would be taken by the Trustee in bankruptcy. Unlike bankruptcy, your client's property is not affected. A person in a Debt Agreement can also acquire property during the agreement without it being taken (by the Trustee) for the benefit of creditors. In a Debt Agreement there is no trustee, only a Debt Agreement Administrator. Many clients are put into Debt Agreements in circumstances where they would have been financially better off bankrupt. Debt Agreements may last longer than bankruptcy and often do. Further, many clients default on their Debt Agreements and ultimately end up bankrupt anyway. The debtor will pay an upfront fee for the preparation of a Debt Agreement Proposal. This will usually not be refunded even if the proposal is rejected. There are very limited circumstances in which a Debt Agreement may be the best option for your client. The following circumstances typically indicate that a Debt Agreement is NOT suitable for your client: Their income is less than the bankruptcy threshold for income contributions; and They do not own any property that would be divisible in bankruptcy (see Chapter 6 Part 3 for an explanation of divisible property); or They have only one debt, or very few debts. Clients who wish to remain company directors (or engage in another occupation which is permitted under a Debt Agreement but not bankruptcy), are a special case but need to carefully consider the ramifications and risks involved in pursuing a Debt Agreement. If your client wants to make a contribution to their debts but can't afford to pay in full, this may be able to be achieved through an informal arrangement. Further, there is nothing to stop clients making voluntary payments to creditors during bankruptcy provided they are otherwise complying with their obligations to the Trustee. Introduction As mentioned, a Part IX Debt Agreement is a formal alternative to bankruptcy under the Bankruptcy Act introduced in 1996. Debt Agreements were substantially refined in September 2019, which is discussed in detail below. Amendments to the regulation of Debt Agreements came in response to the increasing use of debt agreements and evidence of consumer exploitation by the debt agreement industry. Please see the previous version of this toolkit for Debt Agreements entered into prior to 27 September 2019. Although it is considered an alternative to bankruptcy, many of the consequences are the same, so clients considering a Debt Agreement should proceed with extreme care. The potential advantages and risks involved are complex and difficult for most debtors to weigh up effectively. What is an Informal Debt Agreement? An informal debt agreement is an agreement between an individual and their creditors, similar to a Part IX debt agreement, but it is not a form of bankruptcy and is not regulated in legislation. Increasingly, this type of informal arrangement is organised and administered by debt administration businesses, for a fee. Fees can be substantial. For some clients they may have an informal debt agreement set up already and they may come to you after it has failed and will be looking at their options going forward, including about any fees they may previously been charged to set up the informal agreement. If your client has previously entered into an informal agreement, you can request copies of any agreements from the entity they used and see Chapter 11 Part 2 of this toolkit if there are any issues with the fees being charged. What is a Debt Agreement? As stated above, a Debt Agreement is a formal alternative to bankruptcy under the Bankruptcy Act 1966 (Cth). Under a Debt Agreement, the debtor most commonly agrees to pay a proportion of their debts in instalments in return for which the creditor agrees to forego enforcement action. If, and only if, the Debt Agreement is paid out in full, the creditors forego the remainder of the debt. Other arrangements such as payment of a lump sum or payment of a lump sum from the proceeds of the sale of identified property (for example, the sale of the client's car or caravan), are also possible but less common. Usually, the debtor will pay an upfront fee for the preparation and presentation of the Debt Agreement in addition to an ongoing percentage of payments made for the administration of the agreement. There is also a lodgement fee payable to AFSA which was $200 as at October 2025, with exemptions applying if an eligible disaster recovery payment was made in the 12 months before. Check the AFSA website for current fees. As the debts are frozen at the point the agreement is entered on the National Personal Insolvency Index (NPII) further interest is no longer payable, however, the provable debt that is frozen will include interest charged to date. A debtor must appoint a registered debt agreement administrator (DAA) or registered trustee to administer the Debt Agreement. The introduction of the Bankruptcy Amendment (Debt Agreement Reform) Act 2018 tightened the regulation of Debt Agreements. The amendments improved industry standards by imposing duties on DAAs, including registration requirements and introducing penalties for wrongdoing on the part of DAAs. Importantly, s 185LA of the Bankruptcy Act provides that a DAA 'has a duty not to be reimbursed for expenses the administrator incurred in administering the debt agreement unless those expenses are of a kind specified in the relevant debt agreement proposal'. The general duties of the DAA include to: deal with the debtor's property in the manner provided for in the Debt Agreement; provide information to the debtor about the administration of the Debt Agreement if a reasonable request is made; provide information to creditors who are party to the Debt Agreement if they make a reasonable request; consider whether the debtor has committed an offence against the Bankruptcy Act; and refer to the Inspector-General or to law enforcement authorities any evidence of an offence by the debtor against the Bankruptcy Act. Before a Debt Agreement Proposal can be put forward, the DAA has a duty to make reasonable enquiries about the debtor's financial situation and take reasonable steps to verify the debtor's financial situation (s 185LG). DAAs must maintain a separate bank account to the debtor and are required to only pay into that account money received from debtors under a Debt Agreement (s 185LD). A DAA must not pay any money out of the account unless it is for the purpose of administering the Debt Agreement, pursuant to a Court order, or otherwise in accordance with the Bankruptcy Act. It is a strict liability offence if any of these requirements are not met (s 185LDA). DAAs are also required to ensure that creditors party to the Debt Agreement are notified in writing if the debtor is in default of their agreement by 3 months (s 185LB) and notify the Official Receiver if a debtor defaults on their agreement for 6 months (s 185LC). The Bankruptcy (Registration and Cancellation of Registration of a Debt Agreement Administrator) Guidelines 2020 provide that a DAAs who is entitled to remuneration must express their remuneration as a percentage of the total amount payable by a debtor in respect of provable debts. Any remuneration must be taken proportionately over the duration of the agreement. Example Debtor owed a total of $30,000 in unsecured debts. She also had a secured car loan of about $40,000. Her Debt Agreement Proposal prepared by a DAA was as follows: She ceases paying all debts except the secured car loan. For the secured car loan, she would pay $28,000 of the total $40,000 debt, over a 3 year period. The DAA's remuneration for administering the agreement is 35% of her provable debts, to be paid in monthly instalments over the duration of her Debt Agreement. The realisation charge payable to the Australian Government is 7% of the DAA's remuneration (outlined above). The DAA will either pay this after the end of each financial year that the Debt Agreement is on foot, or at an earlier time. She would then make 36 monthly payments (3 years) of $1,166.67 totalling $42,000. This would be distributed as follows: Distributed to creditor $28,000 Paid to DAA - fees for administration of the agreement $14,000 Paid to Australian Government (Realisation Charge) $980 Total: $42,980 Savings to the debtor (assuming she completes the Debt Agreement) are limited to the interest she would have paid (which could be substantial). The creditors lose all the interest plus $12,000 in capital. The DAA gains $14,000 less the costs of administering the agreement. Fees As shown in the example above, fees paid for both setting up and then administering a Debt Agreement can be substantial. There is also a lot of confusion, with debtors often misinterpreting their initial payments on the upfront fee as payments under the agreement, resulting in disappointment if the proposal is rejected as the money is neither refunded nor set off against their debts. Despite being given the paperwork to sign, clients also tend to focus on the size of the repayments and may not fully appreciate the amount being paid to the administrator rather than the creditors until much later (sometimes only when they default and lose the benefit of any amounts paid to the DAA). The amount of fees paid is not currently regulated. Although consumers can theoretically shop around, in reality it seems to be creditors who constitute the relevant 'market force' for ongoing fees because they can reject a proposal on the basis that the fees are too high. Consumers tend to be more passive in the process - only concerned initially about the amount of the repayments and whether the agreement is accepted (to stop any enforcement activity by creditors). Duration There are now maximum durations for debt agreements. If the debtor has a principal place of residence (they are not agreeing to sell as part of the agreement), the proposal may provide for a maximum of 5 years. A debtor who does not have an interest in a principal place of residence may lodge a proposal for a maximum of 3 years. The role of financial counsellors The information in this toolkit is provided to enable financial counsellors to properly advise clients who may be considering a Debt Agreement or who are having problems with a Debt Agreement they have already entered. Financial counsellors are no longer permitted to set up Debt Agreements. Important Note: If your client has just signed up for a Debt Agreement and is having second thoughts (or you think they should be) there is a very limited time to stop the proposal from proceeding. Getting out of a Debt Agreement once it has been made is very difficult and undoing the harm is virtually impossible. You need to act immediately to stop the proposal before it is accepted - see Chapter 11. If your client is convinced that a Debt Agreement is the right option for them (once all the consequences have been explained), suggest they get you to do a reality check on affordability before the proposal is submitted. Conditions on who can enter a Debt Agreement There are conditions on the circumstances in which a debtor can propose or enter a Debt Agreement. These are: The debtor must be insolvent (s 185C(1)); Pursuant to s 185C(4) of the Bankruptcy Act, a debtor cannot proceed with a Debt Agreement Proposal if, in the immediately preceding 10 years, the debtor has: been a bankrupt; or been a debtor under a separate Debt Agreement; or given authority for a solicitor or trustee to control their affairs under Part X of the Bankruptcy Act (which is directed to Personal Insolvency Agreements); At the time of making the Debt Agreement Proposal, the debtor's unsecured debts cannot total more than the relevant threshold amount, or such amount as may be prescribed by the Regulations (s 185(4)(b)); The debtor's property divisible among creditors in the event of their bankruptcy cannot exceed the relevant threshold (s 185C(4)(c)); The debtor's after-tax income cannot not exceed three quarters of the relevant threshold amount (s 185C(4)(d)). Note: Where a sequestration order was made against the debtor was subsequently set aside, the debtor is not classed as have been a bankrupt in respect of that sequestration order. The debtor's total proposed payments under the Debt Agreement (over the life of the agreement) cannot exceed the debtor's yearly after-tax income by a prescribed percentage (the payment to income ratio) (s 185C(4)(e)). As at October 2025 the threshold on the maximum value of property to enter into a Debt Agreement is $296,259.60. Note: The threshold applies to the debtor's equity in the property, not its total value. The threshold is an indexed amount available on the Australian Financial Security Authority website. Further, even if a debtor fails this test, a Debt Agreement Proposal can still be accepted if: the administrator is satisfied and provides a signed certificate that the debtor can meet their obligations (s 185C(4C)); or the debtor has an interest in the home where they live. When does the ten years start from? Bankruptcy - from the date of discharge/annulment Debt Agreements - from the date of completion or if not completed from the date of termination Personal Insolvency Agreements - from the date the s.188 Authority was signed As at October 2025 the allowable limit on unsecured debts was $148,129.80 and on divisible assets was $296,259.60. The maximum income of the debtor was $111,097.35. To get the most up-to- date threshold amount go to the Indexed Amounts section of the AFSA website. The debtor's after-tax income is their anticipated income after tax and deduction of the Medicare levy for the year commencing on the proposal date. If the client has a secured debt but the debt exceeds the value of the security, then the amount of the excess is considered an unsecured debt and should be included in the calculation to determine whether the client's unsecured debts exceed the relevant threshold. Insolvency Section 185C(1) of the Bankruptcy Act provides that the debtor must be insolvent to propose a Debt Agreement. The Official Receiver's Practice Statement states that a Debt Agreement Proposal will NOT be accepted where there is insufficient evidence in the Explanatory Statement and Statement of Affairs to support the debtor's statement of insolvency, that is, they are unable to pay their debts as and when they fall due. The Official Receiver is to have particular regard to the following in the Explanatory Statement and Statement of Affairs to determine whether these factors support a finding of insolvency: The circumstances that led to the debtor becoming unable to pay their debts (e.g. loss of employment); The status of the unsecured debts (e.g. arrears, repossession, judgment); The status of the secured creditors (e.g. arrears, legal action); and The date the debtor was last able to pay their debts as they fell due shown by the debtor on the Statement of Affairs. Whether the debtor's income is sufficient to pay his or her debts. Further information about Debt Agreements can be found in the Official Receiver Practice Statement 11 - Debt Agreements on the AFSA website. According to the Practice Statement above, the Official Receiver may seek clarification from the debtor or the DAA with respect to certain factors that may indicate solvency of the debtor. This includes the circumstances that led to the debtor becoming unable to pay their debts (for example loss of employment), the status of unsecured and/or secured debts, the date the debtor was last able to pay their debts as and when they fell due and whether the income is sufficient to pay the debts. It has been noted by consumer advocates, however, that there often appears to be little scrutiny of whether or not the debtor is insolvent. Statements by the debtor about their insolvency are often dictated by DAA's 'to ensure it gets accepted'. Further, arrears are sometimes the result of the DAA telling the debtor to cease paying their debts at the first appointment or phone call.   Summary - eligibility for a Debt Agreement as at October 2025 Insolvent No bankruptcy, PIA or other DA in the previous 10 years Unsecured debts less than or equal to $148,129.80 Divisible property less than or equal to $296,259.60 Taxable income less than or equal to $111,097.35 All debts must be paid in equal proportion To get the most up-to- date threshold amount go to the Indexed Amounts section of the AFSA website.   Consequences of proposing and entering a Debt Agreement Proposing and entering a Debt Agreement has both positive and negative consequences: Positive Debts and enforcement action are frozen while the proposal is considered. The debtor may pay less than the full amount owed and may not have to pay any more interest. The debtor is released from the same debts as would be the case in bankruptcy upon completion of the Debt Agreement. The debtor may retain any assets, such as their home. The debtor can remain or become a Director of a company. The debtor is not disqualified from being employed in a position defined as key personnel under the Aged Care Act 1997 - this includes people in charge of nursing staff. Note: There may be other forms of employment that will differentiate between a Debt Agreement and bankruptcy, but many don't so the debtor will have to make detailed enquiries. The debtor may derive some satisfaction from having met a proportion of their financial obligations rather than none. The debtor gets to make a single periodic payment rather than keep track of numerous creditors and accounts. Important: It should be noted that in some cases, all of the above can be achieved by an informal arrangement with creditors, without the negative consequences listed below. Negative The Debt Agreement Proposal will be recorded on the National Personal Insolvency Index (NPII) - note that it is the proposal that is recorded, and this occurs whether or not the proposal is accepted. Even if the Debt Agreement is not accepted by the creditors, the debtor by submitting their proposal has committed an 'act of bankruptcy' which one of their creditors could use to base a Creditor's Petition on and apply to have the debtor made bankrupt by the Court. The acceptance or rejection of the proposal will also be recorded on the NPII and any subsequent variation or termination of the Debt Agreement. These details will be recorded on the debtor's credit reporting records making it harder for the debtor to obtain credit in the future. The debtor is required to disclose that they are subject to a Debt Agreement when they apply for a loan or credit (including a hire purchase agreement or lease) for an amount in excess of $7,173 (as at October 2025). The debtor will most commonly have to pay both up front and ongoing fees to the DAA. The Debt Agreement may last longer than bankruptcy. There is a significant risk of non-completion - if the debtor is unable to pay out the agreement in full, the whole amount originally owing will become payable again (with interest) less the amounts received from the Debt Agreement, and collection/enforcement activity will recommence. The debtor may then have to consider bankruptcy after all at the point of default, which could be several years down the track. Any amounts paid for the preparation and administration of the Debt Agreement will not be refunded. There may be ramifications for their employment - check with the appropriate professional body or licensing authority. The time period for which a Debt Agreement can be retained on an individual's credit file is the longer of the following: 5 years from date of agreement; or 2 years from when the agreement is terminated or declared void; or If the agreement is completed (after longer than 5 years) the date of completion. It will also mean that Debt Agreement proposals which are withdrawn, voted down, lapsed or rejected by the Official Receiver (even if initially accepted) cannot be retained on a credit file once one of these things has occurred. Note: Completed Debt Agreements only appear on the NPII until the later of 5 years from the date of agreement or the date of completion. Terminated Debt Agreements only appear until the later of 5 years from the date of agreement, or 2 years from the date of termination. In addition, Debt Agreement proposals will now only appear on the NPII for 1 year from the day that the proposal was either withdrawn, rejected, cancelled or lapsed. Comparing Debt Agreements with Bankruptcy There are some benefits that apply to both bankruptcy and Debt Agreements - and these are listed first. Some benefits only apply to one or other arrangement. There are also consequences that cannot be assessed without considering the particular situation. For example, without knowing the amount of payments under a particular Debt Agreement, and the contributions that would be assessed in bankruptcy for that particular person, you can't tell whether a person would be better off financially with one or the other. A financial counsellor can, however, make this assessment in a particular case. Benefits of both Bankruptcy and Debt Agreements Any debt collection or harassment by unsecured creditors should stop. Bankruptcy or a debt agreement usually will not affect a person's ability to earn an income from their chosen occupation (there are exceptions). Most debts are forgiven at the end of the bankruptcy - the person gets, more or less, a fresh start. Most debts are also forgiven for the debt agreement BUT only if they succeed in completing the agreement. Essential household goods can be retained. A motor vehicle can be retained (any vehicle for a debt agreement; only up to a prescribed value for a bankruptcy). There is generally no criminal sanction (unless the borrower breaches an obligation or acts dishonestly). Additional benefits for Bankruptcy The bankrupt can usually stop paying most debts immediately. Bankruptcy usually ends after 3 years. There may be a great sense of relief or a reduction in stress. The bankrupt may have more income available for living expenses once relieved of the requirement to pay some debts. Additional benefits for Debt Agreements Assets will not be sold. Assets acquired during the debt agreement will not be affected by the agreement. However, a material improvement in the debtor's financial position during the debt agreement may prompt a creditor to apply to terminate or vary the debt agreement. A person in a debt agreement can continue as a company director. There are no restrictions on travel for debt agreements, although payments must be met. Financial affairs are not usually investigated. Consequences that may make a Debt Agreement better than bankruptcy - this will depend on the circumstances: Income is not taken BUT payments must be met - how this will compare to meeting income contributions will depend on the terms of the debt agreement and the certainty of income of the client. There may be some sense of relief for the client, with lower payments and fewer creditors to keep track of. HOWEVER, many complaints are made by debtors who are disappointed and feel they have been misled or who are struggling to keep up with payments. Sometimes there is more income available for living expenses, but this will be dependent on how much less the payments are under the agreement compared to the contractual payments, whether or not the debtor could have obtained a hardship variation on similar terms and the general affordability or the agreement in the debtor's circumstances. Some people may feel that it is preferable to make a significant contribution to their debts via a debt agreement rather than go bankrupt. HOWEVER, as a result of NPII and credit report listings, treatment by others is often the same as bankruptcy. Negative Consequences of both Bankruptcy and Debt Agreements Some debts will not be extinguished in bankruptcy. Debtor will not be released from those debts that are not released by bankruptcy even if they complete the Debt Agreement. A record of the bankruptcy is retained in the public register forever (NPII). A record of the Debt Agreement (and proposal even if it does not proceed) is retained on a public register forever (NPII). NB: note about potential change to this. A record of the bankruptcy remains with credit reference agencies for the longer of 5 years from the start, or 2 years from discharge. A record of the Debt Agreement remains on the debtor's credit report for the longer of 5 years from the start, or 2 years from termination or being declared void. If completed after 5 years, then until completion A bankrupt and a debtor in a Debt Agreement may be prevented from working in some roles or professions or need to seek special permission or show cause to do so. However, this would occur in less cases for a debtor in a Debt Agreement than for bankruptcy (for example, The Aged Care Act 1997 excludes bankrupts from being key personnel in certain facilities by does not mention debtors in Debt Agreements). Negative Consequences of Debt Agreement only There is no limit to how long a Debt Agreement may be and the evidence from the most recent review shows that many now exceed 5 years in length. Negative Consequences of Bankruptcy only Non-protected assets, including a home, may be sold. 50% of income above the prescribed amount is payable to the trustee. Certain assets acquired during the bankruptcy can be taken and sold for the benefit of the creditors. Questions to decide if my client benefit from a Debt Agreement? Step 1: Can your client meet their debt repayments as they fall due? YES: Then neither a DA nor bankruptcy is an appropriate option NO: Go to Step 2 Step 2: Has your client, or someone acting on their behalf, tried to negotiate informal arrangements with the client's creditors, such as a hardship variation, reduced lump sum payment or compassionate release (if appropriate)? NO: Go to Step 3 YES: Successful agreements reached, DA is not necessary YES: Unsuccessful negotiations: Go to Step 4 Step 3: A DA is a formal arrangement under the Bankruptcy Act with serious consequences. Attempts should always be made to come to informal arrangements with creditors first. [Back to Step 2 - try negotiations] Step 4: Have negotiations for informal arrangements been unsuccessful? YES: Does your client have any assets that would not be protected in bankruptcy (such as a home in which they live)? YES: Go to Step 5 NO: Go to Step 6 Step 5: Is your client's equity in those assets (market value less any loan/mortgage secured over the asset) MORE than the threshold amount (AFSA website lists up to date threshold amounts)? YES: Your client is not eligible to enter a DA NO: Your client may be a candidate for a DA but make sure they fully understand the consequences before referral. If your client has a mortgaged home they wish to continue paying, you should warn the client that failure to meet both the mortgage repayments or payments under the DA could result in repossession of the home or bankruptcy (and likely loss of the home anyway) in the future. If your client's creditors are not pressuring them for payment, they may be better off just waiting to see if circumstances improve. If one or more creditors have judgment or have issued a Bankruptcy Notice, then the client will need to act quickly. See also Chapter 6, Part 3, Bankruptcy and Mortgages. Step 6: Is your client a director of a company or intending to be a director of a company in the next 3-5 years? NO: There is no good reason for your client to consider a DA. Your client should either enter informal arrangements with as many creditors as possible, consider bankruptcy, pay as much as they can afford, or do nothing. You should advise them of the consequences of doing nothing. YES: Does your client owe unsecured creditors more than the threshold amount (AFSA website lists up to date threshold amounts)? OR Is your client likely to earn more than the threshold amount in the next 12 months? OR Has your client done any of the following in the last 10 years: Been bankrupt (unless it was annulled), or Entered a DA, or Appointed a controlling solicitor or trustee under Part X of the Bankruptcy Act? YES, to any of the above: Your client is not eligible to enter a Debt Agreement. Does your client have assets that could be sold to pay their debts in full? YES: Your client should seriously consider selling their assets to pay their debts rather than taking insolvency action and all its consequences, unless creditors have already commenced insolvency proceedings and no compromise can be made. NO: A Debt Agreement may be the appropriate option for your client, but the consequences of this choice should be articulated, see Chapter 11 for more details. In short, a Debt Agreement is unlikely to be suitable to your client unless they have assets to protect and/or they wish to be, or continue to be, a company director (or other occupation where this is permitted under a Debt Agreement but not bankruptcy). The circumstances where a client both fits one of these categories and meets all the legal requirements for eligibility are relatively rare. Further, the risk of non-completion of the agreement is very real, usually leaving the debtor worse off than if they had never made the agreement in the first place. Tip: Your client should NOT enter a Debt Agreement where he or she: Would not be likely to have to pay contributions in bankruptcy Does not have any assets that would be taken by the Trustee and Is not a company director (and does not want to be) Bankruptcy is likely to be a better option. Finally, if your client is contemplating a Debt Agreement, they should be warned to make sure the Debt Agreement is affordable and likely to be completed within a reasonable period of time. Accordingly, when preparing their budget they should include contingencies. As a general rule clients should be wary of any Debt Agreement Proposal that will last significantly longer than the usual period of bankruptcy (3 years). Using a Debt Agreement to save the home If the client is trying to protect their equity in a home, then extra care needs to be taken in making the decision to enter into a Debt Agreement. Importantly, the client needs to be confident of being able to pay both the periodic payments due under the Debt Agreement and the mortgage in the coming years. You should advise your client to do a detailed analysis of their options, including comparing what they would have to pay under a Debt Agreement in addition to their mortgage, compared to option of selling the home, renting a home suitable to their needs and either going bankrupt or attempting to pay the remainder of the debts after applying any equity in their home towards those debts. You should also try to assist them to imagine their likely position in 3 years and 5 years time under each option. While losing any hope of capital gain on their home (if they sell) and the problems associated with getting back into the housing market after leaving it are valid considerations, they are only valid to the extent that retaining the home is at all realistic. Such considerations should also be carefully balanced against other important factors, such as the stress associated with debt repayment and having income available for improvements in lifestyle. Of course, if the debtor would have to pay more to rent a suitable home than the amount of their mortgage payments then the option of staying in the home has clearer benefits. If your client has no equity in their home at all and the value of the home is not likely to increase much in the next 3 years, then she or he could consider bankruptcy in which case they may be able to keep living in the home whilst maintaining the mortgage/ rates/ insurance payments with a view to 'buying back' their equity in the home from the trustee when they are discharged in 3 years. However, this alternative also entails significant risk (see Chapter 6 Part 3). Case study A husband and wife entered a Debt Agreement in relation to their unsecured debts in an attempt to save their home. Unfortunately, they could not keep up with the repayments under the Debt Agreement and the mortgage, so they put the house on the market. Eighteen months later they still can't afford to live because the repayments under the Debt Agreements and rent alone leave them with only $50 per week! They will need to terminate the agreement and go bankrupt or stop paying and wait until it is terminated automatically. Very occasionally a client may come along where a Debt Agreement offers real advantages: Case study The client is a 55 year old company director with his own business. He is married and the family home is in his wife's name. He has a number of debts arising from credit cards that total $52,000. He has a judgment debt of $36,000 resulting from an action taken against him by the purchaser of a previous business for poaching his old clients in breach of contract. He had been to mediation but had failed to meet the agreed repayment schedule. The judgment creditor served a Bankruptcy Notice and subsequently served a Creditor's Petition on the client. The judgment creditor has indicated that he has no interest in a negotiated arrangement. The client believes the creditor just wants to put him out of business. There is a Creditor's Petition hearing in 3 weeks' time. The client's income is about $60,000 per annum after tax according to a statement from his accountant and his assets are below the threshold for entering a Debt Agreement. The new business is currently up for sale but in the meantime, he would like to continue as company director. He believes he will eventually be able to pay his debts either from his income or the proceeds of the sale. The above client is very likely to end up bankrupt regardless of any action on his part unless he can come up with a lot of money fast. Without more information we cannot tell whether the trustee is able to claim an interest in the family home in bankruptcy, but it is certainly possible depending on the history. The client will also be prevented from a being a company director if he is made bankrupt. The other advantage of a Debt Agreement in this case is that the credit card creditors can potentially bind the reluctant judgment creditor (force him to accept the Debt Agreement) because they hold the majority of the debts by value. If the business was successfully sold, the client could apply to vary the agreement and pay out the debts earlier than anticipated, completing the agreement. However, it may not be easy to get a Debt Agreement accepted at this late stage in the Creditor's Petition process. The challenges of doing this are covered in Chapter 10. Non-completion risk Perhaps the biggest risk not taken into account by consumers entering Debt Agreements is the risk of non-completion. Many consumers contact financial counselling services after they have defaulted on a Debt Agreement. This is the real risk that consumers often don't take into account. Once they have defaulted, they have limited options. They can apply to vary the Debt may not be accepted or they may default again. Once a Debt Agreement has been terminated, the consumer owes all the original debts, plus back-dated interest, less any money that was paid to the creditors under the agreement. Any amounts paid to the DAA (or a broker) are lost. The reality for people who cannot meet the repayments under their Debt Agreement is often inevitable bankruptcy after a lot of money and time is wasted. Client suitable for a debt agreement - next steps If your client is suitable for a Debt Agreement, then they will need to consult a suitably qualified Debt Agreement Administrator. AFSA can provide referral information, also available on their website. Further information on what is required to get into a Debt Agreement and what your client can do if they are already in one and want to get out and/or complain is contained in Chapter 11. Where your client has been in the process of applying for a Debt Agreement and has now changed his or her mind, urgent action is required to stop the process (if it's not too late already!) - see Chapter 11. See also Chapter 10 in the event that a Creditor's Petition has been presented against your client and they are considering a Debt Agreement.

Updated: 1 May 2024 Content Part 1: Declaration of Intention to Present a Debtor's Petition Part 2: Debt agreements Part 3: Personal Insolvency Agreements Important: The options covered in this Chapter are formal arrangements under the Bankruptcy Act. An informal agreement with creditors is almost always better than a formal option under the Bankruptcy Act where it is possible. Financial counsellors can sometimes achieve fantastic results for clients with advocacy skills and perseverance. Part 3: Personal Insolvency Agreements Summary A Personal Insolvency Agreement (PIA) is similar to a Debt Agreement in that it is an alternative to bankruptcy but also a formalised option under the Bankruptcy Act with many similar consequences to bankruptcy. An agreement is made with creditors to transfer property or funds or make periodic payments in return for a release from the provable debts at the conclusion of the arrangement. As with a Debt Agreement (and unlike bankruptcy), your client's property does not vest in the trustee (although some or all of it may have to be transferred to creditors as part of the agreement itself) but will be subject to the trustee's control. The debtor can also acquire property during the agreement without it vesting in the trustee or passing to creditors, subject to the terms of the agreement. Like proposing a Debt Agreement, appointing a controlling trustee (the first step in setting up a PIA) is an act of bankruptcy. Unlike Debt Agreements, a person in a PIA cannot be a director of a company for the duration of the agreement. A PIA is expensive to set up and will not therefore be useful to most financial counselling clients.   What is a Personal Insolvency Agreement? Part X of the Bankruptcy Act covers Personal Insolvency Agreements. A Personal Insolvency Agreement (PIA) is an arrangement whereby a person who is insolvent seeks to avoid bankruptcy by proposing a formal arrangement to their creditors to discharge their debts. The debtor commences the process by authorising a controlling trustee over the debtor's property, who will then call a meeting of creditors within 30 days. Although a PIA must comply with the substance requirements in s 188A(2), there is flexibility as to its terms. A PIA may provide that the debtor will: pay a lump sum payment to creditors (from his or her own money and/or the funds of a third party or parties such as family members); and/or transfer property to the trustee (of the PIA) to be sold by the trustee and the proceeds paid to creditors; and/or make periodic payments to the trustee for distribution to creditors. Unlike a Debt Agreement, there are no limits to the income that can be earned by the person proposing the PIA or limits on the amounts owed or assets owned. The debtor however: must be insolvent; and must have an appropriate connection to Australia; and must not have proposed another insolvency agreement in the previous 6 months. The trustee informs the creditors of the proposed agreement and holds a meeting where creditors either accept or reject the proposal according to a voting procedure at a creditor's meeting. This is explained further in Chapter 12 under the heading What is the Process for entering into a PIA? There are very few financial counselling clients who would be suitable for a PIA and this section is therefore relatively brief. The cost alone would be prohibitive for most people seeking financial counselling. More information is available on the AFSA website. What are the consequences of a PIA? Similar to bankruptcy and Debt Agreements, a PIA remains on the debtor's credit file for the latter of 5 years from the day it is executed and: if the trustee has issued a certificate under s 232 following the discharge of all obligations under the PIA, the day on which the certificate is signed; or otherwise, 2 years from the day the PIA is terminated or set aside. Unlike Debt Agreements, a debtor who appoints a controlling trustee may remain on the National Personal Insolvency Index indefinitely. This can impact a debtor's ability to obtain credit and other services (such as rental accommodation, telecommunications contracts and insurance) in the future. Appointing a controlling trustee (to set up a PIA) is also an 'act of bankruptcy' (like proposing a Debt Agreement) and can be relied on by creditors to petition the Court to make the debtor bankrupt if he or she fails to complete the terms of the agreement, or the creditors do not vote to accept the proposal. It may also impact on a person's ability to remain in a licensed or regulated profession, similar to both bankruptcy and Debt Agreements. Like bankruptcy, a person in a PIA cannot be a director of a company until the terms of the PIA have been complied with in full (that is all agreed amounts are paid or property has been sold or transferred as provided for in the agreement). This is not the case with a Debt Agreement, where the person can continue to be a director of a company while in the Debt Agreement. A PIA will also prohibit clients from being able to deal with their property (for example, a house or car) without the consent of the controlling trustee. The client will also be obligated to assist the trustee by providing information and documentation if requested. Once a controlling trustee is appointed, all proceedings in respect of a Creditor's Petition that has been presented against the debtor are stayed (suspended) including applications to extend the life of the Creditor's Petition past the normal 12-month period. The stay lasts until the creditor's meeting has been concluded or adjourned, whichever occurs first. If the PIA is accepted, the Creditor's Petition cannot proceed. If the PIA is not accepted, the stay will end, and the creditor can resume action under their Creditor's Petition, and it is most likely that a sequestration order will be made against the debtor. What is the advantage of a PIA over bankruptcy? Compared to bankruptcy, a PIA offers greater flexibility as to the duration and terms of any arrangement and places less onerous responsibilities on the trustee. This can be particularly advantageous for debtors with businesses or complex financial relationships. Debtors are also able to avoid some of the consequences that follow from bankruptcy, such as restrictions on overseas travel or automatic restrictions on obtaining credit. The assets of the debtor do not automatically vest in the trustee, although they become subject to the control of the trustee. The terms of the PIA will set out what is to become of the debtor's property and income and, as a result, it is possible for those terms to provide that the debtor retains some property. However, in practice, it may be difficult to get the creditors to agree to the debtor retaining significant assets. Creditors may expect that property which would be divisible amongst the creditors in bankruptcy should be included in the PIA. That being said, creditors may agree to the debtor retaining business assets on the proviso that periodic payments be made to the trustee from the income generated by the business. Likewise, creditors will generally not object to the debtor retaining their home if there is little (if any) equity in the home. Property acquired in future (after the PIA has been accepted and executed) will not automatically become available to creditors (unlike the situation for an undischarged bankrupt), unless the terms of the PIA provide for that to occur. The process commences when the debtor signs a s 188 Authority appointing a controlling trustee. When the Section 188 Authority becomes effective, the debtor's property (whilst not technically vesting in the controlling trustee) becomes subject to the control of the controlling trustee. Accordingly, there is a certain loss of autonomy in relation to dealing with property, especially any assets of the debtor's business. Normally, the trustee will only allow the debtor to keep their business operational where it is considered be in the interests of the creditors. Whilst the Controlling Trusteeship is in place, the debtor's property is subject to a charge in favour of the creditors, plus the Controlling Trustee is entitled to be indemnified out of the debtor's property for his/her remuneration and expenses. The proposal must also detail whether the antecedent transactions provisions of the Act apply. If they do not apply, the trustee is precluded from taking recovery action in respect of any under-value property transfers, transfers to defeat creditors and/or preferential payments to creditors made prior to the proposal. However, creditors can insist on the antecedent transactions provisions applying in the PIA as one of the conditions of the agreement. If the debtor's proposal states that the antecedent transactions provisions do not apply, the creditors may be suspicious and assume (rightly or wrongly) that there have been undervalue transactions, transfers to defeat creditors and preferential payments to creditors prior to the proposal. Accordingly, debtors are usually advised to state in the proposal that the antecedent transactions provisions do apply so as not arouse the suspicions of creditors, even if there is a possibility that the trustee of the PIA might take action to recover property. As with bankruptcy, the trustee of the PIA will not take any recovery action unless creditors provide funding to do so or authorise the use of moneys in the estate plus give the trustee an unlimited indemnity as to costs in the event the recovery action fails, and the trustee is ordered to pay the other party's costs. Accordingly, creditors are usually most reluctant to provide funding and an indemnity. The creditors must vote on the PIA proposal at a meeting arranged in accordance with the Act. The proposal must be approved by a majority of unsecured creditors (by number) who represent at least 75% of the dollar value of the total debts of the creditors who attend the meeting and vote on the resolution. This is referred to as a special resolution. Once the agreement is accepted, the trustee is appointed to administer the agreement and will have control over any property necessary to the completion of the agreement. If the proposal is not accepted or if the PIA is not executed within the prescribed time period of 21 days from the day the special resolution requiring the debtor to execute a PIA was passed; then the Controlling Trustee remains in control of the property until either: the creditors vote at the meeting for the property to cease to be subject to the trustee's control; four months pass; the Court orders the release; or the debtor becomes a bankrupt and property vests in the Trustee (in bankruptcy). If the PIA is completed (all obligations under the agreement complied with), then the agreement will specify the extent to which the debtor is released from any debts that would be provable in bankruptcy at the date the PIA was executed. A PIA cannot release a debtor from debts in circumstances where the debtor would not be released after discharge from bankruptcy. It also does not affect the creditor's rights against any co-borrower or guarantor, or the rights of secured creditors to enforce their security. Who should consider a PIA? In practice most controlling trustees in Sydney, for example, would commonly seek at least $15,000 upfront to accept an appointment. This means the debtor must be very sure that they have sufficient funds to cover this, that they have a proposal that creditors are likely to accept, and that they will still end up better off than if they had gone bankrupt. Accordingly, most financial counselling clients would not be suitable for a PIA because they have little, if anything, to offer their creditors that would be superior to what was available to them in bankruptcy. In the rare case that a client has available assets (but insufficient to sell and pay out the debts) and/or a significant income from which amounts could be offered above and beyond contributions payable in bankruptcy, then the following should be considered: Have negotiations been undertaken to try to convince creditors to accept repayments and or lump sum settlements without needing to resort to bankruptcy? Is bankruptcy inevitable? If, for example, if there is a Creditor's Petition on foot and the client is clearly insolvent, a PIA may be the only alternative (always ensure your client gets urgent legal advice about the Court process) if the client does not qualify for a Debt Agreement. Similarly, even if there is no advanced enforcement action against your client, he or she may have no prospects of improvement in their position (for example they have a permanent illness or disability) and have some assets to offer to avoid bankruptcy. Does the person qualify for a Debt Agreement instead? Has the client considered the comparative benefits and disadvantages of bankruptcy? Like Debt Agreements, a PIA will only be effective if the debtor is able to complete all the obligations. Failure to do so will be likely to lead to bankruptcy further down the track. Can the person pay the fees and costs associated with a PIA? Personal Insolvency Agreements versus Debt Agreements If your client wants to be (or continue to be) a company director, then a Debt Agreement is the only option which allows this. Of course, the person would have to meet all the other preconditions such as the income, property, residency and debt thresholds and must not have been a bankruptcy, a party to a Debt Agreement or appointed a controlling trustee in the last 10 years. Generally, the cost of proposing and administering a Debt Agreement will be much less than the cost of proposing and administering a PIA. A PIA, however, gives more flexibility in the types of agreements that can be made and there are no limitations on the extent of the debtor's assets, liabilities and income. For example, creditors do not have to be paid in equal proportions to the size of their debts. PIAs may also include transfers of property. If your client is suitable for a PIA, then they will need to consult a suitably qualified Controlling Trustee. AFSA can provide referral information, also available on their website. See also Chapter 12 on the process for proposing/entering a PIA, dealing with complaints about PIAs, varying and terminating PIAs. Read the checklist for this chapter in Chapter 11: Tools and Resources  

Updated: 13 August 2024 Content Part 1: Debts - will I still have to pay my debts? Part 2: Protected property - What can I keep? Part 3: Divisible Assets - What will the trustee take and sell? Part 4: Income contributions - What happens to money I earn while bankrupt? Part 5: Other consequences of bankruptcy - How else will it affect my life? Part 6: Small business and bankruptcy Part 7: Family law and bankruptcy Part 8: Gambling and hazardous speculation Part 9: Death and bankruptcy Summary There are many different consequences of bankruptcy. Some of the concepts are quite complicated. It is important to have a broad understanding of the principles and to be familiar with problems that might arise so that you know what questions to ask the client and when to seek more advice on their behalf. This section is broken up into segments. Parts 1 - 5 covers: What happens to debts? What property is protected? What property will be taken by the Trustee? Whether the client has to pay income contributions and how much. What other consequences there might be. Financial counsellors should be aware of the content of all these parts at least in broad terms as they are relevant to all clients. Parts 6 - 9 need only be referred to if they are relevant to your client's individual circumstances. They cover in order: Small Business Family Law Gambling and hazardous speculation Death Introduction Your client must understand the following potential impacts of bankruptcy before making an informed decision whether to go bankrupt: Debts - will they go away? Assets (past, present and future) - will the trustee in bankruptcy ('the Trustee') take them? Can the Trustee undo past transactions and get at assets now owned by others? What about assets your client may acquire in the future? Income - will the client have to pay a portion of their income towards their debts ('income contributions') and if so, approximately how much? What other limitations might there be on the client's life as a result of the bankruptcy? These are all covered in this Chapter. Note: The same consequences apply when the client has been made bankrupt on a Creditor's Petition, although in that case there is no decision for the client to make. You can refer to this Chapter to advise your client about what to expect during bankruptcy. You should also refer to the bankrupt’s obligations in Chapter 8. If your client has very recently been made bankrupt and does not think this should have happened, refer to Chapter 10 - A sequestration order has been made against my client - Is there anything he or she can do? Advise your client to seek urgent legal advice.   Part 1: Debts - will I still have to pay my debts? Summary Not all debts will be extinguished by bankruptcy. It is very important for your client to understand which debts will go away permanently, and which may still be enforced during or after bankruptcy. Very briefly a discharged bankrupt will be released from most unsecured consumer loans, such as credit cards, personal loans and the shortfall on a mortgage after a house has been sold, unless they were incurred by fraud. Court imposed fines relating to offences are not affected by bankruptcy and will still be enforced against the client. Child Support and Maintenance Orders also continue to be payable, although these debts may be claimed against the bankrupt estate and against the client personally. Some debts, for example motor vehicle accident damages, can be provable in bankruptcy, and the client released, but only if certain conditions are met prior to bankruptcy. Where a debt has been incurred by fraud, the creditor can claim from the bankrupt estate, but can also continue to enforce against the debtor after discharge from bankruptcy (until they have recovered the full amount owed). The law about when this can and cannot occur is quite complicated and a client being pursued for a debt allegedly incurred by fraud should seek legal advice about their particular circumstances. Secured loans are a special case. The client can continue to pay a secured loan to stop the lender repossessing the goods/ vehicle/ house. Any equity the client has (or acquires during bankruptcy) vests in the Trustee and the Trustee can choose to sell the goods, repay the loan and retain the remainder of the proceeds for the bankrupt estate at any time. This Chapter explains concepts such as: Provable debts Non-provable debts Preferential payments Bankrupt estate All debts should be included in the statement of affairs, regardless of whether they are secured, provable, or whether the client will be released. Understanding the language For the client in debt, the main objective of bankruptcy is to seek relief from unmanageable debt. This includes the stress of being financial difficulty places on a debtor and their family, pressure from debt collectors and other consequences of unpaid debt. It is vitally important for the debtor to understand which debts bankruptcy will release them from and which debts it will not. It would be pointless to go bankrupt over court fines, for example, as these will not be affected by bankruptcy and would remain payable by the debtor. There are a number of key concepts to understand. For example, some debts are 'provable' in bankruptcy and others are not. A provable debt is one which the creditor can seek to recover from the bankrupt estate by lodging a proof of debt. When the proof of debt is accepted by the Trustee, the rights of the creditor convert from rights against the debtor (such as the right to take court action to seize the debtor's personal property) to the right to a share in the debtor's bankrupt estate. Sometimes this will be the right to a share of nothing, but this does not change the fact that the debt is provable and, in most cases, can no longer be enforced against the debtor for the period of the bankruptcy or afterwards. However, there some debts which are provable (meaning the creditor can claim against the bankrupt estate) and can be enforced against the debtor after bankruptcy (if not paid in full out of the bankrupt estate) and some which can even be enforced during bankruptcy. Debts can be broken down into those debts which are: Not Provable (debts that creditor cannot claim against the bankrupt estate) and The debtor still has to pay the debt; or Cannot be legally enforced against the debtor either. Provable (debts in respect of which a creditor can lodge a proof of debt and seek a proportionate share of the bankrupt estate) and The debtor is released from the debt after being discharged from bankruptcy (no need for debtor to pay the creditor) and enforcement ceases during bankruptcy; or The debtor is released from the debt after bankruptcy and legal enforcement ceases but there are compelling practical reasons to pay (debtor may want to pay) The debtor is not released after bankruptcy (unless the debt is paid in full from the bankrupt estate) but enforcement ceases during bankruptcy (debtor may still have to pay) The debtor is not released from the debt after bankruptcy and enforcement can continue even in bankruptcy (debtor very likely to have to pay). In short whether a debt is provable or not only dictates whether the debt can be claimed against the bankrupt estate; there is another step to determining whether or not the client can still be forced to pay the debt or may want to do so. Whether a debt is provable or not is found in s 82 of the Act and in a long history of case law interpreting the section. Section 82(1) specifies that 'all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy'. This is quite difficult to understand so some common examples are included in the section on Provable Debts below. The section then goes on to specifically exclude a number of types of debts (or demands). These are included in the section Non-Provable Debts below. Generally speaking, if a debt is not provable in bankruptcy, the creditor can still pursue the debtor. There are, however, also debts which are not provable, but cannot be enforced against the debtor either. An obvious example would be a statute barred debt, where the client may have a defence. What is the bankrupt estate? Provable debts are paid from the bankrupt estate if there are sufficient funds to cover them after paying for the costs of administering the bankruptcy. The bankrupt estate consists of any assets of the bankrupt that vest in the Trustee - or the proceeds of their sale - including any assets acquired during the bankruptcy (that is prior to discharge from bankruptcy) unless those assets are protected by the Act and any money paid to the trustee as assessed income contributions. These topics are covered in more detail in the relevant sections below. The bankrupt estate is made up of: Property owned by the bankrupt at the date of the bankruptcy Plus any property clawed back by the Trustee as a result of the antecedent transactions provisions (see Chapter 6 Part 3 Looking into the past) Plus any property acquired by the bankrupt after the date of the bankruptcy and before discharge (see Chapter 6 Part 3 Assets acquired during the period of bankruptcy) Plus amounts paid to the Trustee as income contributions (see Chapter 6 Part 4) Except where any of the above property is protected under the Bankruptcy Act (see Chapter 6 Part 2) It is also important to note that even when your client is discharged from bankruptcy, the bankrupt estate continues to exist, and the Trustee may still deal with property or transactions relevant to the bankruptcy. The bankrupt may have acquired property just before discharge which vested in the Trustee, for example. Wherever this publication refers to a client being 'released' from a debt after discharge from bankruptcy, the debt itself still exists and can be claimed against the bankrupt estate as long as there are funds or property in that estate. Secured debts The treatment of secured debts in bankruptcy can be somewhat confusing. Secured debts have to be listed in the appropriate place in the statement of affairs, but the secured asset will not be clear of the debt even after discharge until either: the asset is sold by the secured creditor for a loss (or is otherwise lost or destroyed). The deficit is then an unsecured liability and will be dealt with in the same way as all provable unsecured debts. That means the mortgagee cannot take recovery action against the bankrupt personally for the deficit (for example, the shortfall on the sale of the bankrupt's home). This is the case even if the asset is sold after discharge from bankruptcy, as the contract came into existence before the date of bankruptcy; or the trustee sells the secured asset, and the liability is paid out (in other words the debt has been fully paid); or the bankrupt pays out the secured loan within the bankruptcy and the asset is protected in bankruptcy (for example, the client pays off his or her car loan, but the car is then worth less than the relevant threshold for the bankrupt's primary means of transport). Where your client pays off a loan that is secured over property or is still paying a secured loan off at the point of discharge from bankruptcy, he or she needs to be aware that an interest in the asset is likely to have vested in the Trustee. Trustees have many years in which to make a claim upon a vested interest in an asset (such as a home or land or caravan). More details are given on this in Chapter 6 Part 3: Divisible Assets - What will the trustee take and sell? Your client may have options, such as buying back the Trustee's share, but they cannot assume that the Trustee will no longer make a claim because they have been discharged. Further, if they default on a secured loan, either during bankruptcy or after discharge, the lender may repossess the asset in the usual way. Example Jackie and Luca were paying off their home when they decided to go bankrupt to deal with overwhelming unsecured debt. They had minimal equity in their property at the time they became bankrupt. When they were discharged 3 years later, their equity had grown to $60,000 as a result of a combination of repayments made and an increase in property values in their area. This interest has automatically vested in the trustee in bankruptcy, and they will need to make an arrangement with the Trustee to either purchase the Trustee's interest in the property or sell the home for the benefit of their bankrupt estate. The fact that they are discharged from bankruptcy makes no difference to this - see Chapter 6 Part 3 of this Chapter on Divisible Assets. Important Note - All debts must be disclosed in the client's statement of affairs whether secured or not! A creditor cannot repossess a secured property or vehicle just because the debtor is bankrupt (see Chapter 8 - Dealing with secured loans during bankruptcy). However, if there is sufficient equity in the asset the Trustee may choose to sell it, repay the secured creditor and use the balance to pay creditors and/or the costs of administering the estate. In some cases, the debtor may wish to surrender the asset and include the shortfall in the bankruptcy to reduce their financial commitments. Non-provable debts Debts that creditor cannot claim against the bankrupt estate It is easier to begin with those debts which are not provable in bankruptcy because this is a more defined list than those debts which are provable. The following debts are not provable in bankruptcy, either because they are specifically excluded by s 82, or because they do not meet the definition in s 82(1) above: Unliquidated debts (claims where the client's liability and the amount of the damages claimed has not been settled) except where they arise from a contract, promise or breach of trust. The law in this area is extremely complicated so if your client's debts include claims or demands that are not obviously based on a contract, or a court judgment, you should recommend the client gets legal advice to determine whether the debt is provable or not. The most common type of demand faced by clients that is not covered by contract, promise or breach of trust is in relation to motor vehicle accident damage - this is covered in more detail in the section about Motor vehicle accident debts below. Penalties or fines imposed by a court in respect of an offence against a law (on the spot infringements that are not imposed by a court are provable in bankruptcy, but you may still want to pay them to avoid loss of licence/registration). The system varies from State to State as to whether certain fines, such as traffic fines, are issued by a court or as part of an administrative process. Financial counsellors need to be aware of the status of such fines in their own jurisdiction, as they may vary and have different consequences for your client. A pecuniary penalty order made under s 1317G of the Corporations Act 2001 (Cth). Council rates - these are generally secured over the property and paid as a priority upon sale of the property (relevant local government laws usually empower the relevant local authority to sell the land in order to recover unpaid rates after a specified period of time). Water rates are usually similarly secured. Creditor's legal costs (except the Petitioning Creditor) are not provable unless there is a judgment for costs made before the date of the bankruptcy or there is a contractual obligation to pay the costs which predates the bankruptcy (for example, enforcement costs under a mortgage). Furthermore, the amount of the costs must have been quantified prior to bankruptcy by either being an amount specified in the judgment or having been assessed (reviewed using the appropriate process in the jurisdiction in which they are claimed). HECS-HELP debts (including FEE-HELP and OS-HELP), VETSL debts and Student Start-Up Loan (formerly known as Student Financial Supplement Scheme or SFSS debts) Proceeds of Crime Orders (and any property subject to a proceeds of crime order is not divisible among creditors). Debts incurred after the date of bankruptcy - these can be enforced in the usual ways despite the bankrupt status of the debtor. This means that property that is protected in bankruptcy will not be protected from the sheriff enforcing a writ for a debt incurred after the date of bankruptcy. This could include, for example, unpaid tax or GST for the period after the date of the bankruptcy. Bankruptcy will not affect the above debts and there is no point in your client going bankrupt if one of the above debts is the sole motivation. If your client has other debts, and could still benefit from bankruptcy, then they need to understand that they may still face enforcement of any of the above types of debt. Motor vehicle accident debts Demands for damages as a result of motor vehicle accident damage for which your client is not insured are extremely common. Before your client goes bankrupt over a motor vehicle accident, make sure they have considered the following: Are they liable? Your client should get legal advice about whether they have a defence to the debt. Are they insured? Check whether the client has an insurance policy which would cover them for the relevant damage. If your client has claimed and been rejected, get advice from the Insurance Law Service on 1300 663 464 to check there are not grounds on which the rejection can be disputed. If the other party is an insurance company, has the client or someone acting on their behalf tried negotiating with the insurance company (to reduce or waive the debt, or make a repayment arrangement) using the hardship provisions of the Insurance Code of Practice? Sample letters are available on the Financial Rights Legal Centre website. Is the debt provable? If legal proceedings have already occurred and there is a judgment debt for a specified amount, the debt is provable. Where there is no judgment, the debt will only be provable if the debtor has provided written acknowledgement of liability for the debt (including specifying the amount payable in full and final settlement) and can demonstrate that this acknowledgement has been received and accepted by the other party (or their solicitor or insurer, as appropriate). Do NOT assist your client to go bankrupt until this has been done. (to be sent to client) To [insert the name of the creditor/creditor's legal representative] Address Dear Sir/Madam Re: Your claim [insert details and reference numbers for damages claimed including details of any court proceedings] in relation to motor vehicle accident on [insert date of accident] I [insert client's name] of [insert client's address] refer to the above claim. I advise that I admit liability for the amount claimed as [insert details such as damage to motor vehicle with rego number XXX XXX] and that consequently I am indebted to [insert name of creditor] for the sum of [insert sum claimed]. Yours faithfully [insert client's name and contact details] Important: This letter should not be sent until the client is absolutely certain that he or she is going bankrupt as it is an admission of liability that could be used against the client in legal proceedings. If possible get the other party to reply or acknowledge receipt of the letter. If sent by email, retain a copy of the emails. If the letter is sent by fax as successful transmission may be sufficient to establish receipt. If there is a debt collector and insurer involved, send to both parties. Where there are multiple creditors, for example, a multi-vehicle accident or accident to infrastructure, a separate letter will be required for each creditor seeking damages. Personal injury claims Usually personally injury will be covered by the vehicle owner's compulsory third party insurance but there may be situations where this is not the case. For example, where the client was driving an unregistered vehicle, or where the insurance claim has been rejected (such as where the driver of the vehicle was under the influence of drugs or alcohol). If any of these situations apply, the person should wait if possible until any demands for personal injury damages are made before going bankrupt, or he or she may risk having to go bankrupt again. A personal injury claim will also be an unliquidated debt, so a similar letter (or letters) to the Sample Letter above will need to be sent in relation to any claim. Debts which are not provable and not enforceable Debts which are not enforceable against the debtor are also not enforceable against the bankrupt estate. Therefore, they are not provable but there is no obligation on the debtor to pay either - for example a statute barred debt or a debt to an unlicensed bookmaker. There is a remote chance that a debt based on a judgment more than 12 years old could be provable in circumstances where the original court has given leave to enforce the judgment. A Bankruptcy Notice cannot be based on a judgment that is more than 6 years old. This means that for this to be an issue either the creditor has relied on a different act of bankruptcy (very rare) or the debtor is contemplating, or has presented, a Debtor's Petition. Similarly, there are circumstances in which a court can extend a limitation period and such debts would also be provable. In either case, the debt would be extinguished upon discharge from bankruptcy unless it was incurred by fraud. Note: Where the debtor has a number of provable and non-provable debts and decides it is still worth going bankrupt (or has been made bankrupt by a Creditor's Petition) the non-provable debts must still be included in the debtor's statement of affairs. Provable debts Provable debts are debts that entitle a creditor to participate in proceeds from the bankrupt estate. Clients will be released from provable debts on discharge of bankruptcy Basically all debts not included in the previous section are provable, although you need to be careful about whether or not this means the client will be fully released from them. The following list of debts would all be provable in bankruptcy (provided they pre-dated the bankruptcy), and the client will be released from them (unless they were incurred by fraud). However there may be practical consequences as a result of the debts not being paid. This is not an exclusive list, simply some common examples: credit card debts personal loans any unsecured portion of a secured debt (shortfall on the sale of a house or vehicle for example) unpaid rent for residential premises (but client may be evicted if the unpaid rent is for private premises the bankrupt currently occupies - see section in relation to Rent below) debts for phone, internet and television services (although current service providers will disconnect the service if unpaid) medical bills unpaid workers compensation premiums tax debts accrued up to the date of bankruptcy (see section titled Taxation and bankruptcy below) penalties imposed by the Australian Tax Office for late payment of income tax or late lodgement of returns (as opposed to imposed by a court) judgment debts for non-contractual claims (for example motor vehicle accident damage) social security debts (Centrelink) except where incurred by fraud (more on this topic is included later in this Part and Chapter 9 Part 2) Victim's Compensation Recovery Orders (note that these will not be extinguished after discharge if the offence involved fraud unless the order was registered as a judgment - a necessary step towards enforcing the debt - prior to the date of the bankruptcy) restitution orders (where, for example, as part of a criminal case the Court ordered the convicted defendant to repay the victim the value of property destroyed). Only this 'restitution' part of the amount is provable - any amount imposed as a fine or penalty is not provable, nor is any amount ordered to be paid to compensate the victim for pain and suffering unless it is part of a Victim's Compensation Recovery order. Warning regarding Restitution Orders: Care must be taken with these orders and the client should be advised to seek advice from their solicitor, as to what will happen if amount due under the order is not paid. If they did not have a solicitor, they will need to take regard of the Court order and the rules of the Court that made the order and possibly seek advice. The only way to challenge a restitution order is to appeal that order as part of a sentencing appeal. If the restitution order relates to an offence involving fraud, then the debt is provable but the defendant is not released from the debt upon discharge. Also, in some cases, the Court imposes a prison sentence on conviction but then suspends the sentence on the condition that the defendant is of good behaviour and enters into a recognizance whereby they undertake the pay the restitution amount. Therefore if they do not pay the amount they breach the recognizance which could result in them going to prison. The client could arguably apply to the Federal Circuit and Family Court of Australia for the order to be discharged under s 60 (1)(a) of the Bankruptcy Act. The client should be referred for legal advice on this issue. Unpaid wages, superannuation and all other employee entitlements (where the debtor was the owner of an unincorporated small business). A creditor can no longer enforce any of the above debts after the date of the bankruptcy (unless they were incurred by fraud in which case enforcement may recommence after discharge - s 153(2)(b)). Any garnishee over the person's bank account or salary/wages should cease (except where it is a garnishee notice issued by the ATO). The sheriff can no longer seize personal property under a writ for levy of property. Generally speaking, a creditor cannot enforce any remedy against the person or property of a bankrupt in relation to a provable debt (s 58). This does not affect a secured creditor's right to enforce against property that is security for a loan. Enforcement action can still be taken in relation to a maintenance agreement or maintenance order under the Family Law Act 1975 or Child Support (Assessment) Act 1989 - see later section. Debts incurred after the date of the bankruptcy can be enforced in the usual manner. What about the interest on a provable debt? Interest on a provable debt falls into 2 categories: interest accrued from the date that interest became due and payable under the terms of a contract or the date of the judgment until the date of bankruptcy - which is provable in certain circumstances, and interest accrued from the date of bankruptcy onwards, which is not provable (see s 82(3B)). The client (and his or her protected property) cannot be pursued for interest in either case. However, where there is a surplus in the bankrupt estate after the proved creditors have been paid in full, those creditors with claims for interest accrued from the date of bankruptcy to the date that they received their final dividend can lodge a claim for such interest from the bankrupt estate. Similarly, if the client later wishes to annul his or her bankruptcy, he or she will have to pay all the debts in full, the trustee's costs and disbursements, and any interest accrued on the debts to the date of payment (s 153A(1A)). Tax and bankruptcy The interaction of taxation and bankruptcy is sometimes complicated and affects most bankruptcies. The following answers the most common questions. Are tax debts provable in bankruptcy? Tax debts are provable up to the date of the bankruptcy. This includes any part financial year (for example, if a person becomes a bankrupt on 3 March any tax debt accrued between 1 July the previous year and 2 March is provable in the bankruptcy). This will have little relevance for most employees as their tax is deducted each pay period. Self-employed bankrupts, however, should lodge two returns: one for the period from 1 July to 2 March in the example above and another from 4 March to 30 June. The tax assessed as payable in relation to the latter period will still be owed despite the bankruptcy. The tax assessed as payable in the former period, that is the period prior to the bankruptcy, is provable in the bankruptcy and the client is released from that debt upon discharge. The ATO is not keen on 'split returns' for 1 year, so your client may need to press the issue via their accountant or tax agent, if they have one. The exception to this (tax debts being provable) is where a Garnishee Notice has already been issued. According to the Taxation Administration Act 1953 as soon as the Notice is issued a charge is created over the property detailed in the Notice, for example, the money in the bank account details in the garnishee. This makes the Deputy Commissioner for Taxation a secured creditor for the amount covered by the garnishee - the money can therefore be taken from the account despite the client's bankruptcy. This is to be distinguished from a normal garnishee issued by a court pursuant to a civil debt collection process, such garnishees would normally cease to have any affect once the client is bankrupt and any amount taken pursuant to the garnishee after the date of the bankruptcy would need to be returned for the benefit of all creditors (or to the bankrupt if the garnishee affected protected property). As noted above, penalties imposed by the ATO for late payment or late lodgement of returns are also provable in bankruptcy and the client is ultimately released from such debts. However, as with any other court-imposed penalty and fines, penalties which are imposed on clients who have been prosecuted in court for breaches of the taxation laws, will not be provable in bankruptcy and the client will need to make suitable arrangements with the court to avoid the consequences of non-payment. What about tax returns within the period of the bankruptcy? Following a similar principle, tax refunds relating to any financial year, or part financial year, prior to the date of bankruptcy (not matter when the tax return is lodged) vest in the Trustee and form part of the bankrupt estate (ss 116(1) and 139N(3)). They will be claimed by the Trustee.  Any refund relating to the period after the date of the bankruptcy received during bankruptcy, is considered as income and will be used in the calculation of the bankrupt's income to determine whether they need to make income contributions. However, the ATO also has a right of set off against any debt to the Commonwealth (s 86). Therefore, if the bankrupt owes a debt to the Commonwealth, including but not limited to income tax, overpaid family tax benefit or childcare assistance, social security overpayments, or child support, the tax refund can be retained by the ATO and applied to such debt(s) (even though it may be a provable debt). Even if the refund is payable to the Trustee, approval can be sought from the Trustee for the client to retain the total amount of the refund or part thereof, on the grounds that they are experiencing financial hardship. This may be particularly compelling if they have a disability or medical condition or other reason they cannot meet essential living expenditure or a special one-off expense. However, this decision is entirely at the discretion of the Trustee. What about future tax returns (post-discharge)? Your client will be discharged from all tax debts arising prior to the bankruptcy (unless incurred by fraud). The ATO also has a policy of ceasing to set-off refunds against provable tax debts after discharge. However, any debt incurred after the date of bankruptcy will be subject to both set-off and enforcement in the usual way. Overpayments of family tax benefit or childcare benefit, whilst provable, are in practice adjusted by the ATO in subsequent assessments. What about unpaid GST? Self-employed (or formerly self-employed) clients may also have unpaid GST debts to the Commonwealth. Both unpaid GST and administrative penalties (imposed by the ATO) for late/non-payment are provable in bankruptcy. Again, the ATO will set-off any refunds due to the client during bankruptcy in reduction of a GST debt. However, should the ATO choose to prosecute the client for breaches of their obligations to collect and account for GST, any court-imposed penalty is not provable. Prosecutions are relatively rare. Debts which are provable but the client is not released from them on discharge from bankruptcy (may still have to pay) Some debts are provable in bankruptcy and cannot be enforced during the period of the bankruptcy but remain payable after your client has been discharged from bankruptcy, unless they have been entirely paid out of the bankrupt estate (s 153). Your client may face enforcement action in relation to such debts after discharge. This includes any debts incurred by fraud or fraudulent breach of trust. There is little point in your client going bankrupt if their only debts consist of debts incurred by fraud as bankruptcy will provide no more than a temporary stay of enforcement. Caution should be taken with alleged fraudulent debts - mere allegations of fraud should not be enough to cause the client not to be released from the debt. Social Security debts and allegations of fraud Enforcement of Centrelink debts should cease during bankruptcy. Centrelink will sometimes inform a client (usually just after the client is discharged) that notwithstanding the client's recent discharge from bankruptcy they remain indebted to Centrelink because the debt was incurred by means of fraud (s 153(2)(b)). It may be that the debt related to an overpayment due to some misinformation or omission by the client. This alone is insufficient to prevent the client from being released from the debt on discharge from bankruptcy. The Courts have consistently found that there must be evidence that the person either deliberately acted dishonestly or was reckless as to whether the information they provided was true or false. The High Court case Director of Public Prosecutions (Cth) v Keating [2013] HCA 20 found that the notices issued to the defendant by Centrelink asking for updated income details created a duty to disclose which, if not complied with could form the basis of the Criminal Code offence of obtaining a financial advantage from the Commonwealth entity. The implications of this for discharge in bankruptcy cases are unclear. It is unlikely that this would mean that a person who lacked the capacity to complete a form correctly, or who answered honestly but mistakenly for example, would be found guilty or fraud. In circumstances where, for example, the bankrupt is disabled, or suffers from a mental illness which does not permit them to understand or complete the forms correctly, or where a person has an honestly held but false belief about a relevant fact, or is under duress when making the false representations, then there may be no fraud and the client may be released from the debt. If the client informs you that they have not been convicted of fraud in respect of the debt nor made an admission to Centrelink that they engaged in fraud to obtain the payment, Centrelink should be asked to explain the grounds on which it is asserting that the client obtained the benefit payment by fraud. If Centrelink is unable to produce documentary evidence of either a conviction or admission of fraud, Centrelink should be requested to cease any recovery action on the basis that the client has been released from the debt by operation of s 153(1) of the Bankruptcy Act. Further, if a Centrelink has obtained a reparation order for the repayment of the debt and registered it as a judgment prior to the date of bankruptcy, the original cause of action merges in the judgment and cannot form the basis for the exception contained in s 153(2)(b) - judgments founded on fraud will not be released in bankruptcy. The Guide to Social Security Law, Commonwealth of Australia states that 'where reparation is ordered before bankruptcy, recovery is only available by 'proving' the debt for the bankruptcy. If the person has been discharged from bankruptcy, debts for which a judgement or reparation order was made before bankruptcy cannot be recovered'. However, debts incurred by fraud, fines and custodial sentences or other penalty will not be affected by the bankruptcy (see above for information on fines and penalties imposed by a court). Debts which are provable in bankruptcy, but the client is not released from them, and they can still be enforced during bankruptcy (may still have to pay) There are only two types of debt that are both provable in bankruptcy (so the creditor can lodge a proof of debt and seek to claim on the bankrupt estate) and enforceable during bankruptcy and beyond: maintenance (agreements and orders made under family law for the benefit of a former spouse or de facto partner) and Child Support (s 58(5A)). This means that legal action and enforcement can continue during bankruptcy provided no more than the total amount due is claimed (that is part of the debt can be claimed via the bankrupt estate and part from the debtor directly). Further, the bankrupt will not be released from a Child Support or maintenance debt upon discharge unless specifically ordered by the court (s 153, subsection (2)(c) and (2A)). In making such an order the court may impose any conditions as it sees fit. However, the likelihood of the court making such an order is extremely remote. Usually if the client has a debt for Child Support it will have an interest component (or late payment penalties as it is usually expressed) imposed under the Child Support Act. For example, a total debt $12,000 comprised of $10,000 unpaid child support + $2,000 'penalty'. Upon bankruptcy, the client is released from the $2,000 portion of the debt and enforcement action can be taken against the bankrupt in respect of only the $10,000. However, interest or penalties will start accruing again on the $10,000 from the date of bankruptcy onwards. As a result of the above, bankruptcy is not at all useful in dealing with Child Support or maintenance debts unless the client's main difficulty is in paying accumulated interest/penalties (although you may be able to negotiate for these to be reduced or waived in appropriate circumstances anyway). The client may have grounds to challenge the assessment by the Child Support Agency of his/her liability for Child Support, especially if the CSA has 'deemed' the client's income in the absence of tax returns or financial statements. Accordingly, you should ask the client for details of the history and composition of the debt plus any correspondence/ communications with the Child Support Agency. It may be possible to seek a reduction in (or release from) a debt for accumulated Child Support on the basis of extreme financial hardship (after discharge or instead of going bankrupt at all). This would be entirely at the discretion of the Child Support Agency. Debts that are provable and the client is released from them but there are compelling reasons to pay (may want to pay) In some cases, a debt may be provable in bankruptcy but there are compelling practical reasons for the client to pay because of the likely or inevitable consequences of non-payment: Any fine/infringement notice/penalty that could lead to loss of driver’s licence and/or vehicle registration. Financial counsellors need to be aware of both the nature of the fine system in their state and the relevant policies and practices of the relevant fine enforcement and licensing authorities. Remember: Court imposed fines are not provable regardless of who is collecting them. Essential service providers such as electricity and water, which are currently providing a service to the client, to avoid disconnection. Debts that accrued prior to the bankruptcy to former service providers are provable in the bankruptcy and do not need to be paid. However, if the client subsequently applies for connection to a former service provider they may be required to pay a substantial security deposit before the service will be provided. Current telecommunications providers to avoid disconnection. Rent where the bankrupt remains in the same privately rented premises and does not wish to be evicted (for rent outstanding on previous premises or government housing - see separate section below headed What about rent?). Local store, chemist, vet, dentist, service station etc where there are no alternatives (for example, if your client lives in a small country town). Family members. Joint debts with a non-bankrupt partner/spouse/family member. Debts guaranteed by family member, friend etc (or where security has been taken over another family member's home or other asset). Restitutions orders made as part of criminal proceedings where the debtor may be imprisoned for non-payment (note, if the restitution order is not part of the penalty, the debtor may apply to the Federal Court or Federal Circuit and Family Court under Section 60(1) of the Bankruptcy Act for a stay on the imprisonment order in respect of a provable debt - the client will need legal advice). There is nothing to prevent clients from paying such debts voluntarily from income while bankrupt (if they earn enough). However, these amounts will not be deducted from their income for the purpose of working out income contributions (see Chapter 6 Part 4) - they will need to be able to afford their day-to-day living expenses, their income contributions (if any are payable) and any payments to creditors listed above. These debts need to be listed in the statement of affairs regardless of whether the debtor intends to try to pay the creditor during bankruptcy. Preferential payments Where a creditor accepts payment from a person who later becomes bankrupt in roughly the six months prior to their bankruptcy (the exact period varies - see Chapter 6 Part 3 Transfers to defeat creditors), the creditor is in danger of having those payments 'clawed back' by the Trustee as 'preferential payments'. However, it is a defence if the payments were made: in good faith and in the ordinary course of business for market value where the creditor did not know, or have reason to suspect, that the debtor could not pay his debts as they fell due and that the payment (or transfer of property) would give the creditor preference, priority or advantage over other creditors. The requisite knowledge or suspicion of the debtor's insolvency can be inferred from the circumstances. When the debtor wishes to pay a debt simply to maintain a business or personal relationship, then it is safer to make an arrangement to repay the debt from income (after contributions) during bankruptcy, than to make a lump sum payment prior to going bankrupt. Very small payments are unlikely to be a problem - Trustees are unlikely to raise the issue for less than about $1,000 and are unlikely to take legal action for less than about $5,000 but they may still demand it, which may be distressing. What about rent? As noted above, outstanding rent in relation to your client's privately rented premises will usually need to be paid to prevent eviction (unless the client has alternative accommodation). Private rental arrears may be recorded on tenancy databases. This could severely impact on a bankrupt's ability to rent in his or her own right in future. The NSW Family and Community Services generally does not pursue rent from the period prior to bankruptcy, but current payments and any post-bankruptcy arrears will usually need to be paid. Financial Counsellors should make a point of knowing the relevant practice and policy for government housing in their own state. Joint debts Where there are joint debts, the other person will be left exposed to the whole of the debt while the other joint debtor is bankrupt (not half the debt as many clients believe). Where the client needs to maintain a familial or working relationship with the joint debtor, bankruptcy can raise major issues. Before proceeding with bankruptcy your client should be encouraged to discuss their plans with the joint debtor (if possible and if there is no risk of family violence). Where the joint debtor (who is not considering bankruptcy) pays the total debt owing to the creditor, they can if they wish lodge a proof of debt in the bankrupt estate for one half of the amount paid to the creditor so they will receive a share of any dividend. Guarantors Likewise, a guarantor for any of your client's debts is in a similar position to a joint debtor - the guarantor will be liable for any part of the debt outstanding as a result of the debtor's bankruptcy. The client must be told of the consequences for the guarantor. It should be strongly advised that the guarantor gets his or her own independent legal advice. Motor vehicle leases The client can continue to make payments on a leased vehicle if he or she wishes to retain the car and can afford it. The lease should be included in the client's statement of affairs. In the event that the client was to later default on the lease, any penalties under the contract would be provable in the bankruptcy as contingent liabilities existing at the date of the bankruptcy. Any contractual penalties incurred under a lease taken out after the date of the bankruptcy would not be provable. Likewise, with similar arrangements relating to acquisition of motor vehicles such as 'rent/buy' (entered prior to the date of the bankruptcy) - usually there is no equity in the vehicle as the amount required to 'buy' the vehicle under the option usually exceeds the market value of the vehicle at the expiration of the 'rent' period. Clients can continue to pay in accordance with the contract if they wish to retain the vehicle or surrender the vehicle and include any resultant debt in the bankruptcy. Forgotten debts It is important that the debtor does not intentionally omit any relevant information or provide misleading information in the statement of affairs. However, genuinely forgotten debts can be added later by contacting the Trustee (or AFSA, when AFSA is acting as Trustee). From time to time, creditors will falsely assert that because their debt was not included in the statement of affairs, the client is not released from it on discharge. This is not true. Set-off As a general rule, a creditor when lodging a claim with the Trustee is required to set-off (that is, deduct) any amounts they owe to the bankrupt and only lodge a proof of debt for the net balance owing by the bankrupt. This is most common with tax refunds (covered in Tax and Bankruptcy above) and bank accounts. When your client is contemplating bankruptcy and they have a bank account for basic living expenses with the same institution as they have an outstanding loan, then they should open a savings account with another deposit-taking institution prior to lodging their Debtor's Petition. As banks have a general right of set-off it is a good idea to keep savings and loans with separate institutions in any event, particularly if the client is experiencing, or likely to experience, financial hardship. See also Chapter 8 in relation to Freezing of Accounts.

Updated: 15 April 2025 Content Part 1: Debts - will I still have to pay my debts? Part 2: Protected property - What can I keep? Part 3: Divisible Assets - What will the trustee take and sell? Part 4: Income contributions - What happens to money I earn while bankrupt? Part 5: Other consequences of bankruptcy - How else will it affect my life? Part 6: Small business and bankruptcy Part 7: Family law and bankruptcy Part 8: Gambling and hazardous speculation Part 9: Death and bankruptcy Summary There are many different consequences of bankruptcy. Some of the concepts are quite complicated. It is important to have a broad understanding of the principles and to be familiar with problems that might arise so that you know what questions to ask the client and when to seek more advice on their behalf. This section is broken up into segments. Parts 1 - 5 covers: What happens to debts? What property is protected? What property will be taken by the Trustee? Whether the client has to pay income contributions and how much. What other consequences there might be. Financial counsellors should be aware of the content of all these parts at least in broad terms as they are relevant to all clients. Parts 6 - 9 need only be referred to if they are relevant to your client's individual circumstances. They cover in order: Small Business Family Law Gambling and hazardous speculation Death Introduction Your client must understand the following potential impacts of bankruptcy before making an informed decision whether to go bankrupt: Debts - will they go away? Assets (past, present and future) - will the trustee in bankruptcy ('the Trustee') take them? Can the Trustee undo past transactions and get at assets now owned by others? What about assets your client may acquire in the future? Income - will the client have to pay a portion of their income towards their debts ('income contributions') and if so, approximately how much? What other limitations might there be on the client's life as a result of the bankruptcy? These are all covered in this Chapter. Note: The same consequences apply when the client has been made bankrupt on a Creditor's Petition, although in that case there is no decision for the client to make. You can refer to this Chapter to advise your client about what to expect during bankruptcy. You should also refer to the bankrupt's obligations in Chapter 8. If your client has very recently been made bankrupt and does not think this should have happened, refer to Chapter 10 - A sequestration order has been made against my client - Is there anything he or she can do? Advise your client to seek urgent legal advice.   Part 2: Protected property - what can I keep? Summary When a person becomes bankrupt (either by filing a Debtor's Petition or by an order of the court based on a Creditor's Petition) their divisible property vests in the Trustee and becomes available to be sold and distributed among creditors. Some property is protected by the Bankruptcy Act and does not vest in the Trustee or become available for creditors. This Part explains what property is protected and therefore not divisible. In brief, protected property includes among other things: Essential household property (furnishings and appliances for example with very few exceptions). Tools of trade up to a prescribed value. A vehicle used as a primary means of transport up to a prescribed value. Policies of life assurance or endowment in respect of the life of the bankrupt or his or her spouse or de facto spouse. Superannuation that has not been withdrawn from a superannuation fund prior to bankruptcy. Compensation for personal injury paid to the bankrupt. Superannuation withdrawn on or after the date of the bankruptcy. Proceeds of life assurance or endowment policies received on or after the date of the bankruptcy. Property where substantially the whole of the purchase price was made up of funds from one or more of the last three dot points. These are collectively referred to as protected money (that is personal injury compensation paid to the bankrupt, or where received on or after the date of the bankruptcy, payments from superannuation, life assurance or endowment). Amounts for prescribed values (or thresholds as they are often called) where shown, are included up to the date of publication. For current prescribed amounts check the AFSA website. Of course it is not always that simple and the detail and potential complications are covered below. Sometimes a property will be partially protected and partially divisible. For example: A car worth more than the prescribed value. A house that has been purchased with a combination of protected money and other funds. In that case the unprotected portion will vest in the Trustee and the Trustee may sell the property and return to the bankrupt the value of the protected portion. All other property is divisible property and is covered in Part 3 of this Chapter. All property should be included in the statement of affairs, whether it is protected property or not! What happens to a person's property when they become bankrupt? When a debtor becomes a bankrupt (on the first instant of the day on which the Debtor's Petition is accepted by the Official Receiver - s 57A), then the property of the bankrupt 'vests' in the Trustee (s 58) (that is the trustee in bankruptcy which may be the Official Trustee (AFSA), or the relevant Registered Trustee). The same occurs when a court makes a sequestration order making a person bankrupt (see Chapter 10). Any property acquired by the debtor during the period of the bankruptcy also vests in the relevant Trustee. This property (along with any income contributions) makes up the bankrupt estate. This means that the debtor has no right to deal with the property anymore and the Trustee acquires extensive rights to deal with the property for the benefit of the creditors. The Trustee is then entitled to take possession of the property (s 129) and can sell the property, lease it, divide it among creditors, carry on any business of the bankrupt until such time as it can be wound up or sold, mortgage any property, make compromises with creditors and more (s 134). None of this, however, affects the right of a secured creditor to repossess and sell the secured asset. Dealing with secured debts in bankruptcy can be quite tricky and the most common scenarios, houses and motor vehicles are dealt with separately later in Chapter 6 Part 3. The property that has vested in the Trustee can then be dealt with as the Trustee sees fit in order to meet the demands of creditors with provable debts and to cover the costs of administering the estate. However, there are some types of property which are not available to creditors. Property which is available for creditors is known as divisible property and property which is protected is referred to as protected property. Protected property Importantly, some property is protected by the Bankruptcy Act from division among the creditors including (Section 116): Property held in trust for another person (the trust must be properly documented and comply with any relevant laws to be valid); Household property (see Protected household property below); Tools of trade used to earn a living (property used to earn income by personal exertion) up to the prescribed value ($4,450 as at August 2025. For current indexed amounts check the AFSA website). Remember: The value is garage/auction value not replacement or insurance value. A vehicle used primarily as a means of transport up to the prescribed value ($9,600 as at August 2025. For current indexed amounts check the AFSA website). Where the vehicle is secured the critical amount is the equity level (value of vehicle less any loan secured over the vehicle); Policies of life assurance or endowment assurance in respect of the life of the bankrupt or the spouse or de facto partner of the bankrupt (that is the policy itself, not any money paid out or withdrawn from it prior to bankruptcy); The proceeds of a life assurance (or life insurance) or endowment assurance policy referred to in the previous point received on or after the date of the bankruptcy; The interest of a bankrupt in a superannuation fund (except where it can be shown that funds or property were transferred to the superannuation fund for the purpose of depriving the creditors of that property or otherwise or delaying their access to it); A payment from a superannuation fund received on or after the date of the bankruptcy (provided it is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993). The issue of Total & Permanent Disability (TPD) payouts linked to superannuation and life policies is a difficult issue and your client should seek legal advice before proceeding with bankruptcy (more information is included in below in the section titled Superannuation and Bankruptcy and in Chapter 8 in the section titled Insurance Claims); Money held in a Retirement Savings Account (under the Retirement Savings Act 1997); A payment from a Retirement Savings Account (provided it is not a pension within the meaning of the Retirement Savings Act 1997); Any right of the bankrupt to recover damages or compensation for: personal injury or wrong done (for example defamation) to the bankrupt, their spouse or de facto partner, or a member of their family the death of the bankrupt's spouse or de facto partner, or family member. Any compensation received by the bankrupt for personal injury, wrong or death in the previous point, whether received before or after the bankruptcy (NOTE - compensation paid to others as opposed to the bankrupt is not protected if it has been given to the bankrupt, nor is any divisible property - such as a house - purchased with compensation received by, for example, a spouse of the bankrupt and placed in the name of the bankrupt); mounts originating from a Rural Support Scheme in prescribed circumstances; Money required to be transferred to a spouse or de facto partner under the Family Law Act 1975 (Parts VIII and VIIIAB) Payments made under the National Redress Scheme for Institutional Child Sexual Abuse Act 2018 (Cth) to the bankrupt Awards of a sporting, cultural, military or academic nature made to the bankrupt, such as trophies & medals, that are claimed as having sentimental value, may be exempted by a vote of creditors (in practice this issue rarely arises as most such awards have no monetary value). Money paid as prize money is not protected. Note: Defence Service Home Loans: Where the client has a home that is being purchased with a Defence Services Home Loan, the home is protected unless the Secretary of the Department waives the protection due to fraudulent behaviour of the borrower (which would be most unusual). Also, the protection ceases if the borrower re-finances and the Defence Services Loan is paid out in the process. Accordingly, clients should be advised to maintain the Defence Services Home Loan when they are re-financing by way of a second mortgage. Protected household property A full description of household property that is NOT divisible among creditors is found in Bankruptcy Regulation 27. Generally, 'household property (including recreational and sports equipment) that is reasonably necessary for the domestic use of the bankrupt's household, having regard to current social standards' is not available for distribution among creditors and can be retained by the bankrupt. Specifically: a. In the case of kitchen equipment, cutlery, crockery, foodstuffs, heating equipment, cooling equipment, telephone equipment, fire detectors and extinguishers, anti-burglar devices, bedding, linen, towels and other household effects (to the extent consistent with the above definition); b. Sufficient household furniture; c. Sufficient beds for the members of the household; and d. Educational, sporting or recreational items (including books) that are wholly or mainly for the use of children or students in the household; e. 1 television set; f. 1 set of stereo equipment; g. 1 radio; h. Either: 1 washing machine and 1 clothes dryer; or 1 combined washing machine and clothes dryer; i. either: 1 refrigerator and 1 freezer; or 1 combination refrigerator/freezer; j. 1 generator, if relied on to supply electrical power to the household; k. 1 telephone appliance; l. 1 video recorder (or equivalent technology). In the case of household property not included above, the following should be considered in determining whether or not a particular item is protected household property: a. The number and ages of members of the bankrupt's household; b. Any special health or medical needs of any of those members; c. Any special climatic or other factors (including geographical isolation) of the place where the household residence is located; d. Whether the property is reasonably necessary for the functioning or servicing of the household as a viable and properly run household; e. Whether the costs of seizure, storage and sale of the property would be likely to exceed the sale price of the property; f. If paragraph (e) does not apply - whether for any other reason (for example, costs of transport) the sale of the property would be likely to be uneconomical. Antiques may be divisible property (that is 'not protected'). An item is considered antique only if a substantial part of its market value is attributable to its age or historical significance (Regulation 27 (5)-(6)). Note: This regulation also forms the definition of property that cannot be taken as security for a loan under the National Credit Code. Tools of trade Tools of trade used to earn a living worth up to the prescribed value are protected in bankruptcy and cannot be taken by the Trustee (the prescribed value is $4,450 as at August 2025. For the current indexed amounts check the AFSA website. Remember: The value is garage/auction value not replacement or insurance value. The Act no longer refers to 'tools of trade' since the 1996 amendments. Instead, the phrase is property 'for use by the bankrupt in earning income by personal exertion' (s 116(2)(c)). This reflects a general trend to widen the scope of the provision from being restricted to men who earned their living by manual labour using the implements or tools of their trade to encompass a broader range of occupations. Therefore it could include a pianoforte (for a music teacher), or a computer for a home-based consultant or law books up the threshold value for a lawyer. However, there are some restrictions: The person must have the capacity to use the property to earn an income by personal exertion - that is the bankrupt must have the requisite skills and ability. If the property relates to a trade that the bankrupt is not trained in or the bankrupt is too ill (permanently) or disabled to continue in, then the property will not be protected; The property must have a readily identifiable connection with income producing activities carried out by the bankrupt - although it could arguably be a different activity to the primary income generating activity of the bankrupt prior to the bankruptcy. Bottles of wine used for wine tasting were found by the court not to be protected because they were consumables and therefore did not fit in the ordinary concept of a 'tool'. However, it is not clear whether this case was referring to the current s 116(2)(c) which uses the broader term 'property' or the former version of the Act which referred specifically to tools of trade etc. Property in excess of the threshold amount can be protected where: There is a resolution passed by the creditors to allow this (presumably because they are convinced that they are better off allowing the bankrupt to use the property to earn income than by selling and dividing the proceeds); or A higher amount is ordered by the court upon the application of the bankrupt. These exceptions are clearly intended to address the somewhat arbitrary nature of the setting of the threshold amount. Motor vehicles A vehicle used primarily as a means of transport up to the prescribed value is protected and cannot be taken by the Trustee (the prescribed value is $9,600 as at August 2025. For the current indexed amounts check the AFSA website. Where the vehicle is secured, and the bankrupt can afford the payments, the critical issue is the equity level. If your client owns one or more motor vehicles you need to ask the following questions: What is the total value of the vehicle(s)? Is/are the vehicle(s) security for a loan? Unencumbered motor vehicles (no secured loan) Note: All of the following assumes that the vehicle is not protected for another reason, such as that it was wholly or substantially purchased with money received for compensation for personal injury - see next section below. Where there is no loan, then whether or not your client can keep the car will depend entirely on the market value of the car. Your client will be able to retain one vehicle as a primary means of transport if it is valued at less than the prescribed amount (in reality a bankrupt can usually retain more than one vehicle provided their combined value does not exceed the threshold). If your client's vehicle is worth this amount or less, then he or she will definitely be able to retain it. If it is worth more than $2,000 over this amount, then the Trustee may sell the vehicle. There is a grey area in the middle where the Trustee is highly unlikely to take the vehicle because the costs of selling it will not make it worthwhile. If there is a question over the protection of the vehicle the client should be advised to discuss the situation with AFSA. Clearly the closer the value to the prescribed amount, then the less likely it will be sold. If your client has more than one vehicle, then any additional vehicle will be sold unless their combined value is worth less than the threshold amount. Where your client has one car worth a significant amount of money (say $25,000) and another worth very little (say $2,500) then the Trustee will take and sell the more expensive car and there is no requirement to return the difference between the value of the cheaper car and the threshold amount. If the client has a good relationship with the Trustee they may be able to come to another arrangement but strictly speaking the bankrupt is entitled to a (singular) primary means of transport. Your client may want to consider selling both (for market value) prior to bankruptcy and purchasing a car valued closer to the threshold amount. Keep in mind that the Trustee may seek to recover any proceeds received above the value of the car eventually retained if this transaction occurred close to the date of the bankruptcy. It is most unusual for a client to a have an unsecured motor vehicle that has an auction value well in excess of the threshold, as high value vehicles will usually be subject to a lease, hire purchase or other secured credit agreement. If your client has only one vehicle valued at well above the threshold amount, then it will be sold, and the threshold amount returned to the bankrupt to allow them to purchase a cheaper vehicle as a primary means of transport. However, the Trustee will usually accept an offer from a friend or relative of the bankrupt to pay the difference between the auction value of the vehicle and the threshold amount, to enable the bankrupt to retain the vehicle. If your client and his or her partner are both bankrupt, they can usually retain one vehicle each valued up to the threshold amount. AFSA (where the Official Trustee is the Trustee) may allow a couple who are both bankrupt to retain one vehicle worth twice the threshold amount, but it is unclear whether private registered trustees will interpret the law in this same way. Case study A client and his wife have a car worth approximately $19,000. They still owe about $4,000 on a secured loan. The husband is considering going bankrupt but the wife is not. Although there is $15,000 equity in the car, the husband’s share is only $7,500 which is close to the threshold amount. In these circumstances the Trustee is very unlikely to take the car. If the car was worth closer to $26,000 the Trustee may request the wife to make an offer to purchase the husband’s share less the threshold amount - in this case about $2,900. The Trustee cannot take a car that does not belong to the bankrupt. Proving ownership of a vehicle may not always be straightforward. Registration is only an indicator of ownership. Who paid for the vehicle is also very important, as is any evidence of the purchaser's intentions in relation to ownership (was the car intended as a gift?). Who predominantly uses and maintains the car may also be important. Even if it can be established that the vehicle belongs to someone other than the bankrupt, then the bankrupt will be asked to supply details of their ongoing use of the vehicle in the statement of affairs as this benefit could be deemed as income for the purpose of establishing whether income contributions are payable and how much. Often, clients under 25 will have their vehicle registered in a parent's name to reduce the insurance premiums. Remember: Putting a car in another person's name, such a spouse or family member, in anticipation of bankruptcy could be found to be an undervalue transaction or transfer to defeat creditors as with any other asset. These are known as antecedent transactions and more information on the trustee's powers in relation to antecedent transactions is found in Chapter 6 Part 3. Where a vehicle has been specially modified for a person with a disability, AND is necessary for their transport, AND is worth more than the prescribed value, then there may be a way of protecting the vehicle: Was it paid for with compensation funds? - if so, it may be protected (see below in relation to compensation for personal injury); Is the trustee willing to seek a resolution from creditors under s 116(2)(ca) that a greater amount than the prescribed value should apply in the circumstances? Apply to the court (it is not clear whether this is possible - it is not mentioned as an option in the relevant section of the Act, as it is with property used for personal exertion, but there are broad powers under the Act to apply to the court on a range of issues (s 30) and your client should seek legal advice); Have a relative or other interested party negotiate to pay the Trustee the difference in value. As there is always some discretion involved in deciding whether to sell a vehicle for the benefit of the creditors it is always worth making a case to the Trustee on behalf of a client with special needs (their own or their dependents) where the value of the vehicle is not too far above the threshold. Tip If your client is unsure of the value of their vehicle, you can find out by using the Redbook website. You will need the following details: Make Model Year Kilometres travelled (odometer reading) Condition (well maintained/poorly maintained etc) This service cost $33 (as at May 2024). Where there is a loan secured over the vehicle Where the car is security for a loan (whether by mortgage, bill of sale or other means) then what will happen to it depends on the amount of the client's equity in the vehicle. This is simply the market value of the vehicle less the amount outstanding on the loan. If the equity equals the prescribed amount or less, the Trustee will not be interested in the vehicle and the client may retain it provided they can keep up the repayments on the loan. Should the client fail to make the repayments then the lender can repossess the car in accordance with their contractual rights. In most cases the market value of the car will be less than the loan because cars depreciate in value quite quickly. Note: In some cases, creditors will seek to rely on a provision of the contract to repossess the vehicle just because the debtor is bankrupt, even though he or she is up to date with their repayments. Such clauses are void by virtue of s 301 (or s 302) of the Bankruptcy Act. This means that the creditor cannot take action on this basis alone (the fact of the bankruptcy) - the client needs to have otherwise breached the contract, such as not meeting the repayments or failing to the keep the vehicle insured. More information on what do if the creditor tries to repossess the car or vary the contract as a result of the bankruptcy is included in Chapter 8. Where the secured vehicle's value is substantially less than the secured loan balance and the bankrupt cannot maintain payments on the secured loan, the bankrupt may be able to negotiate a pay out with the secured creditor to release the security. If the subsequent value is then below the AFSA threshold the vehicle should be protected from recovery action by the Trustee. Where the equity in the vehicle is higher than the prescribed limit plus the likely costs of organising a sale, then the Trustee may require the vehicle to be sold. When the vehicle is sold the amount of the loan would be repaid to the secured creditor; the amount equivalent to the prescribed limit would be returned to the bankrupt for the purchase of another vehicle; and the Trustee would retain the balance (less the cost of the sale) for distribution to the creditors (and to meet the costs of administering the estate). Example Bankrupt has one car worth $40,000. There is a loan secured over the vehicle with $20,000 owing. The Trustee can sell the vehicle and: $20,000 will go to the lender to pay out the loan $9,600 (indexed amount at August 2025) will go to the bankrupt to cover the cost of a vehicle as primary means of transport (the threshold amount) $10,400, less the costs of the sale, will go to the bankrupt estate for the benefit of creditors and the costs of administering the estate. The Trustee can elect to do this at any time during the bankruptcy or afterwards (see How long does the Trustee have to make a claim on property in Chapter 6 Part 3). It is important to note that the property which vests in the Trustee is that which is 'acquired' before or during the period of the bankruptcy. This means that if your client keeps paying the loan and building up equity, then the Trustee may opt to sell the vehicle later in the bankruptcy or even afterwards. Due to the rate at which most vehicles depreciate, this is far less likely to be a problem with cars than it is with houses and other real estate. If your client is paying off a fairly expensive vehicle but has little equity, you need to: Warn the client that continuing to pay off the vehicle could lead to the risk of the Trustee opting to sell it at a later date; When the client is interested in retaining the vehicle, assist him or her to assess whether he or she will have the capacity to meet the repayments on the vehicle once other provable debts no longer need to be paid - if he or she does not have the capacity to repay the loan, then the vehicle should be surrendered or the client will risk losing the vehicle plus the benefit of any repayments made. It is also important that the client can afford to keep the vehicle comprehensively insured; When the client is interested in retaining the vehicle, and has the capacity to meet the repayments, determine whether there is a relative (or other appropriate person) who would be interested in purchasing the Trustee's interest in the vehicle and allowing the bankrupt to keep it (the client should be aware that use of the vehicle may then constitute a benefit for the purposes of calculating income contributions); When the client is interested in keeping the vehicle and can afford the repayments but has no interested 'buyer' to help out, then the client will need to be aware of the need to try to buy out the equity in the vehicle from the Trustee upon discharge (if there is any); In any event the loan should be listed in the statement of affairs. This is not only required but will make it easier in the event that the vehicle is repossessed or otherwise damaged or destroyed, and the client needs to be released from the liability for any shortfall by the bankruptcy. What if my client has sold a vehicle that is security under a loan contract? This is not an uncommon occurrence among the clients of financial counsellors. Where your client has sold a vehicle over which there is a mortgage or bill of sale securing a loan, he or she is in breach of contract and may potentially face criminal proceedings if the creditor refers the matter to the police. This is not a likely outcome, but it is a possible one. By selling or otherwise disposing of the vehicle (i.e., the security), the underlying loan is no longer a secured debt (regardless as to whether the Personal Property Security Reregister is removed or not) and becomes an unsecured debt. The creditor has a right to claim for the shortfall and lodge a proof of debt in the estate to receive any dividends.  The trustee will investigate if any portion of the sale proceeds are still available for recovery. Any deliberate omission of the above information may potentially enable enforcement action against the debtor (by the trustee). It is recommended advice is sought about how to proceed and this issue is considered prior to filing for bankruptcy. If the creditor threatens to go to the police, or the police wish to question the client, or lay charges, the client will need criminal law advice. If the creditor claims the debt has been incurred by fraud and that the client will not be released at the end of the bankruptcy - refer the client for legal advice. Superannuation and bankruptcy Generally speaking, funds in a superannuation fund are protected in bankruptcy (s 116 (2)(d)(iv)). This means they are not available to the Trustee unless they have been withdrawn from the fund prior to bankruptcy. Funds withdrawn by the bankrupt on or after the date of the bankruptcy are also protected. Superannuation withdrawn prior to the bankruptcy is not protected. If this money has been spent on living expenses (or medical expenses, for example) the client should inform the trustee and provide evidence such as receipts where possible. If the money is still in the client's bank account, it will vest in the trustee. If it has been used to pay someone else (for example, given to adult children to assist with the purchase of their home) the Trustee is likely to require the money to be repaid. There are a number of possibilities for the Trustee to void the transaction including as a preferential payment, undervalue transaction or transfer to defeat creditors - see Chapter 6 Part 3. Case examples A client obtained early release of some of her superannuation to repay a debt to her mother prior to going bankrupt. The mother was in receipt of the Aged Pension. After the client went bankrupt, the Trustee considered the payment was a preferential payment and required the mother to repay it to the bankrupt estate. The mother had already spent the money and was asked to enter into a repayment arrangement with the Trustee. The amount was ultimately waived after representations were made by a financial counsellor on behalf of the mother, but this outcome cannot be guaranteed. If the mother had owned significant assets or had a good income the amount would have been more determinedly pursued by the Trustee. A man in his fifties who was bankrupt sought advice from a legal centre. He had withdrawn $90,000 in superannuation a couple of years previously and had given it to his daughter to assist her to purchase an apartment. The trustee was now demanding the daughter repay the money to the bankrupt estate or join with the Trustee in the sale of the apartment. The man was advised that the Trustee was entitled to do this as it was an undervalue transaction under the Bankruptcy Act (see Chapter 6 Part 3). While superannuation that has not been withdrawn prior to bankruptcy is generally protected, there is an exception for superannuation contributions 'made to defeat creditors' (s 128B). The contribution(s) will be found to be made to defeat creditors if the now bankrupt person’s main purpose in making the contribution(s) was: To prevent the transferred property from becoming divisible among his or her creditors; or To hinder or delay the process of making property available for division among his or her creditors. However, the Act also provides that the main purpose will be taken to be one or both of (i) or (ii) above if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the now bankrupt person was, or was about to become, insolvent. Other evidence may also be used to establish the main purpose of the contributions (instead of or in addition to imminent insolvency). Of course the compulsory contributions made by a person’s employer would not be relevant - it would only be additional, voluntary contributions that would be vulnerable to this allegation. In deciding what the main purpose was regard must also be had to whether the now bankrupt person had established a pattern of making contributions to one or more eligible superannuation plans, and whether, in the light of that pattern, the contribution(s) in question were out of character. This means that if a person can demonstrate a long history of contributions of a similar amount and regularity predating their insolvency, they can use this to combat the inference that the contributions were made to defeat creditors. Contributions by third parties to the bankrupt's superannuation fund may also be challenged applying the same principles (Section 128C). Self-managed superannuation funds The same rules apply to self-managed superannuation funds, but only if they are found to comply with the definition of a regulated superannuation fund (within the meaning of the Superannuation Industry (Supervision) Act 1993). The Trustee may review the underlying trust deeds establishing the fund to determine if this is the case. Also, a bankrupt is not permitted to remain as the Trustee of a self-managed superannuation fund. He or she has 6 months from the date of the bankruptcy to cease to perform this role. More information on this is available from the ATO. Total and Permanent Disability Payouts Whether payments under Total and Permanent Disability (TPD) claims paid out under an insurance policy attached to a bankrupt's superannuation are protected is currently a vexed issue. Advice from AFSA suggests amounts paid by superannuation funds under total and permanent disability insurance policies vest in the trustee if paid before bankruptcy.  However, if paid on or after the date of bankruptcy, such amounts do not vest. There is judicial authority that lump sum TPD payments (whether attached to superannuation or not) will be protected where the amount of compensation is determined by reference to personal injury (as opposed to illness) suffered by the bankrupt (see Chapter 6 Part 2). Another view is that a TPD payment should be treated as a payment from a superannuation fund under s 116(2)(d)(iv) and is protected regardless of the cause of the disability but only if it is paid on or after the date of the bankruptcy See also the section on Insurance Claims in Chapter 8 for more information. Claims made during the period of the bankruptcy will only vest in the Trustee once a decision has been made to accept the claim. If that decision is made after discharge the funds will not vest in the Trustee. The surest solution is to wait until after discharge to make a claim, but this will not always be practical or desirable. Another option may be to have the amount paid into the superannuation fund's allocated pension fund (if it has one) and paid as income - this would then count towards income contributions but would not vest in the trustee. If your client is in a position where they have no choice but to proceed with a TPD claim during bankruptcy, or they have already received such a payment and the Trustee is seeking to claim the amount, they should get legal advice. Compensation for personal injury What part of compensation money is protected? Lawyers often divide compensation claims into heads of damage such as pain and suffering, expenses paid, economic loss etc. In bankruptcy it is not the head of damage that matters but the essential nature of the loss that is being compensated. So, compensation from a personal injury claim resulting from a car accident will be completely protected. On the other hand, if the essential nature of the loss being compensated is economic for example, negligent advice in relation to money or property) then the money will not be protected, unless there is a separate and divisible cause of action relating to a wrong done to the person rather than their property. When your client is unsure about what their compensation was for, they will need to obtain records from the relevant proceedings or negotiations, and possibly seek legal advice. Berryman v Zurich Australia Ltd [2016] WASC 196 Mr Berryman was self-employed as a carpenter. He had taken out a life insurance policy with Zurich which provided for a lump sum payment in the event of total and permanent disablement. In 2009, Mr Berryman's right foot was crushed while at work. He made a claim under his policy, which was refused, and he commenced proceedings for breach of contract. He later became bankrupt. Zurich applied to have the proceedings dismissed on the basis that they had been abandoned as the trustee had not made an election to continue. The court found that Mr Berryman's right to compensation was protected under section 116(2)(g) and that he was entitled to continue proceedings in his own name under section 60(4). This was so even though the action was for breach of contract. Importantly, the amount of benefit payable under the policy, and therefore claimable as damages, was determined by reference to the personal injury. This approach has been approved in the recent decision of Lee v The State of Western Australia (No 2) [2023] WASC 247. Protected money and property purchased with protected money Where your client has purchased property using entirely protected money, or almost entirely protected money (substantially the whole of the purchase price), then that property does not vest in the Trustee and is not divisible among creditors. Protected money includes: Compensation received by the bankrupt (at any time, before or during bankruptcy) for personal injury to him or herself or a member of his or her family, or the death of a person in his or her family. This does NOT extend to compensation received by the bankrupt's spouse or other family member that has been given to the bankrupt or used to purchase property in the bankrupt's name, jointly or solely - see example below. The proceeds of a life assurance or endowment assurance policy over the life of the bankrupt or his or her spouse or de facto spouse received on or after the date of bankruptcy. A payment from a superannuation fund that was received on or after the date of the bankruptcy.  Any loan repaid with money from one of the above sources. Where property has been purchased almost entirely with money from one of the above sources it will be protected and cannot be taken and sold by the trustee. Similarly, if the property was purchased with a loan for almost 100% of the property and that loan was repaid entirely by one of the above sources, that property will be protected and will not vest in the trustee (ss 116(2D) and 116(3)). What if the house purchased with protected money is in more than one name? Where the property purchased with personal injury compensation or other protected money is in more than one name, it gets more complicated. Examples A man receives compensation money for personal injury. He uses the money to buy a house for himself and his wife and puts the house in both names. The house is paid for entirely from the compensation funds. Where he later becomes a bankrupt (and his wife does not), the man's half interest in the house will be protected because it was acquired with 'protected money'- that is compensation for personal injury paid to the bankrupt. Further the wife is not bankrupt in any event and can retain her 50% share. On the other hand, where she becomes a bankrupt and he does not, then her share of the house will not be protected because the compensation was not paid to 'the bankrupt'. This is a very important distinction. If they both become bankrupt, then his share will be protected, but hers will not. The last point above is very important. It is not uncommon for couples to purchase property in both names regardless of the source of the purchase funds. If a couple purchase a house in both names with compensation paid to one of them, then it is always possible that the court will interpret the transaction as a gift from the party receiving the compensation to their spouse/ de facto partner unless there is very clear evidence that this is not the case. This means that the money that has been gifted is no longer protected under the Bankruptcy Act. As shown in the example above, this won't matter if the member of the couple who did not receive the compensation does not go bankrupt (as his or her share of the asset does not vest in the Trustee anyway). It is a disaster, on the other hand, if the person who did not receive the compensation is the bankrupt party, or where both members of the couple end up bankrupt, because half the compensation money may no longer be protected. Note: If you have a client who has received a compensation payout and is contemplating buying property with another person, you should strongly recommend that they get legal advice about the best way to organise their affairs to make sure the compensation funds remain protected in the event of the bankruptcy of either the client or the other person. What if property has been only partially paid for by compensation or other protected money? Quite often a property will have been purchased partly with protected money and partly with other funds. Alternatively, the property may have been purchased with other funds and then improved with protected money or the property may have been initially purchased with protected money and the client has subsequently taken out a mortgage over the property which he or she has been repaying from other funds. In such cases the property itself is not protected (because protected money did not make up substantially the whole of the purchase price) - it will still vest in the Trustee - but when the Trustee sells the property, the Trustee must pay the bankrupt 'so much of the proceeds of realising the property as can be fairly attributed to that protected money' (s 116(4)). Sometimes there will be a quite complicated chain of purchases, improvements, sales and further purchases since the protected money was expended. Provided there is sufficient evidence to the trace the money, then the Trustee should still account to the bankrupt for the protected amount. Further, the amount to be repaid is not simply the amount of protected money used, but the proportion of the proceeds of the sale as is attributed to the protected money. This means that if the property has increased in value, the amount of the protected portion will increase accordingly. Of course, the downside is that if the property has decreased in value, then so will the protected portion meaning that the bankrupt may receive back less than their original compensation. Of course, the costs of the sale will be deducted to determine the amount of the proceeds of the sale. Examples Where a bankrupt had purchased her home with 50% protected money (say a personal injury pay out) and the other half had since been paid off using regular income, then the trustee should return half the proceeds of the sale to the bankrupt (assuming there is no co-owner to complicate matters). Where a bankrupt had already owned his home and then received compensation money, which was used to improve and modify the home, the current value of those modifications would have to be repaid by the Trustee. This would usually be worked out by establishing the percentage increase in value in the property as a result of the improvements at the time they were done, and then applying this percentage to the proceeds of sale. Clearly, this will not be an easy or non-controversial calculation. Where a non-bankrupt spouse or de-facto (or other co-owner) is involved, the calculation will become very complicated. The court will first have to determine the amount of the respective shares of the bankrupt and non-bankrupt parties and then work out the appropriate percentage of protected money used in the purchase and apply this to the bankrupt’s share of the equity. This may be further complicated if the Court finds that part of the compensation money was actually a gift to the spouse and is therefore no longer protected (see below). Stankovic v Van Der Velde [2012] FCA 1436 The parties in this case were a married couple. The couple already owned one block of land when the male member of the couple received personal injury compensation of $250,000. They then purchased the property next door, mostly with the compensation funds, but also with a small mortgage. This transaction was complicated slightly by the fact that the couple set up a company with both of them as directors and equal shareholders to execute the purchase. This was in the late eighties or early nineties. In 1994 they sold both properties and bought another one for $850,000. $255,826 of this amount was financed by the sale of the property purchased largely with compensation money. By the time the matter came before the Court in 2012 there were both family law proceedings and a dispute between the Trustees in the husband's bankruptcy and the husband about the amount of protected money involved as a result of the personal injury compensation. The Federal Court determined the matter as follows: The purchase of the house by a company owned equally by both parties meant that the husband had effectively given 50% of the money to his wife (there being no evidence to the contrary); This meant that the contribution of the compensation money had to be reduced by half from $255,826 to $127,913. This represented only 15.05% of the purchase price or 30.1% of the husband's half share in the equity of the new $850,000 property. After payment of mortgages and expenses the proceeds of the sale of the above property amounted to $6,229,795. The Court said that 50% or $3,114,898 should be paid to the wife. The Trustees then conceded that 30.1% of the remainder should be returned to the bankrupt as representing the portion of the proceeds attributable to protected money. The court also ordered that the Trustees were entitled to deduct the costs of the proceedings before calculating the bankrupt's share (but after deducting the wife's full 50%) as a result of his failure to provide the information to justify this protected amount to the Trustees earlier when they requested it. The court said that the proceedings would not have been necessary had the bankrupt complied with his obligations to provide adequate information to the Trustees. Despite this the bankrupt is likely to have received in excess of $900,000. Where it appears that there may have been protected money involved in the purchase of an asset the bankrupt will need to provide as much evidence as possible to the Trustee to establish the status of the money as protected, and where necessary, to trace the transactions that have occurred since the purchase in order to justify the amount of the protected portion claimed. It is not sufficient to simply claim the property or funds are protected. Further, it is vital that all assets are disclosed in the statement of affairs, regardless of whether they are allegedly fully or partially protected. Note: Do not attach original documents to the statement of affairs - provide copies or a list of documents the client holds and tell the client to retain the originals unless requested to produce them by the Trustee. More information on the treatment of co-owners of property generally is included in Chapter 6 Part 3 in relation to Divisible Assets Protected Property Must be disclosed in the statement of affairs AND Protected status must be established by evidence. Where there has been a complicated chain of events with property being bought, sold and/or refinanced, there must be sufficient evidence of all relevant transactions to conduct a tracing exercise back to the protected money.

Updated: 20 May 2024 Content Part 1: Debts - will I still have to pay my debts? Part 2: Protected property - What can I keep? Part 3: Divisible Assets - What will the trustee take and sell? Part 4:  Income contributions - What happens to money I earn while bankrupt? Part 5: Other consequences of bankruptcy - How else will it affect my life? Part 6: Small business and bankruptcy Part 7: Family law and bankruptcy Part 8: Gambling and hazardous speculation Part 9: Death and bankruptcy Summary There are many different consequences of bankruptcy. Some of the concepts are quite complicated. It is important to have a broad understanding of the principles and to be familiar with problems that might arise so that you know what questions to ask the client and when to seek more advice on their behalf. This section is broken up into segments. Parts 1 - 5 covers: What happens to debts? What property is protected? What property will be taken by the Trustee? Whether the client has to pay income contributions and how much. What other consequences there might be. Financial counsellors should be aware of the content of all these parts at least in broad terms as they are relevant to all clients. Parts 6 - 9 need only be referred to if they are relevant to your client's individual circumstances. They cover in order: Small Business Family Law Gambling and hazardous speculation Death Introduction Your client must understand the following potential impacts of bankruptcy before making an informed decision whether to go bankrupt: Debts - will they go away? Assets (past, present and future) - will the trustee in bankruptcy ('the Trustee') take them? Can the Trustee undo past transactions and get at assets now owned by others? What about assets your client may acquire in the future? Income - will the client have to pay a portion of their income towards their debts ('income contributions') and if so, approximately how much? What other limitations might there be on the client's life as a result of the bankruptcy? These are all covered in this Chapter. Note: The same consequences apply when the client has been made bankrupt on a Creditor's Petition, although in that case there is no decision for the client to make. You can refer to this Chapter to advise your client about what to expect during bankruptcy. You should also refer to the bankrupt's obligations in Chapter 8. If your client has very recently been made bankrupt and does not think this should have happened, refer to Chapter 10 - A sequestration order has been made against my client - Is there anything he or she can do? Advise your client to seek urgent legal advice. Part 3: Divisible Assets - What will the trustee take and sell? Summary All property of the bankrupt that is not protected (see Part 2 above) is divisible property that vests in the trustee from the date of commencement of the bankruptcy (see ss 5 and 116(1) of the Bankruptcy Act 1966 (Cth) for the definitions of 'property' and 'divisible property'). This includes property owned by the bankrupt at the commencement of the bankruptcy and any property acquired by the bankrupt between the commencement of the bankruptcy and discharge from bankruptcy (or annulment). It also includes any rights and powers in relation to that divisible property that would have been exercisable by the bankrupt if he or she had not become a bankrupt. Generally speaking, divisible property can include many things but most commonly: Vehicles (cars, boats, caravans, motorbikes, trailers, trucks, buses, vans); Houses, flats and other real estate (including the bankrupt's share of property owned jointly with others); Shares and other investment products; Cash in a deposit account (or under the bed or buried in the chicken coop); Registered (pedigree) animals (if their value if sufficient to justify costs of sale); Insurance claim proceeds unless specifically protected (for example, life insurance paid after the date of the bankruptcy is protected) or indemnifying the loss of property that would itself have been protected; Debts owed to the bankrupt. The commencement of the bankruptcy and the date of the bankruptcy are not necessarily the same thing. The commencement of bankruptcy is up to six months prior to the presentation of the Debtor's Petition or Creditor's Petition, depending on the date of the earliest act of bankruptcy committed by the bankrupt in that period, known as the 'relation back period' (see Chapter 10 for more information on acts of bankruptcy). Divisible property vests in the Trustee and the bankrupt can no longer deal with it. The Trustee has extensive powers to deal with, and sell, the vested property for the benefit of creditors and the costs of administering the bankrupt estate. The Trustee has a choice whether to take possession and sell particular property, carry on the bankrupt's business (if any) in the short term to improve realisation value, bide their time to see if it will be worth selling the property in the future (for example, because there is the potential of an offer for the whole of the divisible property, which will provide a better price than selling the assets individually), or disclaim the property. Note: Clients with intellectual property rights or potential intellectual property rights (such as copyright and patents) should get specialist legal advice. Any income stream will definitely count towards assessing whether income contributions are payable, but a lump sum advance, for example, may vest in the Trustee. Note: Where an insurance policy exists for the benefit of a 3rd party - such as the mortgagee bank in the case of home building insurance, or the creditor in the case of consumer credit insurance - then the proceeds of the claim must be paid to the relevant 3rd party (s 117). More on insurance is found in Chapter 8. Complicated scenarios include: Where property is security for a loan (such as a motor vehicle loan or home loan); Where the property is owned jointly with one or more other persons; Where the legal ownership of property and the equitable ownership may not be the same; (such as where a person puts a property they have largely paid for in someone else's name) A combination of the above. Generally speaking, the trustee will only take property where the bankrupt's share after deducting any loan will still leave a worthwhile return for the bankrupt estate. Co-owners will be given the opportunity to buy out the bankrupt or will be given the equivalent of the value of their share after any sale. The Trustee is not limited in the timeframe in which they should realise vested property, though they must deal with it in such a way as to maximise returns for creditors and therefore assets should be sold as soon as possible. Just because the bankrupt has been discharged, does not mean that it is too late for the Trustee to take and sell vested property unless the bankrupt (or someone else) has arranged to buy back the bankrupt's share. Property which has not been disclosed to the Trustee can also be discovered and sold long after discharge. The Trustee also has extensive powers to look into the past (that is, investigate the financial affairs of the bankrupt) and recover property from other people in some circumstances, usually because the bankrupt has (intentionally or unintentionally) shifted assets to other people when they would otherwise have been available for creditors. These are called antecedent transactions. They include (among others) preferential payments, undervalued transactions and transfers to defeat creditors. Assets acquired during the period of bankruptcy (after-acquired property) Non-protected assets acquired after the date of the bankruptcy and before the bankrupt is discharged will also vest in the Trustee and be available for distribution to creditors (unless that property is of the type exempted by s 116(2) - see Chapter 6 Part 2). This means that if your client inherits money from a deceased estate, wins money, or is given money or property in the period of the bankruptcy, then that money or property will be taken by the Trustee as an asset of the bankrupt estate. Should the asset (including funds) be sufficient to pay out all the debts, the Trustee's fees and expenses, and interest on the debts up to the date of payment, the bankruptcy will be annulled, and the surplus will be returned to the bankrupt. Clients should also be told that while they are allowed to accumulate savings from income earned during bankruptcy (provided they pay any assessed income contributions) any asset purchased with such savings, or invested in anything other than a savings account, will be considered after-acquired property and vest in the Trustee. It is important to note that it is the date that the client acquires the interest in the property that is relevant, and the Trustee may still seek to get in property from the bankrupt estate after the bankrupt has been discharged.   Examples A client's relative dies 6 months before she is discharged from bankruptcy. She does not receive the money from the will until 3 months after discharge. The inheritance still vests in the Trustee for the benefit of the bankrupt estate (unless all debts, interest and expenses have already been paid) because it is the date of death which is relevant. A client's relative dies during bankruptcy and bequeaths the client their house but subject to the 'life tenancy' of another relative. Whilst the house vests in the Trustee, the house cannot be sold by the Trustee until the life tenant dies or vacates the property, which may be many years after the client is discharged from bankruptcy. A client has no real estate in his own name but applies for a property settlement from his ex de facto partner 6 months after discharge. The relevant relationship ended 18 months previously and the apartment they shared was purchased 6 years previously. If the court orders that the client should have a share in the property then that share will vest in the Trustee. Sometimes clients will win, inherit or otherwise come into possession of more property or money than their debts ever amounted to. In such cases the bankruptcy may be annulled, but only if there is sufficient money to pay out the debts, any interest that would have been payable up to the date of payment, the Petitioning Creditor's legal costs and the Trustees fees and disbursements. This can amount to a considerable amount more than the debts by the time the Trustee's expenses are paid, which is one of the reasons that going bankrupt should be given very careful consideration and the client given detailed information on the consequences of bankruptcy. More detailed information on the process of annulment is included in Chapter 8. Houses and other real estate (including your client's mortgaged home) Unlike motor vehicles, there is no concept of protected real estate unless it has been wholly, or substantially, purchased with the proceeds of a compensation pay out or other protected money (see Chapter 6 Part 2 on protected property). Any asset that is not listed in s 116(2) discussed in Chapter 6 Part 2 will vest in the Trustee immediately upon bankruptcy (or upon the acquisition of the property if acquired after bankruptcy and before discharge). This means that the Trustee is the legal owner, and the bankrupt can no longer deal with the property in any way without the Trustee's permission. The Trustee will sell any real property worth sufficiently more than the balance of the secured loan (if there is one) and the cost of organising the sale. It would be rare for an unencumbered house (i.e. a house with no mortgage over it) not to be sold by the Trustee, unless there are factors which would significantly affect its realisable value, for example the property is in a very remote area or in very poor condition. Similarly, it would be rare for a person to be considering bankruptcy if they owned unencumbered property, as usually it would be more beneficial for the person to sell the property and try to negotiate with their creditors prior to considering bankruptcy (though, of course, there will always be exceptions). A client who has been made bankrupt by a sequestration order, on the other hand, may have unencumbered property. A key cause of complaints about bankruptcy (and bankruptcy assistance and advice) is the effect bankruptcy has on assets, particularly the bankrupt's home. Some bankrupts enter voluntary bankruptcy without advice and do not understand that in most circumstances they will not be able to keep their privately owned home. In rare cases, bankrupts who have received advice claim not to have been told about the impact on their home, or the effect it will have on other family members or associates with whom they jointly own property. Claims that the bankrupt did not receive adequate explanation of the treatment of after-acquired property in bankruptcy also occur. It is very important that financial counsellors and other advisors always do three things: Specifically ask the client whether he or she owns their own home, is buying their own home, or has any interest in any other assets (including real estate, shares or money in the bank etc). You should prompt the client to consider small shares in family owned property, or assets purchased in previous relationships. You should file note that you asked the question, and the client's response. In the event that the answer is yes, you need to warn the client of the rights of the Trustee in relation to unprotected assets. You should file note your warning. Even if your client says no, you should tell them that this is very important because the Trustee will take control of the bankrupt's share of any property/asset automatically upon bankruptcy and may choose to sell that property for the benefit of the creditors (or ask co-owners to purchase the bankrupt's share). Clients may have genuinely forgotten something or could be withholding information. You must explain the consequences just in case. Explain that any real estate, money or other assets inherited or otherwise acquired while bankrupt will also vest in the Trustee.   Example: A client attended financial counselling to seek assistance to go bankrupt for substantial debts which he could not pay. The client had a number of meetings with the financial counsellor and was asked on 3 occasions whether he owned or has a share in any property. The client consistently said no. At the final appointment to complete the paperwork the financial counsellor asked the client whether he had ever been left money or property in a will. The client replied 'no, but I do get my father's house when my brother who has a life tenancy dies'. This information changed the decision-making process of the client because his interest in his father's house would vest in the Trustee (subject to the life tenancy) if he went bankrupt. This means that the house would have passed to the trustee for the benefit of creditors upon the death of his brother. The client decided to pursue other options to deal with his debts. What if my client owns, or is buying, property with someone else? Where your client owns property jointly with another person or other people (for example their spouse, de facto partner, other family members or someone unrelated), then the other owners will be affected by the client's bankruptcy. This is also true if the property is being paid off (such as a jointly owned home with a mortgage). Unless the property is protected (see Chapter 6 Part 2 on protected property) then the Trustee will usually ask the co-owner(s) to buy out the bankrupt's share. There may be some negotiations about a fair market value and what constitutes the bankrupt's share, but generally speaking, if the co-owners are prepared to pay to obtain the entire interest in the co-owned property to the Trustee, then the bankrupt's share of the property will be transferred to them. The co-owner(s) will also have to pay to execute the transfer and will be liable for any stamp duty payable in the relevant jurisdiction for transfers of that type. Where duty is payable it will be assessed regardless of any mortgage owed (the duty will be payable on the entire value of the property transferred - not just the equity). Whether stamp duty is payable will vary depending on the law of which State or Territory applies. For example, the Duties Act 2000 (Vic), for example, provides that a transfer from a trustee in bankruptcy to the spouse or domestic partner will not attract stamp duty if the property will be the principal place of residence of spouse or domestic partner (s 48). In some cases, either the Trustee or the co-owners might argue that the legally owned shares do not reflect the true equity position of the parties. For example, the co-owners might want to argue that the bankrupt held his or her share on trust for them (or another third party, such as a child) or the Trustee may want to argue that the bankrupt's share is in fact greater than the share shown on the title because he or she paid for the entire purchase price, or previously transferred their share to a co-owner for less than what it was worth. More information about co-ownership and equitable ownership is found in the section titled: Useful information about property ownership is highlighted below. Where there is a dispute over the respective shares of the bankrupt and non-bankrupt owner, it is important to negotiate and bring any relevant information or evidence to the attention of the Trustee. The Trustee will usually be reasonable rather than undertake expensive litigation. For information about transfers of property which may be challenged by the Trustee, refer to the section Looking into the past - can the Trustee get at money or assets the bankrupt does not own at the date of the bankruptcy? below. Where there is negative equity and the co-owner cannot afford to buy out the bankrupt's share during bankruptcy (as a result of stamp duty and legal fees for example), either the former bankrupt or the co-owner may be able to buy the share back from Trustee on discharge. This is a high-risk strategy (in so far as a number of things can go wrong) and the co-owner should seek independent legal advice on this. The co-owner should always try to make an arrangement to buy out the trustee as soon as practically possible as the trustee's share may increase over time in line with the equity in the property.   Example Janette owns a house as an investment property jointly with her mother and sister. This is her only asset. She lives in a rented apartment and the house is rented out. The investment property is worth approximately $450,000. There is a mortgage over the property of $300,000. Janette is going bankrupt because of a large number of credit card debts and a tax debt she incurred as a result of a business venture she has now abandoned. The Trustee will give Janette's mother and sister the opportunity to buy out Janette's share of the equity by paying the Trustee its market value, in this case approximately $50,000 (market value of $450,000 less the mortgage of $300,000 giving equity of $150,000 divided by 3 owners) provided the family members own the property in equal shares. If Janette's mother and sister are in a position to do this, they will need to also pay the legal costs of preparing and registering the transfer and they will pay stamp duty on $150,000 (Janette's share of the market value rather than the equity). The consent of the mortgagee (lender) will be required as the house is the security for their loan and the lender's interest will be registered on the title. Consent will no doubt also be required as a condition of the mortgage. Janette's bankruptcy will not affect any of the borrowers' rights and obligations under the existing mortgage, except that Janette would not be able to be pursued for any shortfall in the event of a default and undervalue sale. The bank could only take action under the mortgage if there is a default under the contract (such as failure to make the required repayments). However, if Janette's mother and sister wished to borrow additional funds to pay out the Trustee for Janette's share, the bank could insist on refinancing the entire amount and will only do so if the mother and sister qualify for the loan (including having capacity to pay). Janette may continue to assist with paying the mortgage if she chooses to do so but she cannot accumulate any interest in (ownership of) the property while she is an undischarged bankrupt. In the event there was no mortgage, then the Trustee would be claiming $150,000 rather than $50,000 and the stamp duty would remain the same. Where the co-owners are unable or unwilling to purchase the bankrupt's share of the property, then the property will need to be sold so that the Trustee can be paid out of the sale proceeds. Should the co-owner(s) refuse to co-operate, or an agreement cannot be reached, the Trustee can take court action to seize and sell the property. This could be a costly exercise and co-owners would be well advised to avoid costly litigation if possible. The Trustee will also weigh up whether such action is likely to be fruitful for creditors given the costs involved and will only take action if a return is likely after expenses. Without the co-operation of the co-owner(s), the Trustee will be forced to take action in Court (in NSW this would be the Supreme Court under section 66G of the Conveyancing Act 1919 (NSW)) seeking an order allowing the Trustee to sell the property in the absence of the consent of the co-owners. It should be remembered, however, that the Trustee has a very long period in which to choose to take action against the property (see the summary below). This means that even if the Trustee does not consider it worthwhile to take action now, a new assessment may be made in the future if the value of the property has increased and/or any mortgage secured over the property has been paid down. Where a co-owner is particularly uncooperative and there is little equity in the property the Trustee may choose to disclaim the property (see later section on this topic). If no person claims an interest in the disclaimed property, the bankrupt's share in the property would pass to the State (or Territory). If a person claims an interest in the disclaimed property, such as a co-owner (or is under a liability not discharged in respect of the property) they may apply to the Federal Court to for a vesting order to vest the property in that person (s 133(9)). The Court may make such an order as it considers to be 'just and equitable'. Such interested parties would be unable to deal with the property without taking such action, as the interest of the State (the Registrar-General in NSW, for example) would be noted on the title. Process in summary - where divisible property consists of land The Trustee will claim the bankrupt's share in the land (usually based on legal ownership); The co-owner(s) may make an opposing claim (on the basis of equitable principles) or family law orders; Negotiations between any co-owner(s) and the Trustee; and Either the co-owner(s) pay to acquire the bankrupt's interest in the property or the Trustee chooses to concede, sells the property, applies to the court for a statutory sale of the property, or disclaims the   bankrupt's interest in the property. Where your client has a mortgage over their home (jointly owned or otherwise) you should also read the following section. Bankruptcy and home mortgages Where property owned by a bankrupt is mortgaged, the Trustee may sell the property on behalf of the mortgagee with its permission (and the Trustee will be reimbursed for the costs and expenses of the sale only). The Trustee can still sell the property even without the mortgagee's permission, but they must ultimately repay the mortgaged debt to the extent possible from the sale proceeds of the property. Any surplus amount from the sale of the property will be paid into the bankrupt estate. It is becoming increasingly common for people with home mortgages and a large amount of unsecured debt, such as credit cards and personal loans to consider bankruptcy as an option, particularly if they have little or no equity in the property (where the market value of the property is less than or close to the amount owed under the mortgage). In some cases people will be happy to surrender their home or real estate to the mortgagee (home loan lender). In others, they may wish to remain in the home and keep paying the mortgage while bankrupt. This is possible, but it is a risky course of action, and sometimes gives rise to complaints about advisers, particularly when the Trustee claims an interest in the property a few years down the track. When your client is considering bankruptcy in circumstances where they are paying off their home and have very little equity you should warn the client that the Trustee may elect to sell the property at any time during the bankruptcy should the equity position change significantly. Further, the Trustee can still do this after discharge unless a formal arrangement is made to 'buy back' any equity in the property. Generally, where there is little or no equity in the property, the Trustee informs the bankrupt(s) that they can continue to occupy the property on the clear understanding that they will be required to: Maintain the repayments due under the mortgage; and Pay the council and water rates as they become due and payable; and Keep the property fully insured and properly maintained and kept in a good state of repair at all times; and Accept that all payments in respect of 1, 2 & 3 above are considered by the Trustee to be in the form of an 'occupation fee' - this means that paying the mortgage and maintaining the property will NOT create any interest for the bankrupt in the property, nor create any entitlement for reimbursement of such payments. Furthermore, bankrupts are usually informed that they can 'buy back' their interest in the property when they are discharged from bankruptcy. In the case where the Trustee has lodged a caveat to protect the Trustee's interest in the property (instead of becoming registered on the title in place of the bankrupt) the Trustee will exchange a Withdrawal of Caveat for a bank cheque for the agreed 'purchase price'. Consequently, as the Trustee has not legally transferred the title there is no conveyance of the property, no stamp duty is payable in that instance (however, advice from a taxation specialist should be obtained in these instances). On the other hand, if the Trustee had become registered on the title in place of the bankrupt, then there would be a transfer of title from the Trustee to the former bankrupt in which case, stamp duty would be payable. Normally, Trustees lodge a caveat on the title in the first instance and only become registered on the title where there is a sale to a third party. Clearly there is a risk inherent in this process that these arrangements will not play out as planned and the property will have to be sold after all. Specifically: Circumstances may change so as to mean that there is sufficient equity in the property to justify its sale by the Trustee for the benefit of the creditors. The bankrupt(s) may not have sufficient funds to acquire the equity in the property upon discharge. The bankrupt may not be able to maintain the mortgage, rates, insurances etc and the home may be repossessed. In an attempt to circumvent these problems, some Trustees and bankrupts are coming up with creative arrangements whereby there is an attempt to settle the arrangements between the parties prior to the bankrupt's discharge, or even before the bankruptcy has even commenced. AFSA has previously warned about the problems associated with attempts to allow a bankrupt to purchase their equity in a property prior to discharge - any property transferred to the bankrupt will automatically vest straight back in the Trustee as after-acquired property even if it has been paid for with income available after all contributions have been made. Some arrangements involve third parties such as family members purchasing the equity from the Trustee. In some cases, there is no equity at all, and the payment made is effectively paying the trustees fees for an otherwise 'empty' estate. An arrangement to purchase the equity by a third party may be perfectly valid, however a related agreement involving the promised transfer of the property back to the bankrupt runs the risk of the bankrupt's rights simply vesting back in the Trustee. Financial Counsellors should not attempt to advise any client in relation to such an arrangement. There are risks and uncertainties for all parties and the arrangements appear to attempt to circumnavigate some of the basic principles of bankruptcy. Bankrupts and 'purchasers' should be very cautious of entering into such arrangements and should obtain independent legal advice from a solicitor well versed both in bankruptcy and real property law and practice. Preferably, if there is no equity in the property the bankrupt should simply inform the Trustee that they wish to buy back their interest in the property upon their discharge from bankruptcy and start putting money aside for this purpose. Resulting trusts A resulting trust depends on the intention of the parties at the time they purchased or otherwise acquired the property. A resulting trust may also be found to exist where one party has transferred property or a share in a property to another person. The law of equity says that where one party provides all of the purchase money but the property is put in two names, then there is a presumption that the person who provided no money for the acquisition of the property holds their share of the property in trust for the person who paid. Similarly, if both parties have provided the purchase money but in unequal shares, then the party who provided the least amount holds part of their legal share on trust for the other party reflecting the proportions actually paid. This presumption can be overturned by evidence of the parties’ actual intentions at the time. The presumptions may also be altered as a result of the relationship between the parties. The 'presumption of advancement' as it is usually referred to, assumes that people in certain circumstances intended a gift to the other party unless the evidence shows otherwise. For example, a father placing a property in the name of a child has been presumed to be making a gift, and in the past, a husband to a wife, or intended wife. These presumptions are not set in stone and may change with the times - for example in one case the majority of judges in the High Court found that the presumption of advancement did not apply to de facto relationships whereas one judge thought that it could, and another was of the view that the presumptions had no place whatsoever in modern property law (see Calverley v Green (1984) 155 CLR 242). The High Court has also recently decided on the issue of resulting trusts in Bosanac v Federal Commissioner of Taxation (2022) HCA 34. More recently, the High Court also decided that when married spouses placed property in joint names (as joint tenants) then there is a presumption that the property is owned on a 50/50 basis unless the contrary can be clearly established by evidence of their actual intentions at the relevant time (see Cummins v Cummins (2006) 227 CLR 278). This principle does not affect the powers of the Family Court to alter interests in property according to the contributions and needs of the parties and their children under the Family Law Act 1975. Note. The non-bankrupt owner in the case of tenants in common will have some difficulty asserting that they have a greater than 30% share in the property on the basis they have contributed more than 30% of the acquisition cost of the property, because the extent of their ownership is designated on the title (reflecting the parties clear ownership intentions at the time). However, they may be able to lodge a proof of debt as a creditor in the bankruptcy. The Trustee on the other hand may in some circumstances assert the bankrupt has a greater share than that reflected on the title. Constructive trusts Constructive trusts have been implied by the courts in circumstances where it has been considered unconscionable to allow one party to benefit from the contributions of another. This principle can apply to a variety of situations including business ventures, but it was commonly used to allocate property interests upon the breakdown of de facto relationships prior to law governing de facto relationships being enacted by the various state Parliaments. Prior to the 2005 amendments to the Family Law Act 1975, which allowed the family court to divide property which had already vested in a trustee in bankruptcy, constructive trusts were often argued to prevent the Trustee taking property that might otherwise have been dealt with under a property settlement. A constructive trust was usually found in circumstances where a 'joint venture' was thwarted by no fault of the parties concerned, leaving them in a situation where one would benefit from the contributions of another in circumstances neither ever intended. For example, in one case a de facto couple purchased a property with the woman paying over 90% of the purchase price and placed it in joint names because the man was intended to make considerable improvements to the property at his own expense and with his own labour. The relationship broke down before the improvements were ever made. The court found that there was no resulting trust in proportion to the initial contributions because there was clear evidence that the couple consciously placed the property in joint names intending to contribute to the venture in differing ways. There was, however, a constructive trust because it would be unconscionable to allow the man to benefit from the woman's much greater contribution. Accordingly, upon the sale of the property, each would recover their contribution first and then any additional proceeds should be split 50/50 as intended by their original joint venture. Given that the Family Law Act 1975 (Cth) now provides a statutory regime which provides a clear framework for dividing property between both married and de facto couples, and that regime is still accessible after property has vested in the Trustee (see Family Law and bankruptcy in Chapter 6 Part 7), it is unlikely that these equitable rules will be as relevant as they have been in the past. They may still have relevance in circumstances where the co-owners are not and have never been married or de facto spouses. The trustee may also appeal to the above principles to assert that a bankrupt has an equitable share in a property owned by someone else such as their spouse (or greater equitable share than on the title in the case of co-ownership) in circumstances where there are no family law property proceedings between the parties. This would only be likely to occur if the bankrupt has made significant and clearly traceable contributions to the purchase or improvement of the property, and there is sufficient equity to make any proceedings worthwhile. A Trustee can also rely on ss 139DA and 139EA of the Bankruptcy Act to argue that the bankrupt has made contributions to allow the acquisition of property, or substantially increase its value, to establish an interest larger than the bankrupt's ownership as reflected on the title, or even an interest in a property entirely in another party's name. Such contributions would need to have been substantial for a Trustee to risk the costs of pursuing such an application. Co-owners of property should always seek independent legal advice if another co-owner becomes bankrupt. Similarly, where a party claims to have made a significant contribution to the purchase or improvement of a property legally owned by a bankrupt, then they should also seek legal advice to determine whether they can claim an interest in the property against the Trustee. When the non-bankrupt owner is a spouse or de facto spouse, he or she needs urgent family law advice - see Chapter 6 Part 7: Family Law and bankruptcy. If you are assisting the bankrupt, you cannot also assist any non-bankrupt co-owner. If your client is a co-owner of property with another person who is bankrupt, or likely to become bankrupt, then you should also refer your client for specialist legal advice. Property outside Australia Divisible property under Australian bankruptcy laws is not limited to property in Australia. Clients who come from other countries may own, or inherit, property in their country of origin. If the country has similar bankruptcy laws and is one of the small number of prescribed countries listed in s 29(5) of the Bankruptcy Act and Regulation 7 of the Bankruptcy Regulations (for example, Canada, the UK, NZ, the US and Singapore), the Trustee is able to claim and sell the property if it is commercially viable to do so with the assistance of the equivalent court in the foreign country. If it is in any other country, it is difficult if not almost impossible for the Trustee to sell the bankrupt's property. However, in some cases, the Trustee may direct the bankrupt to sell their overseas property and pay the net proceeds to the Trustee. If the bankrupt refuses to do so, the Trustee can take contempt action against the bankrupt. In some cases, there may also be practical difficulties transferring the money out of the other country. Disclaiming contracts and property Sometimes the Trustee will not be interested in a particular piece of vested property or particular contractual rights and obligations. The Trustee can disclaim property if the property is unsalable, and/or the costs of holding onto the property or selling the property exceed the value of the property to the bankrupt estate. The usual example of this is when there is estimated to be little or no equity in the property after taking into account the amount owed to the mortgagee, charges such as rates, holding charges such as insurance and the costs of sale. However, the Trustee will usually refrain from disclaiming the bankrupt’s residence (unless there is no equity and particularly intractable co-ownership issues). Another common example might be a lease arrangement where the costs of maintaining the lease are worth more than its value to a potential purchaser. The reason a Trustee disclaims a contract or property is to avoid personal liability in respect of the property if there is no benefit for the bankrupt estate. For example, if the Trustee didn't insure the house and it was subsequently destroyed, then he or she could be held liable for the loss by the mortgagee because the Trustee effectively steps into the shoes of the bankrupt. A disclaimer in relation to property or a contract has the effect of operating to bring to an end the rights and interests of the bankrupt in respect of the property and crystallises or fixes the liabilities of the bankrupt in respect of the property. A disclaimer also discharges the Trustee from all personal liability as from the date when the property vested in the Trustee, usually the date of bankruptcy. However, the disclaimer does not affect the rights or liabilities of another person. The disclaimer must be in writing and served upon each person who, to the knowledge of the trustee, has an interest in the property being disclaimed (and in the case of a contract, any person who is entitled to a benefit of, or subject to a burden or liability under, the contract). Where the Trustee has not disclaimed property, they may be required to make a decision where a party interested in the property of the bankrupt applies in writing setting out their interest in the property and requiring the Trustee to decide whether to disclaim within 28 days of the notice being provided. If the Trustee fails to disclaim the property within that period (although, they may extend the period by application to the court), the Trustee cannot disclaim and, in the case of a contract, are deemed to have adopted it (see s 133(6)). What happens after the property is disclaimed? In most cases the property reverts to the person with the next best interest. In the case of land in NSWs, for example, the Registrar General on behalf of the State of New South Wales becomes the legal owner of the property subject to the disclaimer. It is then up to the person claiming an interest to apply to the Federal Court to have the property registered in their name. Looking into the past - can the trustee get at money or assets the bankrupt does not own at the date of the bankruptcy? In many ways bankruptcy does not begin neatly upon the date your client goes bankrupt and end on the day of discharge. The Trustee has extensive powers to look backwards into the bankrupt's affairs to seek funds and assets which may have been transferred in the past, depending on the circumstances. The Trustee's rights to recover property also extend beyond discharge - provided the property vested in the Trustee prior to discharge (see the summary below). The Trustee can challenge transactions which were perfectly legal at the time they occurred but have now taken on a different characterisation (retrospectively) as a result of the bankruptcy. In some cases, they may be transactions which were clearly arranged to prevent money and assets being available to creditors. In others they may have been normal acts of generosity or familial support which are considered (by law) unfair to creditors who are now being asked to forego debts which they are legally owed. The Trustee can challenge transfers of property or money made in the years leading up to the bankruptcy under the following rules or principles: relation back preferential payments undervalue transactions transfers to defeat creditors superannuation payments to defeat creditors. Superannuation is usually protected but not if payments have been made to defeat creditors. Where the Trustee is of the view that the bankrupt has been making extra superannuation payments in anticipation of becoming insolvent then he or she may take action to recover these extra payments for the benefit of creditors. This is covered earlier in Chapter 6 Part 2 - Protected Property, in the section on Superannuation and bankruptcy. Relation back The bankruptcy does not necessarily commence on the date of the presentation of the Debtor's Petition, or the date of the sequestration order made by the court. A variety of time limits apply up to 6 months prior to the presentation of the first Creditor's Petition (where there was a Creditor's Petition) or in the absence of any Creditor's Petition, up to 6 months prior to the presentation of the Debtor's Petition - see the summary below. This means that any property or funds owned by the bankrupt at the time of the commencement of the bankruptcy will vest in the Trustee even though they may no longer be owned by the bankrupt at the date of the bankruptcy. Accordingly, in some circumstances a transfer of property may be void against the Trustee, which means that it is as if the transaction never occurred and the property vests in the Trustee upon bankruptcy regardless of the transfer. It also means that the time limits for undervalue transactions run further back than would otherwise be the case because the starting point for counting backwards to determine whether a transaction is potentially void against the trustee is the commencement date rather than the date of the bankruptcy. The Bankruptcy Act provides for a number of defences to protect those persons who have acquired property from a debtor prior to bankruptcy, in the ordinary course of business, and paid the prevailing market value for the property. Preferential payments Where a creditor has accepted payment (or a transfer of property) in the period immediately prior to the bankruptcy they may be vulnerable to having the money taken back by the Trustee as a preferential payment (section 122) - again a variety of periods apply of not more than 6 months prior to the presentation of the first Creditor's Petition or the presentation of a Debtor's Petition where there was no Creditor's Petition - see the summary below. The creditor can resist such a claim by the Trustee by establishing that: the transfer or payment occurred in the ordinary course of business for market value a payment of the debtor made under a maintenance agreement or maintenance order a transfer of property under a debt agreement where the creditor did not know, or have reason to suspect, that the debtor could not pay his debts as they fell due, and that the payment (or transfer of property) would give the creditor preference, priority or advantage over other creditors. The requisite knowledge or suspicion of the debtor's insolvency can be inferred from the circumstances. Where the creditor repays the money or property to the Trustee by way of recovery of a preferential payment, the creditor can then lodge a proof of debt for the amount owing prior to the payment or transfer being made. Undervalue transactions A transfer of money or property may be void against the Trustee because the person who received the money or property did not give payment (or anything else of equal value) in return or gave consideration of less value than the market value of the property (s 120). A typical example is where a husband transfers his share of their jointly owned property to his wife for a nominal amount like one dollar. The Trustee will request the wife to pay the Trustee the actual market value of the husband’s half interest in the property or transfer back the husband's half interest to the Trustee. If the wife transfers back the husband's half interest, the Trustee must pay the wife the one dollar she paid. The circumstances in which a transaction may be void against the Trustee as an undervalue transaction are as follows (subject to the exceptions which follow): There is no consideration given for the transfer by the person who received it (consideration usually means payment but may include other property or rights given in return), or the consideration given was worth less than the market value of the property at the relevant time. A common example is where a relative pays out the existing mortgage and the house is transferred to them, but they do not pay the bankrupt for the bankrupt's net equity in the home (that is the difference between the market value of the home and the mortgage payout amount); and The transaction took place in the five years prior to the commencement of the bankruptcy. However, where the money or property was transferred to a person who was NOT a relative or related entity of the bankrupt, then the transfer will not be void against the Trustee where: It occurred more than 2 years prior to the commencement of the bankruptcy; and The bankrupt was solvent at the relevant time. Where the money or property was transferred to a person who was a relative or related entity of the bankrupt, then the transfer will not be void against the Trustee where: It occurred more than 4 years prior to the commencement of the bankruptcy; and The bankrupt was solvent at the relevant time. A transaction is not void against the trustee if is payment of tax due to the government or a transfer made pursuant to a maintenance agreement or order (including assessments under the Child Support (Assessment) Act 1989)). Summary - undervalue transactions Property (or funds) given away for no consideration, or less than market value, in the 5 years before bankruptcy unless: Where a relative or related entity: It was more than 4 years ago AND The bankrupt was solvent at the time of the transaction. Where not a relative or related entity: It was more than 2 years ago AND The bankrupt was solvent at the time of the transaction. There is a presumption of insolvency, which can only be rebutted by evidence, if the bankrupt has not kept adequate accounts or records (or has since destroyed or lost them). Some things are defined by the Bankruptcy Act as having no value as consideration for a transfer, for example: love and affection being a relative of the transferee a promise to marry the transferee a promise to allow the bankrupt to live in the property by a spouse or de facto partner, or ex-spouse or de facto partner. Transfers to defeat creditors Transfers of property or payments of money can also be void against the Trustee where it is found that the transaction was intended to defeat creditors (s 121). The test is whether the transferor's main purpose in making the transfer was: To prevent the transferred property from becoming divisible among his or her creditors; or To hinder or delay the process of making property available for division among his or her creditors. There is no time limit to how far back the Trustee can go to challenge a transaction of this nature - a transfer of property recoverable under section 121 may have been made at any time before the date of bankruptcy. However, it can be assumed that the further back the transaction, the more difficult it will be for the Trustee to produce adequate evidence to challenge the transaction. The test for whether there is a transfer to defeat creditors is a subjective test in so far as it is the bankrupt's main purpose in making the transfer that matters. However, the Act also provides that the main purpose will be taken to be one or both of (i) or (ii) above if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent. Other evidence can also be used to demonstrate the main purpose (it does not have to be imminent insolvency). There is a presumption of insolvency, which can only be rebutted by evidence, if the bankrupt has not kept adequate accounts or records (or has since destroyed or lost them). A transaction will not be void against the Trustee if consideration of at least the market value of the property has been given by the transferee AND the person who received the money or property did not know, or could not have reasonably inferred, that the bankrupt was trying to defeat his or her creditors or was about to become insolvent. A transaction is not void against the Trustee if it is payment of tax due to the government or a transfer made pursuant to a maintenance agreement or order (including assessments under the Child Support (Assessment) Act 1989)). Summary - transfers to defeat creditors Main purpose in making the transfer was: To prevent the transferred property from becoming divisible among his or her creditors; or To hinder or delay the process of making property available for division among his or her creditors. There is no time limit - the Trustee can look back to transactions at any time prior to the date of bankruptcy. It can be assumed to meet the test if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent. Other evidence of intention can also be used. How far back can the Trustee look to claw back property for the bankrupt's estate? In all circumstances of bankruptcy below:  Undervalued transactions (s 120)  5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy. But not if more than 4 years ago where the transferee is a relative or other related entity, and the bankrupt was then solvent; or more than 2 years ago where the transferee was not a relative or other related entity, and the bankrupt was then solvent.  Transfers to defeat creditors (s 121)  No time limit.  1.Circumstances of Bankruptcy: Creditor's Petition Commencement of bankruptcy and relation back period for divisible property ( s115) First act of bankruptcy in the 6 months prior to the Creditor's Petition (usually the expiry of a Bankruptcy Notice) Period for preferential payments (s 122) 6 months prior to the presentation of the Creditor's Petition Period for repaying proceeds of creditor's execution (s 118) 6 months prior to the presentation of the Creditor's Petition 2.Circumstances of Bankruptcy: Debtor's Petition accepted by the Official Receiver under a direction of the court Commencement of bankruptcy and relation back period for divisible property (s 115) Time specified by the court as the commencement of bankruptcy Period for preferential payments (s 122) Time specified by the court as the commencement of bankruptcy Period for repaying proceeds of creditor's execution (s 118) 6 months prior to the presentation of the Debtor's Petition 3.Circumstances of Bankruptcy: Debtor's Petition presented when at least one Creditor's Petition was pending against the Petitioning Debtor (whether alone, as a member of a partnership or as a joint debtor), and accepted by the Official Receiver without a direction from the court Commencement of bankruptcy and relation back period for divisible property (s 115) Time of the commission of the earliest act of bankruptcy on which any of the Creditor's Petitions were based (usually the expiry of a bankruptcy notice) Period for preferential payments (s 122) Time of the commission of the earliest act of bankruptcy on which any of the Creditor's Petition was based Period for repaying proceeds of creditor's execution (s 118) 6 months prior to the presentation of the Debtor's Petition 4.Circumstances of Bankruptcy: Debtor's Petition presented when no Creditor's Petitions were pending but the debtor had committed at least one act of bankruptcy in the past 6 months, and accepted by the Official Receiver without a direction from the court Commencement of bankruptcy and relation back period for divisible property (s 115) Time of commission of the earliest act of bankruptcy within the 6 months before the Debtor's Petition was presented Period for preferential payments (s 122) 6 months before the presentation of the Debtor's Petition Period for repaying proceeds of creditor's execution (s 118) 6 months prior to the presentation of the Debtor's Petition 5.Circumstances of Bankruptcy: Debtor's Petition presented when no creditor's petitions were pending and the debtor had not committed any act of bankruptcy in the past 6 months, and accepted by the Official Receiver without a direction from the court Commencement of bankruptcy and relation back period for divisible property (s 115) Time of presentation of the petition Period for preferential payments (s 122) 6 months before the presentation of the Debtor's Petition Period for repaying proceeds of creditor's execution (s 118) 6 months prior to the presentation of the Debtor's Petition Circumstances of Bankruptcy: Composition or arrangement under Part IV Division 6 or Part X Commencement of bankruptcy and relation back period for divisible property (s 115) First act of bankruptcy in the 6 months preceding the application for the sequestration order Period for preferential payments (s 122) 6 months before the presentation of the Debtor's Petition Period for repaying proceeds of creditor's execution (s 118) 6 months prior to the presentation of the Debtor's Petition How long does the trustee have to make a claim on property? As detailed below, the trustee has a maximum of 20 years in which to make a claim against property owned at the time of the bankruptcy, transferred prior to the bankruptcy in the circumstances referred to above, or acquired during the period of bankruptcy. When the Trustee does not make a claim within the period below (or extend the period by written notice in cases where this is provided for), then the property re-vests in the bankrupt or any other third party claiming through the bankrupt - for example the beneficiary under a will). Circumstances and relevant Time Limits Actions to recover property from other parties allegedly transferred by the bankrupt for less than market value 6 years from the date of the bankruptcy Actions to recover property from other parties allegedly transferred to defeat creditors Unlimited Actions to recover preferential payments 6 years from the date of the bankruptcy In all other cases 20 years When does property re-vest in the bankrupt? For property disclosed in the bankrupt's statement of affairs and For property acquired after bankruptcy that is disclosed to the trustee in writing within 14 days of the bankrupt becoming aware of it and prior to discharge: 6 years after discharge unless the trustee extends the period in writing prior to the end of this period for up to 3 years or 3 years from a specified event (there is no limit to the number of extensions). For property acquired after bankruptcy and not disclosed until after discharge but within 14 days of the bankrupt becoming aware of it: 6 years from disclosure to the trustee unless the trustee extends the period in writing prior to the end of this period for up to 3 years or 3 years from a specified event (there is no limit to the number of extensions).

Updated: 1 May 2024 Content Part 1: Debts - will I still have to pay my debts? Part 2: Protected property - What can I keep? Part 3: Divisible Assets - What will the trustee take and sell? Part 4: Income contributions - What happens to money I earn while bankrupt? Part 5: Other consequences of bankruptcy - How else will it affect my life? Part 6: Small business and bankruptcy Part 7: Family law and bankruptcy Part 8: Gambling and hazardous speculation Part 9: Death and bankruptcy Summary There are many different consequences of bankruptcy. Some of the concepts are quite complicated. It is important to have a broad understanding of the principles and to be familiar with problems that might arise so that you know what questions to ask the client and when to seek more advice on their behalf. This section is broken up into segments. Parts 1 - 5 covers: What happens to debts? What property is protected? What property will be taken by the Trustee? Whether the client has to pay income contributions and how much. What other consequences there might be. Financial counsellors should be aware of the content of all these parts at least in broad terms as they are relevant to all clients. Parts 6 - 9 need only be referred to if they are relevant to your client's individual circumstances. They cover in order: Small Business Family Law Gambling and hazardous speculation Death Introduction Your client must understand the following potential impacts of bankruptcy before making an informed decision whether to go bankrupt: Debts - will they go away? Assets (past, present and future) - will the trustee in bankruptcy ('the Trustee') take them? Can the Trustee undo past transactions and get at assets now owned by others? What about assets your client may acquire in the future? Income - will the client have to pay a portion of their income towards their debts ('income contributions') and if so, approximately how much? What other limitations might there be on the client's life as a result of the bankruptcy? These are all covered in this Chapter. Note: The same consequences apply when the client has been made bankrupt on a Creditor's Petition, although in that case there is no decision for the client to make. You can refer to this Chapter to advise your client about what to expect during bankruptcy. You should also refer to the bankrupt's obligations in Chapter 8. If your client has very recently been made bankrupt and does not think this should have happened, refer to Chapter 10 - A sequestration order has been made against my client - Is there anything he or she can do? Advise your client to seek urgent legal advice.   Part 4: Income contributions - What happens to money I earn while bankrupt? Summary There are two ways in which the Trustee can obtain funds for the bankrupt estate: realising divisible property as covered in Chapter 6 Part 3, and income contributions from the bankrupt between the date of the bankruptcy and discharge. In order to be required to pay contributions the bankrupt must earn above a certain threshold amount. This amount varies according to the number of dependents maintained by the bankrupt. In brief, the bankrupt must pay the Trustee half of any money earned above the relevant threshold. For current income thresholds refer to the indexed amounts in the AFSA website. It can be difficult to work out what might be counted as income, particularly if the bankrupt has complicated personal and working arrangements. For example, the use of a car or house could be deemed income for the purpose of calculating income contributions. The Trustee can investigate the bankrupt's affairs and adjust the income used to calculate income contributions if the Trustee has reason to believe that the bankrupt is not fully declaring his or her income. The bankrupt has the right to apply for a review of that decision. It is very important that the bankrupt declares his or her income to the Trustee and keeps the Trustee informed of any significant changes in income throughout the bankruptcy. Failure to do so is a breach of the Bankruptcy Act and can lead to significant arrears when the amount of the income contributions is adjusted later (when proof of actual income for the period is supplied or investigation uncovers additional income). If the bankrupt fails to make assessed income contributions, the Trustee has a number of options for collecting arrears, including objecting to the bankrupt's discharge from bankruptcy, garnisheeing the bankrupt's wages or bank account, employing the supervised account regime under the Bankruptcy Act, or obtaining a court judgment and enforcing it in the usual way. Income contributions A bankrupt is required to pay contributions towards the bankrupt estate if they earn income above the relevant threshold amount during bankruptcy. The amount required to be paid will be assessed from the income earned in this period, but the liability to pay the assessed amount continues beyond the period of the bankruptcy until the assessed amount has been paid in full. Note: Often your new client will ask you 'How much income can I earn when I go bankrupt, because I have heard that I will not be allowed to earn more than a certain amount?' This is a misconception. There is no limit to the amount a bankrupt can earn - the required contributions simply increase as the income increases. In short, the amount payable is 50% of the amount of after-tax income earned above the relevant threshold, in any given year of bankruptcy (or a proportional amount for any lesser period). For example, if a person's after-tax income is $72,000 and the applicable threshold is $60,000, the contribution payable would be $6,000 for that year, being 50% of the $12,000 difference between the two amounts. The assessment of the bankrupt's liability for income contributions is done on a yearly basis, which is known as a Contribution Assessment Period (CAP). Accordingly, there will be three CAPs in the normal three-year period of bankruptcy. The detail, however, such as what is counted as income, or which threshold applies is much more complex. Note: for more information on any aspect of income contributions see the Official Trustee Practice Statement 1 Income Contributions last updated 1 July 2021, available on the AFSA website. This area can be complicated for some bankrupts with complex arrangements and there is no room to cover all the possible contingencies in this toolkit. Do I really need to work this out for my clients? While it is not necessary to perform an exact calculation of your client's likely contributions, it is wise to at least try to approximate whether your client will need to pay contributions based on their current and likely income, and if so, how much, as part of the decision-making process. It is clearly an important potential consequence your client needs to consider. At the very least a pre-assessment of contributions can prevent nasty shocks and complaints against your service when the contributions are later assessed by the Trustee. It may also assist clients who have a moderate to high income to reconsider their other options when they have been reticent to do so. Case example A client had been left exposed to huge joint debts by the actions of her ex-partner who has now fled the country. She has a high income ($90,000) and a salary sacrifice arrangement ($15,000) in place. She is unable to meet her debts as they fall due and has insufficient funds after meeting living costs, the cost of educating her children, rent and her car loan to make any significant contribution to her liabilities. She needs the vehicle to be able to work. The equity on the car loan is under $4,000 and without her other debts she can just maintain the car loan. The client was advised of the contribution rule and the impact of grossing up the salary sacrifice on the assessable income for the purposes of the threshold. She could then check whether she will be able to continue to pay the car loan and her other expenses. She can also determine how much she is likely to pay in total over the period of her bankruptcy in order to more accurately compare this to any other available arrangement. The relevant income threshold The base income threshold amount (BITA) per annum is the applicable threshold for a person with no dependants. For the current amount for both the BITA and the actual income threshold amount (AITA) check the current thresholds in the indexed amounts on the AFSA website. If a bankrupt has dependants, then the AITA is defined as (see s 139K): No dependants, then the BITA One dependant, then the BITA plus 18% Two dependants then the BITA plus 27%; or Three dependants then the BITA plus 32%; or Four dependants then the BITA plus 34%; or Where more than 4 dependants, then the BITA plus 36%. All threshold amounts are stated per annum. If a contribution assessment period of less than 12 months applies, then the threshold applies pro rata. These amounts are indexed twice yearly in March and September, so it is important to check the AFSA website to obtain the current amounts. What is counted as income? Income is defined very broadly and includes anything that would, within the ordinary meaning of the term, be defined as income subject to various qualifications which state what constitutes income of the bankrupt (s 139L). Clearly this would include any wage or salary payments, or interest earned on savings. Centrelink income also counts including the Centrelink pension bonus for those who have registered before 1 July 2014 and worked past the retirement age. In practice the various retirement payments that are available from Centrelink, including lump sums, would not usually take the bankrupt's income over the threshold amounts. It also specifically includes the following, whether they would come within the ordinary meaning of income or not (s 139L): Annuities or pensions paid to the bankrupt from a provident, benefit, superannuation, retirement, approved deposit fund or RSA Termination payments/redundancies from employers Annuities or pensions paid under a policy of life insurance or endowment insurance An amount received by the bankrupt as a beneficiary of a trust as long as it comes from the income of the trust (capital payments would be claimed as assets by the Trustee) The value of a benefit given to the bankrupt by any person (as defined by the Fringe Benefits Tax Assessment Act 1986 (Cth) and in accordance with its rules in relation to exempt benefits as modified by Regulation 33 of the Bankruptcy Regulations), for example: Provision by an employer of a fully maintained motor vehicle and/or computer which can be used for private use. (Note: Living away from home and travel allowances are not counted where it can be shown that the amount paid is fully expended for the purpose it is paid for). A significant benefit provided by a friend or family member (or any other person) such as substantial regular use of a vehicle or free accommodation. The value of a loan made to the bankrupt by an associated entity, even if the bankrupt simply directs the payment of the proceeds and does not receive the proceeds. The value of any net benefit paid to a third party as a result of work performed by the bankrupt (that is where instead of paying the bankrupt for a job done for the person by the bankrupt, the person pays a relative or friend of the bankrupt as directed by the bankrupt). Royalties from intellectual property rights. However, an advance would be an asset. Payments received from an income protection insurance policy. Instalments drawn from a reverse mortgage may be classed as income in some circumstances. Note: Where the bankrupt has a salary sacrifice arrangement in place, the grossed-up value of the salary sacrifice is used for the income contribution calculation (not the net amount received 'in the hand' by the employee). The following are not income for the purposes of calculating income contributions regardless of whether they might ordinarily be defined as income under s 139L: Child support or any other form of maintenance paid for the benefit of children of whom the bankrupt has custody up to the amount that would be payable under the Child Support (Assessment) Act 1989 (including payments from the Child Support Account established under the Child Support (Registration and Collection) Act 1988 (Cth)). A payment to or for the benefit of the bankrupt under a relevant legal aid scheme. Super contributions paid by the employer. A payment or amount that the Bankruptcy Regulations (see Division 6) provide is not income of the bankrupt. Note: Where there is partial custody/shared care arrangement, the trustee will determine these on a 'case by case' basis. An amount will also still be included as income if an amount is deducted from it, or applied to something else, by law (such as the repayment of a repayable government assistance payment), if it is reinvested, accumulated or capitalised, or paid to another person or entity at the direction of the bankrupt (s 139M). The income that is likely to be derived, or was derived, by a bankrupt during a contribution assessment period (CAP) is then (s 139N): Reduced by any income tax paid or payable including the Medicare Levy and special levies such as the Flood Levy, in respect of that income. Reduced by any child support payable Increased by any relevant tax refund received during the CAP. The assessed income will not be reduced by any income tax debt that is provable in the bankruptcy. Tax refunds for years that ended prior to the bankruptcy are not counted as income, but vest in the Trustee as property of the bankrupt estate. Tax refunds for income pertaining to a year that started prior to the bankruptcy and ended after the bankruptcy are apportioned on a time basis with the percentage pertaining to the period prior to bankruptcy vesting in the Trustee and the percentage pertaining to the period after the date of the bankruptcy counting as income (see also Tax and bankruptcy in Chapter 6 Part 1). Where payments are made for the maintenance of children under any arrangement other than an assessment under the Child Support (Assessment) Act 1989 (Cth) (such as a maintenance order or agreement under the Family Law Act 1975 (Cth)), then the maximum amount that can be deducted is the amount of the assessment that would be made under the Child Support (Assessment) Act 1989. Payments of spousal maintenance to ex-spouses (including de facto spouses) do not count as a deduction whether payable pursuant to a court order or not. They are also counted as income if the bankrupt is the recipient, rather than the payer. At the end of each CAP, a contributing bankrupt is required to complete an income questionnaire disclosing details of income earned from all sources during the past 12 months and includes a question for interest received. It would usually only be in the case of a very high-income earner that the Trustee would take the time to investigate whether the bankrupt had earned any interest on their accumulated savings. Who can be counted as dependants? Dependants include anyone who: Lives ('resides') with the bankrupt; and Is partially or fully dependent on the bankrupt for economic support; and Earns less than the amount prescribed in the Regulations - check the AFSA website to find the current indexed amounts. The residential qualification in practice means 'ordinarily resides' with the bankrupt and thus includes children who attend boarding schools or are boarding with families Monday to Thursday nights in country areas. University students who live away from home whilst partly dependant on the parents, often receive an income or Centrelink payment well in excess of the above threshold amount and accordingly cannot be regarded as a dependant for income contribution purposes. What period is income assessed from? A bankrupt must be assessed on their eligibility to make income contributions (s 139W). A person's bankruptcy is divided into contribution assessment periods (CAPs) of twelve months (or less if the bankrupt is discharged or the bankruptcy annulled within a CAP) (s 139K). The first CAP commences when the person becomes a bankrupt (the date their Debtor's Petition was accepted or a sequestration order was made against them) and is then repeated annually until the bankrupt is discharged, or the bankruptcy is annulled. The first CAP ends 12 months later and the next CAP begins on the anniversary of the commencement of the first and so on until the bankrupt has been discharged or the bankruptcy annulled. Whilst the Bankruptcy Act does not specify when the assessed income contribution amount is to be paid, the Trustee in conjunction with the bankrupt, decide the frequency of the payments. Generally, the contribution payments will align with the bankrupt's paydays - weekly, fortnightly or monthly. How is the contribution calculated? The income contribution is payable if the income likely to be earned as assessed by the Trustee is greater than the AITA applicable to the bankrupt (s 139P). If the assessed income is less than the applicable AITA, then no contribution is compulsorily payable, but the bankrupt is entitled to make voluntary contributions if he or she chooses to do so. The formula for calculating the contribution the bankrupt is liable to pay is simple (once you have identified what income counts and valued benefits, which is not always simple) and is contained in s 139S: Assessed income - Actual income threshold amount Assessed income means the amount assessed by the Trustee to be the after-tax income that the bankrupt is likely to derive, or derived, during the contribution assessment period in accordance with the rules above. Actual income threshold amount means the actual income threshold amount (AITA) assessed by the Trustee to be applicable in relation to the bankrupt when the assessment is made. The Trustee must make an assessment as soon as practicable after the commencement of a CAP of (s 139W): The income the bankrupt is likely to derive in the relevant CAP; and The applicable AITA; and The contribution payable in accordance with the above formula. The bankrupt is obliged by the Bankruptcy Act to provide documents as proof of income to the Trustee (s 139U) within 21 days of the end of a CAP. In practice the bankrupt will be asked to complete a form indicating the income received in the previous period (where there was one) and the estimated income for the current CAP and attaching the required evidence. The Trustee also has broad powers to request more evidence (s 139V), take into account other information obtained from sources other than the bankrupt (s 139X), and to assume reasonable remuneration for an activity undertaken by a bankrupt even if the bankrupt claims they are not being paid (ss 139Y and 139Z). Generally, the assessment for the first CAP is based on the information in the statement of affairs. When income is assessed, salary sacrifices, fringe benefits and benefits obtained from other parties (not limited to employers) are counted at the grossed up rate. The contribution can be reassessed if the bankrupt's situation changes in certain material ways (s 139W). Also, at the end of each CAP the Trustee will compare the estimated projected income figure against the actual income for the CAP and do a re-assessment where there is a significant variation. If the actual income is greater, the amount payable under the re-assessment will be greater than the original assessed amount and the difference between the two amounts will be added to the next CAP. A bankrupt can also apply to the Trustee for a higher BITA to be used where the imposition of the usual threshold will result in hardship for a variety of defined reasons (s 139T). Should the bankrupt disagree with any aspect of the Trustee's assessment (including the Trustee's response to a hardship application), then the bankrupt can apply to the Inspector-General for a review of the decision (s 139ZA). Where the bankrupt is dissatisfied with the Inspector-General's review of, or refusal to review, an assessment, an application can be made to the Administrative Appeals Tribunal (s 139ZF). More information about applying for the threshold to be increased due to hardship is included in Chapter 8. The bankrupt should keep the Trustee informed of any fluctuations in income throughout the year. This is because: The bankrupt is obliged to do so under s 77; If the bankrupt's income increases, the contribution will increase, and the bankrupt may have difficulty paying both the contribution for the following period at the same time as the unpaid balance from the previous period; If the bankrupt's income decreases, they will not be paid back any excess contributions paid - these can only be applied as a credit to a future year's assessment. This means that if there is no future period in which a contribution is payable the bankrupt will never recover these amounts (s 139ZH). Contributions for any relevant CAP continue to be payable, even after discharge from bankruptcy (s 139R). There is also no time limit on the Trustee's right to make a fresh assessment relating to a previous CAP if fresh evidence comes to light. Enforcement of unpaid income contributions The Trustee has wide powers to enforce payment of contributions including garnisheeing of wages or bank accounts under the Act during bankruptcy, without the need to obtain a court judgment. Also, the Trustee can take enforcement action in court after discharge from bankruptcy to collect unpaid contributions. Failure to pay contributions is also grounds for the Trustee to object to the bankrupt's discharge from bankruptcy (s 149D(1)(f)) and is quite often used by Trustees particularly in relation to high income earners. Whilst not stated in the Act, the Trustee will usually withdraw the objection to discharge upon receipt of the arrears if there are no other grounds for an objection. Where the bankrupt is not discharged, then the requirement to pay income contributions continues, increasing the total amount payable. The Trustee will warn the bankrupt prior to the expected date of discharge, of the consequences of having arrears of income contributions immediately prior to the date the bankrupt would otherwise be due to be discharged. In any situation where the bankrupt has repaid (by contributions and/or the realisation of assets) more than the amount of the debt plus the costs of administering the estate (legal costs, trustee remuneration and expenses) then the bankruptcy can be annulled by the Trustee and no court application is required. More information is included in Chapter 8 of this Toolkit about the Trustee’s powers in relation to assessing income and options in relation unpaid contributions.

Updated: 27 October 2025 Content Part 1: Debts - will I still have to pay my debts? Part 2: Protected property - What can I keep? Part 3: Divisible Assets - What will the trustee take and sell? Part 4: Income contributions - What happens to money I earn while bankrupt? Part 5: Other consequences of bankruptcy - How else will it affect my life? Part 6: Small business and bankruptcy Part 7: Family law and bankruptcy Part 8: Gambling and hazardous speculation Part 9: Death and bankruptcy Summary There are many different consequences of bankruptcy. Some of the concepts are quite complicated. It is important to have a broad understanding of the principles and to be familiar with problems that might arise so that you know what questions to ask the client and when to seek more advice on their behalf. This section is broken up into segments. Parts 1 - 5 covers: What happens to debts? What property is protected? What property will be taken by the Trustee? Whether the client has to pay income contributions and how much. What other consequences there might be. Financial counsellors should be aware of the content of all these parts at least in broad terms as they are relevant to all clients. Parts 6 - 9 need only be referred to if they are relevant to your client's individual circumstances. They cover in order: Small Business Family Law Gambling and hazardous speculation Death Introduction Your client must understand the following potential impacts of bankruptcy before making an informed decision whether to go bankrupt: Debts - will they go away? Assets (past, present and future) - will the trustee in bankruptcy ('the Trustee') take them? Can the Trustee undo past transactions and get at assets now owned by others? What about assets your client may acquire in the future? Income - will the client have to pay a portion of their income towards their debts ('income contributions') and if so, approximately how much? What other limitations might there be on the client's life as a result of the bankruptcy? These are all covered in this Chapter. Note: The same consequences apply when the client has been made bankrupt on a Creditor's Petition, although in that case there is no decision for the client to make. You can refer to this Chapter to advise your client about what to expect during bankruptcy. You should also refer to the bankrupt's obligations in Chapter 8. If your client has very recently been made bankrupt and does not think this should have happened, refer to Chapter 10 - A sequestration order has been made against my client - Is there anything he or she can do? Advise your client to seek urgent legal advice.   Part 5: Other consequences of bankruptcy - how else will it affect my life? Summary There are other consequences, and potential consequences, of bankruptcy. Whether these other consequences are relevant and how badly they affect a particular bankrupt will vary considerably from client to client. All bankruptcies are included on the National Personal Insolvency Index (NPII - a register which can be searched by anyone for a fee) and on the person's credit report. Other consequences which may potentially impact on bankrupts include: restrictions on employment in some roles, trades and professions prohibition on being a director of a company problems with getting credit, insurance, rental property, telecommunications connections and utilities restrictions on travelling outside Australia feelings of shame or personal failure. The bankrupt cannot initiate or defend legal proceedings without the involvement of the Trustee (because the right to do so has vested in the Trustee along with other property) except in relation to personal injury or other civil wrongs done to the bankrupt, his or her spouse or de facto partner or a member of the bankrupt's family, or the death of his or her (the bankrupt's) spouse, de facto partner of member of his or her family. Employment Generally speaking, bankruptcy does not prevent your client from working. However, if your client is engaged in particular trades or professions there may be certain restrictions imposed by the relevant professional association or licensing authority. Your client should contact their professional association or licensing authority to confirm whether there is any effect on their membership or ability to practice a particular trade. In some cases, it is possible to apply for permission to continue (or to show cause to the relevant licensing authority) to continue to work in the particular trade or profession. It is better to take proactive action to seek permission where relevant rather than compound the problem with concealment or dishonesty. In some cases, the client may reassess their options as result of the potential impact on their employment. A bankrupt's employer will not be notified of their bankruptcy in the usual course of events. However, bankruptcies are public information, and the employer may become aware of it by other means. An employer may become aware of an employee's bankruptcy if the bankrupt fails to pay assessed income contributions and becomes subject to a garnishee order as a result (see Chapter 6 Part 4). The bankrupt's payroll team (and therefore their employer) will also become aware of the bankruptcy if there is a garnishee order in place that needs to be stopped upon the client becoming bankrupt. Prohibition on being a director of a company A person is automatically disqualified from managing a corporation if they are an undischarged bankrupt or they have entered a Personal Insolvency Agreement under Part X of the Bankruptcy Act (Corporations Act 2001 (Cth), s 206B(3)). This does not apply to a person proposing or entering a Debt Agreement. Managing a corporation includes not only being a director, alternate director or secretary (cessation of these roles is automatic upon bankruptcy) but also actively participating in the management of the corporation in any other way including (Corporations Act, s 206A sets out the kinds of conduct in relation to a corporation for which an undischarged bankrupt cannot engage): participating in making decisions that affect the whole, or a substantial part of the business of the corporation exercising the capacity to significantly affect the corporation's financial standing communicating instructions or wishes to the directors of the corporation knowing that the directors are accustomed to act in accordance with those instructions or wishes or intending them to so act (there is an exception for advice given in the proper performance of functions attaching to the person's professional capacity, for example accountant or solicitor). When a person ceases to be a director, alternate director or secretary of a corporation as a result of bankruptcy the following needs to occur: the bankrupt person must inform the fellow directors that he or she has ceased to be a director the bankrupt must lodge a Form 296 (Notice of disqualification from managing corporations - bankruptcy or personal insolvency agreement) with ASIC the remaining directors should change the company's details with ASIC to reflect the disqualification of the bankrupt director. More information is available on the ASIC website. A person who has been disqualified from managing a corporation as a result of their bankruptcy can apply to the Federal Court for permission to manage corporations (generally); a class of corporations; or a particular corporation (Corporations Act s 206G). ASIC must be notified by a prescribed form at least 21 days prior to the application being made to give the regulator the opportunity to file an appearance if it has an interest in the matter. In making a decision the court will have regard to the following: the onus is on the applicant to convince the court to make the order the provision is intended to protect the public and not to punish a director who subsequently becomes bankrupt; however, hardship on the bankrupt caused by the prohibition is anticipated and will not by itself be a reason for granting leave the prohibition is supposed to have some deterrent effect the prohibition is supposed to deter others from abusing the corporate structure to the detriment of shareholders, investors and others dealing with the company the court will consider the reason the person has ended up disqualified, the role they will play in any relevant corporation, and any consequential risks to shareholders, creditors, employees and the public.   Example: Carey, in the matter of Carey [2011] FCA 235 (17 March 2011) A woman who was bankrupt applied to the court for permission to be a director of a not-for-profit health advocacy organisation. She had become bankrupt after she had suffered severe complications from surgery and had unsuccessfully sued her surgeon, ending up with an enormous legal costs order against her that she could not possibly pay. She was successful in her application. In granting her permission to be a director of the organisation the court considered the reason she became bankrupt, the fact that she would not be paid for the role, the fact that she would have little involvement in the organisation's finances and that she had been sought because of her extensive experience as an advocate on health issues (as opposed to management or financial management skills). However, this case is probably more the exception than the rule due to the somewhat unique circumstances. In most other cases, the courts have been reluctant to grant approval to an undischarged bankrupt to be a director, especially where the bankrupt owes a significant amount to their creditors. A person can become a director again once they are discharged from bankruptcy. However, they will need to be reappointed by the company in accordance with its Constitution and a change to the company details will subsequently need to be lodged with ASIC. ASIC receives data from AFSA about bankruptcy activity and will be alerted to your client's bankruptcy (or Personal Insolvency Agreement). They will also publish your client's cessation as a director, alternate director, or secretary on ASIC's publicly available database. Travel restrictions A bankrupt is not permitted to leave Australia (or even prepare to leave Australia) without the written permission of their Trustee (s 272(1)(c)). To do so is an offence potentially punishable by imprisonment. Section 110 of the Bankruptcy Regulations 2021 and clause 2.11 of the Bankruptcy (Fees and Remuneration) Determination 2015 provide for a $150 fee (as at October 2025) in relation to a request for the Official Trustee's consent to travel overseas. They are encouraged to complete the 'Request for consent to travel overseas whilst bankrupt Form' although it is not required. This fee and form do not apply to a bankrupt whose trustee is a registered trustee. A bankrupt is required to hand over his or her passport 'forthwith' after becoming a bankrupt (s 77). In reality, the Trustee will often dispense with this requirement, depending on the circumstances of the bankrupt. If the client is considered a flight risk - that is someone who has both the means and the motivation to leave the country - they may be placed on a Ports Watch List regardless of whether the Trustee takes the person's passport. In order to ensure a conviction for leaving Australia without the Trustee's written permission, the bankrupt must have actually boarded the aircraft. This would be very unlikely for clients who have few assets. It is also an offence (in fact a more serious offence) to attempt to leave Australia with the intent to defeat or delay payment to creditors during bankruptcy and within the 6 months before the presentation of a petition (s 272(1)(a)). Simply having left Australia in the 6 months prior to bankruptcy will not be sufficient to be an offence - there must be some evidence of the intent to defeat or delay creditors. Bankrupts will usually be given permission to travel provided that: it is necessary to earning their income; OR they have compassionate reasons; AND it will not interfere with the administration of the estate; AND he or she is not considered a flight risk - that is likely to never return. Permission must be sought at least 14 days in advance of travel (it is advisable to apply for permission well before this to give adequate time to make travel arrangements after getting an answer). See Chapter 8 for how to apply. The Trustee may impose conditions when providing consent to travel. Conditions may include such things as: returning to Australia by a particular date; and/or paying up any income contributions due in the period of travel in advance. The bankrupt should carry a copy of the Trustee's written consent with them when leaving the country just in case they have been placed on an alert list with immigration officials and the Australian Federal Police. While this is unlikely for consumer bankrupts with few assets, it is wise to carry a copy of the Trustee's consent just in case. If the bankrupt fails to abide by any condition imposed by the Trustee, he or she can be charged with a breach of s 272(3). The following are also grounds for the Trustee to object to the bankrupt's discharge: leaving Australia without the Trustee's permission failure to abide by a trustee's condition(s) failure to return to Australia at the time specified in the request for permission failure to return to Australia upon the request of the Trustee. This could result in the bankruptcy being extended from 3 years to 5 or 8 years depending on the circumstances. By comparison, people who enter Debt Agreements or Personal Insolvency Agreements do not need to seek permission to travel. The obligation to seek permission to travel ceases when the bankrupt is discharged, or the bankruptcy annulled. Public record All bankruptcies are recorded on the NPII permanently. This is a publicly available register of all insolvency proceedings in Australia including not only bankruptcies but also Creditor's Petitions, Debt Agreements and Personal Insolvency Agreements. Information recorded on the NPII includes: name and other personal information that identifies a debtor or bankrupt (name, date of birth, aliases, address, occupation to the extent these are known) the type of administration or proceeding the Trustee, administrator or controlling trustee of the administration or proceeding the petitioning creditor and/or creditor's solicitor (where a Creditor's Petition is recorded) the date an administration or proceeding commenced; and the current status of the administration or proceeding – for example: whether a person has been discharged from bankruptcy.   Tip: Clients who are concerned for their own physical safety If your client fears that his or her safety may be compromised by the inclusion of their address on the NPII they can apply in writing to the Inspector General to suppress the address only (the name, date of birth and details of the insolvency process will remain). Evidence such as a copy of any court orders or reports from police, a social worker, a medical practitioner or other relevant professional should be supplied along with the request. Where your client is lodging a Debtor's Petition, then the request should be lodged at the same time to avoid unnecessary publication. A decision will usually be made within 1 day and the response supplied to the applicant in writing. Review by the Administrative Appeals Tribunal is available if the client believes the request has been unreasonably refused. Records are only removed from the NPII in the following circumstances: when the record is ordered to be removed by the Federal Court or Federal Circuit and Family Court, for example, because a sequestration order has been set aside when it is has been established that the original process was a forgery (Debtor's Petition lodged by someone other than the named debtor for example) where was an administrative error in processing and the information should never have been recorded. Where a bankruptcy has been annulled, the bankruptcy will not be removed from the record, but the record will be updated to show that it has been annulled. The NPII can be searched by anyone for a fee. The search can be done via an information broker or with AFSA directly on its website under the Bankruptcy Register Searches. A standard search costs $15 (as at October 2025). Obtaining credit/loans It is an offence for a bankrupt person to obtain a loan or other form of credit (including hire purchase agreements and leases) of over a prescribed amount without disclosing that he or she is a bankrupt ($7,173 as at October 2025, for current Indexed Amounts check the AFSA website). The same applies to procuring goods or services on credit or paying by cheque. This is an offence attracting a maximum 3 years' imprisonment and is also a potential reason for the Trustee to object to the person's discharge from bankruptcy. This does not mean that the person cannot obtain or request the credit, only that they must disclose their bankrupt status, which may in turn lead to credit being refused. Extracts from the NPII are also given electronically to credit reporting agencies. Bankruptcies will remain on the person's credit report the longer of 5 years from the date of the bankruptcy, or 2 years from discharge or annulment. This would be 5 years in most cases but could also be 7 or even 10 years if the bankruptcy is extended by objection to discharge. The credit report listing will make it more difficult to obtain credit. In some cases, clients may be able to obtain secured credit, especially at a higher price than the going rate, or expensive fringe credit such as pay day loans. Of course, repaying higher priced credit can be considerably more difficult than repaying mainstream credit and loans incurred after bankruptcy will not be provable, placing the client at risk of enforcement activity commencing all over again (and possibly a subsequent bankruptcy). Obtaining insurance People who are or have been bankrupt may experience difficulties obtaining some types of insurance. An informal survey of members by the Insurance Council of Australia conducted in the last ten years revealed the following about current underwriting policies: generally, for home contents/building and motor vehicle policies, bankruptcy is not a consideration, although one insurer reported declining insurance cover where a person was or had been bankrupt within the 10 years prior to application (clients of financial counselling services also report such difficulties from time to time) bankruptcy may be a relevant consideration for deciding whether to provide consumer credit insurance for business lines of insurance, whether the customer is or has been bankrupt would generally be a significant underwriting factor as an undischarged bankrupt cannot be a director or officer of a corporation, he or she would of course be unable to obtain Director's & Officer's cover. Even after bankruptcy, the previous bankruptcy would remain an underwriting consideration for this type of insurance professional Indemnity and Management Liability Insurance may also be affected, although higher premiums and restrictive conditions would be more likely than an automatic decline of cover. The decision of the insurer (whether to provide cover) will depend on the risk appetite of the individual insurer and would be decided on a case-by-case basis. It may be that insurance cover is declined altogether, but it is also possible that the person would get insurance but have to pay higher premiums or be subject more restrictive terms such as exclusions and special conditions. The consequences would vary depending on: the type of insurance sought (for example, there may be very little impact on obtaining public liability for a market stall holder) the occupation of the person seeking business insurance (for example, a hairdresser would possibly experience less difficulty than an accountant or financial planner); and the cause of bankruptcy (bankruptcy following a divorce may not be seen as significant as that which could be construed as due to business mismanagement). Insurers will vary in the degree to which they will be willing to look into all the above factors and make a tailored decision. Case study Mr T was a builder. He found himself in financial difficulties and went bankrupt. Unable to continue as a licensed builder, he found employment in teaching the skills he had formerly used to make his living. When he was made redundant from that position, he decided to set up a small handyman service. Unfortunately, he was unable to get public liability insurance because of the bankruptcy, despite trying a number of insurers. One of the insurers told him they would not insure him until 5 years after discharge.   Entering contracts (telecommunications, rental housing) The bankruptcy listing on the client's credit report can also affect their access to other services. Clients report having trouble getting rental properties, getting mobile phone contracts and access to services such a pay TV. This is even more problematic for clients who live alone and cannot access services in the name of another member of the household. Sometimes relatives can assist, but this is not always the case. Many clients therefore prefer to keep their bankrupt status confidential. Clients without any history of rent arrears may not foresee any impact on their ability to obtain a residential lease. It is important that you draw this possibility to their attention and get them to think about strategies to deal with this. References from previous landlords may be of assistance, but the degree of difficulty they will encounter will vary with the number of tenants competing for available properties. Immigration and sponsorship of migrants Clients from outside Australia should check with the Home Affairs to determine whether bankruptcy will have any effect on their immigration status. Sponsors of migrants have an obligation to notify the Department of Home Affairs within 10 working days if they become bankrupt. Sponsors should contact both the Home Affairs and AFSA to determine the implications of bankruptcy in their situation, including the impact on any funds held in an account by way of bond. Court proceedings Legal proceedings against your client Generally speaking, a creditor cannot enforce any remedy against the person or property of a bankrupt in relation to a provable debt (s 58(3)). Further, a creditor can only commence proceedings in relation to a provable debt or take a fresh step in proceedings in relation to a provable debt with the leave of the court on such terms as the court thinks fit (s 58(3)). This does not affect a secured creditor's right to enforce against property that is security for a loan. So, if a client defaults on their home mortgage, or car loan, the creditor can take action to repossess and sell the secured property or vehicle according to the usual rules. Note that a lease, mortgage, bill of sale, lien or charge cannot contain a clause which makes becoming bankrupt (or committing an act of bankruptcy) alone sufficient to trigger a remedy, or modifications to the rights of the parties to the contract. Such clauses are void by virtue of ss 301 and 302 of the Bankruptcy Act (more on this is found in Chapter 8). Enforcement action can also be taken in relation to a maintenance agreement or maintenance order under the Family Law Act 1975 (Cth) or Child Support (Assessment) Act 1989 (Cth). Proceeds of crime proceedings and orders are also unaffected by bankruptcy. The court additionally has broad powers to stay proceedings or discharge orders relating to non-payment of provable debts, including releasing debtors from custody (s 60(2)). When contacted by creditors, your bankrupt client should inform the creditor that he or she is bankrupt and give them the date of the bankruptcy and the bankruptcy number (this should be on correspondence received from AFSA). Should your client be sued, or a fresh step taken in proceedings, after the date of the bankruptcy, he or she should notify the plaintiff and the Trustee and provide copies of any court documents to the Trustee. Where the Trustee indicates that he or she does not intend to defend proceedings, the client should also notify the court in writing of the bankruptcy - providing documentary evidence of the date of the bankruptcy and the bankruptcy number.   Example Ms Q was bankrupt. Despite this, her main creditor persisted in pursuing a Statement of Claim for $20,000 in the Local Court in her country town. The Statement of Claim was couched in very colourful language and the plaintiff argued that the debt was not provable in bankruptcy because it was due to fraud. An examination of the facts, however, revealed that the cause of action was really damages for breach of contract. Her Trustee indicated that he would not be defending the action and could not advise Ms Q what she should do. She was worried about a judgment being entered against her based on the rather slanderous allegations in the Statement of Claim. Ms Q was advised to write a letter to the Registry to put before the court on the next occasion, outlining s 58(3) of the Bankruptcy Act which requires the plaintiff to obtain leave from the Federal Court of Australia in order to take a further step in the proceedings. Ms Q was advised that the Local Court put a permanent stay on the proceedings.   When your client is a joint debtor and the other co-borrower is not bankrupt, the client may be joined to proceedings against the other debtor (receive a Statement of Claim or Summons or other document initiating court proceedings). Again, the bankrupt should notify the Trustee and forward the relevant court documents. Where your client is being subject to proceedings alleging fraud, he or she should seek legal advice. Where your client is being sued in relation to a contract entered into after bankruptcy, this debt is not provable, and the client will need to seek legal advice about any possible defence. It is advisable to also discuss the matter with your Trustee. Legal proceedings by your client Any legal action commenced by a person who subsequently becomes a bankrupt is automatically stayed until the Trustee makes an election in writing about whether to continue the proceedings or not (s 60(2)). Your client generally cannot continue or commence court proceedings during bankruptcy without the involvement of the Trustee. This is because the right to recover any property or money owed to the bankrupt vests in the Trustee like any other property (s 116(1)(b)). However, there are exceptions (see s 60(4)) for proceedings in relation to: any personal injury or wrong done to the bankrupt, his or her spouse or de facto partner or a member of his or her family the death of the bankrupt's spouse or de facto partners or of a member of his or her family. This means your client can commence or continue proceedings if it relates to one of the above exceptions. Personal injury or wrong has been defined by the courts as including any case where the damages sought are for pain felt by the bankrupt in respect of 'his mind, body or character' or alternatively 'injury to the person or feelings' of the bankrupt. This means the bankrupt can continue legal proceedings in his or her own name, and without the approval of the Trustee, for not only physical injury, but injuries to reputation or character such as libel, slander or assault. Trespass has also been held to be an exception where the only damage is personal annoyance and inconvenience. On the other hand, any action which is based upon 'direct pecuniary loss to property or the estate of the bankrupt', the right to sue passes to the Trustee. This would include any incidental impact on the feelings or health of the bankrupt if that claim is only incidental to a claim related to money or property. In such cases the bankrupt cannot continue the proceedings in his or her own name - it is entirely the decision of the Trustee as to whether the proceedings are worth pursuing for the benefit of the creditors given the time, effort and expense involved and the likelihood of success. The courts have also allowed bankrupts to continue with actions that have a direct impact on their ability to earn an income by personal exertion (consistent with the protection of tools of trade). This is not an exception under s 60(4) or s 116(2)(g) but instead a recognition that certain types of rights are not property and do not vest in the Trustee under s 116(1). The bankrupt would therefore be permitted to continue an unfair dismissal action or defend an action which threatened an occupational licence. A commercial pilot's licence, for example, was held by the Federal Court not to be a property right, because it was personal to the licensee, reflected the licensee's fitness and qualifications only, and could not be transferred. This meant that the bankrupt could continue with an appeal against conditions imposed upon his pilot's licence. On the other hand, a taxi licence or liquor license which could be sold for a market value, would be considered a property right and any relevant court action would likely vest in the Trustee. Similarly, any claim that related to earning an income from property rights (protecting an investment for example) would also pass to the Trustee. The cases also distinguish between the right to sue to recover 'moneys which, by his personal effort, he [the bankrupt] had earned', which is protected, and the right to sue for damages for breach of employment contract (money he might have earned had the contract not been terminated). In the latter case, the action has been held to vest in the trustee, although in that case the damages claim related to the period prior to bankruptcy. Logically it could be argued that if the breach of contract occurred after the date of the bankruptcy, then the damages would form income and the income assessment regime would apply rather than the damages forming after-acquired property. There is no case law on this point and clients wishing to pursue a claim for damages for breach of contract while bankrupt should get legal advice. Legal proceedings commenced by a person who is, or subsequently becomes, bankrupt against a life insurer or a superannuation fund trustee would also be caught by the stay provisions of s 60 of the Bankruptcy Act and would therefore be subject to the consent of the Trustee to prosecute. The only exception would be if the action was in respect of a personal injury or wrong done to the bankrupt. In practice many Trustees will consent to proceedings being issued or continued, particularly if they are being conducted on a no win/no charge basis or if the adverse risks are being funded. Accordingly, always seek the permission of the Trustee in bankruptcy in writing before issuing or continuing with a court action against an insurer or superannuation fund. The client will also need advice on whether the proceeds of such a claim will be protected in bankruptcy and the implications of this.   Examples Causes of action/loss and Effect of bankruptcy Physical injury as a result of car accident, industrial accident or other negligence None - the bankrupt can start or continue proceedings without the consent or involvement of the Trustee Defamation None - The bankrupt can start or continue proceedings without the consent or involvement of the Trustee unless damages to business or property rights affected Physical or mental injury as a result of an assault or other criminal act (including claims for victim's compensation) None - The bankrupt can start or continue proceedings without the consent or involvement of the Trustee Pain, suffering and inconvenience as a result of harassment or coercion under the Trade Practices Act, Australian Consumer Law or ASIC Act Arguably protected - seek legal advice Misleading or deceptive conduct or unconscionable conduct Likely to involve damages for loss of money or property and therefore likely to vest in the Trustee - if in doubt, seek legal advice Breach of contract Will usually vest in the Trustee Negligence in professional services such as financial or legal advice Likely to involve damages for loss of money or property and therefore likely to vest in the Trustee Employment related claims (for example, unfair dismissal) Any claim to reinstatement does not vest in the Trustee as the bankrupt is entitled to earn an income. The client should get legal advice in relation to the status of any money received by way of settlement (as to whether such funds will vest in the Trustee or be counted as income for contribution assessment purposes). Administrative appeal against cancellation or suspension of occupational licence Probably none - the bankrupt can start or continue proceedings without the consent or involvement of the Trustee. There could be doubt if the licence involves property rights (for example, can it be sold?) - get legal advice. In any event it is preferable to inform the Trustee of any proceedings as any payout will need to be disclosed to the Trustee (along with the reasons why it should be protected in bankruptcy if that is the case). Where the Trustee has been notified of the proceedings by another party (a party to the proceedings other than the bankrupt), then he or she has 28 days within which to elect in writing to continue the action on behalf of the bankrupt's estate. Where he or she fails to do so within this time period, then the Trustee is taken to have abandoned the action and the relevant party could apply to the court to have the matter discontinued. As the right of action has vested in the Trustee, the bankrupt personally cannot be subject of any cost orders in proceedings after the start of the bankruptcy. The right to continue legal action (or commence legal action) in relation to property rights vests in the Trustee, like other property acquired before or during bankruptcy. It does not re-vest in the bankrupt upon discharge. This means that the bankrupt cannot take legal action upon discharge, even though the relevant limitation date for doing so may not have passed. This right remains with the Trustee unless it is assigned for valuable consideration (in the same way a discharged bankrupt can buy back the equity accumulated in their home or other property upon discharge if it has not been sold during the bankruptcy). Even if the former bankrupt were able to successfully take legal action (without objection by the Trustee or another party), any money or property recovered would vest in the Trustee regardless of the bankrupt's subsequent discharge. In some cases, the Trustee will assign the right of action to the discharged bankrupt for a nominal sum of, for example, $5,000, plus a percentage of any successful net verdict amount. Whether the client can take a dispute to an external dispute resolution scheme while bankrupt is covered in Chapter 8. Cooperation with the Trustee Bankrupts have wide-ranging obligations to co-operate with the Trustee. What this means in practice will vary greatly depending on the nature of the bankruptcy and whether the debtor has any assets or has disposed of (or is suspected of disposing of) assets in the period preceding the bankruptcy. These obligations are covered in more detail in Chapter 8, but a client considering bankruptcy should generally be aware that their Trustee will have considerable power to compel him or her to co-operate if such assistance would be useful in administering the bankrupt estate. Criminal penalties can sometimes apply. It is also advisable that the bankrupt co-operates to minimise the chances that the bankruptcy will be extended (see Chapter 8 - Objections to discharge). When the bankrupt (and possibly his or her family) are living in their own home, or a caravan or other asset that may be sold for the benefit of their creditors, they are likely to be asked to leave at some point to allow a sale with vacant possession to take place. Bankrupts who have had business dealings or property ownership arrangements will be expected to answer questions and supply information and records to assist the Trustee to understand and deal with the estate for the benefit of the creditors. How long does it last? Usually, bankruptcy lasts 3 years and 1 day from the filing of the debtor's statement of affairs, but it can be extended to 5 years or 8 years in certain circumstances. The reasons that a bankruptcy may be extended are covered in Chapter 8. How will I feel about it in the morning? Bankruptcy is a big step that has the potential to have a big impact on the client's emotional well-being. Some clients have little compunction about not paying some or all their debts, but may find the restrictions on their life, or the perceived attitude of others, more difficult to deal with than they first anticipate. Others may experience no real practical consequence of bankruptcy but suffer terrible feelings of failure and shame. For many there are both practical and emotional consequences. It is important that clients are given the space and time to consider the decision carefully. As this is a very complex area, part of the financial counsellor's task is trying to identify what consequences are relevant to a particular client's circumstances so that they are not too overwhelmed with information to comprehend the implications. At the same time, no consequence can be completely omitted, in case it has a relevance that the financial counsellor has not foreseen. It is also important not to rely on the client to tell you everything that may be relevant, because the client will have no idea what this may be. In some cases, clients may deliberately conceal relevant information. Counsellors need to develop the skills to elicit the relevant information from the client and to make adequate file notes. It may also help for people to understand the reasons why we have bankruptcy laws and the important role they play in allowing people to move on from insurmountable debt.

Updated: 27 October 2024 Content Part 1: Debts - will I still have to pay my debts? Part 2: Protected property - What can I keep? Part 3: Divisible Assets - What will the trustee take and sell? Part 4: Income contributions - What happens to money I earn while bankrupt? Part 5: Other consequences of bankruptcy - How else will it affect my life? Part 6: Small business and bankruptcy Part 7: Family law and bankruptcy Part 8: Gambling and hazardous speculation Part 9: Death and bankruptcy Summary There are many different consequences of bankruptcy. Some of the concepts are quite complicated. It is important to have a broad understanding of the principles and to be familiar with problems that might arise so that you know what questions to ask the client and when to seek more advice on their behalf. This section is broken up into segments. Parts 1 - 5 covers: What happens to debts? What property is protected? What property will be taken by the Trustee? Whether the client has to pay income contributions and how much. What other consequences there might be. Financial counsellors should be aware of the content of all these parts at least in broad terms as they are relevant to all clients. Parts 6 - 9 need only be referred to if they are relevant to your client's individual circumstances. They cover in order: Small Business Family Law Gambling and hazardous speculation Death Introduction Your client must understand the following potential impacts of bankruptcy before making an informed decision whether to go bankrupt: Debts - will they go away? Assets (past, present and future) - will the trustee in bankruptcy ('the Trustee') take them? Can the Trustee undo past transactions and get at assets now owned by others? What about assets your client may acquire in the future? Income - will the client have to pay a portion of their income towards their debts ('income contributions') and if so, approximately how much? What other limitations might there be on the client's life as a result of the bankruptcy? These are all covered in this Chapter. Note: The same consequences apply when the client has been made bankrupt on a Creditor's Petition, although in that case there is no decision for the client to make. You can refer to this Chapter to advise your client about what to expect during bankruptcy. You should also refer to the bankrupt's obligations in Chapter 8. If your client has very recently been made bankrupt and does not think this should have happened, refer to Chapter 10 - A sequestration order has been made against my client - Is there anything he or she can do? Advise your client to seek urgent legal advice. Part 6: Small business and bankruptcy Summary Small business bankruptcies present particular challenges for financial counsellors. Financial counsellors assisting small business clients need to have a working knowledge of the various business models available - sole trader, partnership and company - and the implications of bankruptcy associated with each. Companies insolvent trading prohibition on being a Director or otherwise managing a company has the company been wound up? is the Director personally liable for the debts or not? Partnerships dissolution of the Partnership impact on other partners AFSA's obligations to refer certain Debtor's Petitions by partners to the Court. Sole traders can the person continue in their trade/profession while bankrupt? does the Trustee have an interest in the business or its assets? will the bankrupt be able to get necessary business insurance? requirement to trade under own name (or disclose bankruptcy status to all customers, suppliers etc) if continuing in business, All preferential payments requirements to disclose bankrupt status in certain circumstances tax implications Family trusts and tax debts also come up in this area frequently. Financial counsellors provide a very useful service to many small business clients, particularly when the business is closed and the only outstanding issue is the residual debts. Financial counsellors should nevertheless treat this area with caution and be careful not to take on cases (or issues within cases) that are outside their area of expertise. Understanding the context Financial Counsellors are often asked to assist with bankruptcies for clients who have been running small (and sometimes not so small) businesses. These clients are often experiencing very high levels of stress and relationship strain as the debt burden spills over into other facets of their lives. When a small business fails it is often the end of a dream. It can be very difficult for clients to let go of the optimism that they had when starting the business. The client may also be facing the loss of their personal assets including the family home and/or the home of a relative (such as their parents). In many cases the family home has been used as security. Even the family car may be leased by the business. Where appropriate, ensuring that no conflicts of interest exist or are managed appropriately, the financial counsellor could offer the opportunity for the spouse/partner to be present at an interview to ensure the family unit understands the implications and consequences of bankruptcy. These clients can be broken down into a number of sub-groups according to the way they operated their business: sole traders those who have been involved in partnerships those who have a corporate structure and may be a director (or the director) of a company Financial counsellor will need to be aware of the different business structures, the issue of insolvent trading, director penalties, and when it is possible for a small business to continue to function within bankruptcy. Often the client will not appreciate the difference and reviewing documents as well as listening to instructions may be required to understanding the structure. As a financial counsellor you will need to ask a number of questions to make sure you understand the nature of the business structure (for example - does the client file an Annual Return with ASIC? Does he or she have copies of a Certificate of Registration for GST? Do they lodge a Business Activity Statement? Also, ask to look at their financial statements such as Balance Sheets, Profit & Loss statements and tax returns/notices of assessment, which will provide an insight into the nature of the business structure.) The categories above can then be further broken down into those who are closing down a failing business; those who are trying to keep a business afloat while personally going bankrupt; and those who are really just self-employed, sub-contractors who want to continue earning a living in this way while bankrupt. Family trusts also come up more frequently among this group of clients. Again, many will have little understanding of a family trust, which will have been formed on the advice of their accountant. Financial counsellors assisting these clients need to: set clear boundaries with what you can and cannot assist with refer to lawyers/accountants with specialist expertise give clients tailored warnings about particular issues get specific advice from AFSA that you carefully file note In other cases, you may have to decline to assist a client at all. giving assistance in areas about which you have no real expertise can be worse than no assistance at all. It will also expose you and your service to complaints and potential negligence claims. Family trusts Trust issues need expert legal advice. Trusts are a minefield. Financial counsellors should recommend that the client seeks legal advice on any trust issues before they assist the client to go bankrupt. The financial counsellor should not purport to advise the client about whether trust assets will be protected from the Trustee. The fact that the client has obtained legal advice in relation to any trust should be recorded in the financial counsellor's case notes. Sole traders If someone is a sole trader, they may be responsible for finding work or customers, marketing/advertising, employing people, dealing with suppliers and so on. They may have assets that are associated with or used by the business, and/or significant loans. Examples could include anything from the local corner shop to an interior decorating business. Other sole traders are really closer to employees but are paid casually and retain responsibility for their own insurance and tax. They have no business assets, no employees and no business debts. The implications of bankruptcy are different depending on where on this spectrum clients are located. Can a sole trader continue in business after bankruptcy? This will depend on the nature of the business: If the nature of the business is that of a 'merchant' (that is, buying and selling goods), for practical reasons, the business cannot continue as all the assets of the business (stock, plant & machinery etc) will become assets that the Trustee can take and sell. Furthermore, as soon as new stock and plant & machinery are acquired after the date of bankruptcy, those assets will be available to the Trustee as 'after-acquired assets'. The same could be said of any business which owns significant plant and equipment or other assets. In some cases, the Trustee may allow the bankrupt to continue trading for a short period to enable the business to be sold as a going concern to obtain a return for creditors. This will only occur where the Trustee considers that the business has some value (goodwill) or there is to be a sale of the business assets 'on site' by the Trustee's agent. If the bankrupt is a 'service provider', such as a self-employed tradesperson or consultant with no business-related assets, they may be able to continue trading subject to compliance with a number of obligations under the Bankruptcy Act (and subject to any occupational restrictions imposed by the appropriate licensing authority or professional association). Specifically, the client would have to take care not to breach s 269 which requires that the bankrupt person disclose their bankrupt status to the other relevant party (for example, creditor or supplier) in any of the following circumstances where the amount involved exceeds the applicable threshold, $7,173 as at October 2025 (for current indexed amounts check the AFSA website): when obtaining credit when obtaining goods or services from a person: by giving a bill of exchange or cheque drawn, or a promissory note by giving 2 or more of the above which add up to more than the threshold when entering into a hire-purchase agreement or a contract or agreement for the leasing or hiring of any goods when obtaining goods or services on credit when promising to supply goods or render services. It is also an offence to carry on a business under an assumed name, in the name of another person, or under a business name (in all cases whether in partnership or not) without disclosing to every person with whom he or she or the business deals his or her true name and the fact that he or she is an undischarged bankrupt. If the person is in business in his or her own name (the same name as appears on the bankruptcy documentation), then compliance with the dot points above only is required. It is recommended that a bankrupt trades in his or her own name for this reason. Note: If the client is in a trade, licensed occupation or profession, there may be limitations placed on their ability to continue in this work while bankrupt imposed by other regulators or professional bodies (see Chapter 6 Part 5). From a practical perspective, the reason for the bankruptcy is crucial to whether the person can realistically continue in business. If the bankruptcy has been caused by a one-off event not associated with the business, such as a family breakdown, an uninsured car accident, or legal costs from an unsuccessful court case, continuing the business may be feasible if the Trustee approves, or has no interest, and the client can overcome the considerable practical hurdles above. On the other hand, if the reason for the bankruptcy is that the business itself has been a losing concern, the client cannot realistically expect to continue. If the client has an existing ABN when he or she becomes bankrupt, the Trustee will advise the Deputy Commissioner of Taxation of the bankruptcy. The Tax Office will note the date of the bankruptcy against the ABN. The client will need to contact the Tax Office and arrange to have the ABN reactivated if they want to continue using it or obtain another ABN. There is no restriction on applying for an ABN after becoming a bankrupt. If the client is registered for GST and wishes to continue in their trade or profession during bankruptcy, he or she should advise the ATO so that their pre-bankruptcy GST liability (if any) can be separately identified. Any pre-bankruptcy GST will be provable in the bankruptcy, including ATO imposed penalties for late payment. However, if the ATO opted to prosecute, any Court imposed fines would not be provable. Regardless of bankruptcy, the client will still be responsible for lodging Business Activity Statements if they have an active ABN and are registered for GST. Whether the client continues to be self-employed or not, he or she will be subject to the income contribution regime (see Chapter 6 Part 4). When the business is being closed down This is the most common scenario faced by small business people approaching financial counsellors. The client is usually very stressed and has been scrambling to try and stay in business for some time. Paperwork is often the last thing on their mind; the accounts are often incomplete; and tax is in arrears. There may also be lease payments that are in arrears. The loss of monies invested in the business by other local businesses, family members and friends is a huge issue for these clients. These clients will need access to a range of support services to manage the level of stress and isolation this can bring. Preferential payments This is a perennial problem when businesses are in trouble. Quite often the business will pay the most pressing creditors and/or debts for essential services to try and stay afloat. If they subsequently go bankrupt those creditors who have been recently paid may find the Trustee wanting to claw back those payments (see Chapter 6 Part 1). When faced with a small business operator who is facing the very real prospect of bankruptcy it is the duty of the financial counsellor to make this issue very clear. This is often very stressful for the client as they often want to pay out a creditor with whom they have a positive relationship, including a family member or friend. The client should also understand that they can pay back the friend or family member from their income during bankruptcy or after discharge (there may of course be practical problems like insufficient money, keeping in mind the possibility of income contributions being required). Undervalue transactions & transactions to defeat creditors When a business is trying to stay afloat the client will often dispose of business assets to keep up the cash flow or to protect them from seizure by the Sheriff 's officers. Where the goods are disposed of for market value this is unlikely to be a major issue within bankruptcy. But where the goods are sold for a nominal amount, or simply signed over for no consideration, then the Trustee will investigate and may take recovery action against the person who received the assets (see Chapter 6 Part 3). Often the client will have sought legal advice on disposing of goods to avoid civil debt recovery action without seeking advice on the consequences of such action if they go bankrupt. The time that this transaction took place is also very important; the closer it is to the bankruptcy the greater the issue (refer to the section How far back can the Trustee look to claw back property for the bankrupt's estate? in Chapter 6 Part 3) Business records These should be brought up to date where possible to simplify the bankruptcy and give the client a greater sense of closure. This is not always possible, especially where the accountant or solicitor is a potential creditor in the bankruptcy. Where no business records are available the client should seek advice from AFSA about what the Trustee will require. Failure to keep proper books of account in the five years prior to the bankruptcy or failing to preserve such records is also an offence under s 270, potentially punishable by imprisonment. There is a defence, however, that the failure to keep or preserve the books was 'honest and excusable'. The potential sentence increases where the bankrupt has previously been bankrupt or entered another form of insolvency arrangement such as a Personal Insolvency Agreement or Deed of Arrangement. The likelihood of prosecution for such an offence is remote, and usually only occurs in conjunction with other alleged offences. Tax debts Most small businesses that fail have outstanding tax returns and/or tax debts. While it is not a requirement of bankruptcy that the outstanding tax returns be lodged before going bankrupt, it will make the bankruptcy less stressful for the client. Plus, it will avoid action being taken against the client by the ATO in respect of the non-lodgement of those tax returns. Where the business is closing partway through the financial year it may be beneficial to lodge two returns, one up to the day before bankruptcy and a second for the period from the date of the bankruptcy to the end of the financial year. Any debt arising from the first return will be provable in the bankruptcy (and any tax refund will vest in the Trustee). Any debt arising from the second return will not be provable and any refund will be counted as income for contribution purposes (or kept by the ATO and set off against any amount owing to the Commonwealth such as Child Support, Centrelink, etc). Commercial Leases The client must be careful to include details of any lease of premises and/or vehicles and plant & equipment in the statement of affairs. The Trustee will normally disclaim a lease of premises as the Trustee becomes personally liable for the liability under the lease. If the client has been permitted to continue trading by the Trustee, they will need to negotiate with the landlord as to their continued occupation of the premises. The lessor may have locked the client out and taken possession of business equipment. This will largely be a matter to be sorted between the Trustee and the lessor but if the client believes there are protected tools of trade on the premises they should inform the Trustee. The Trustee does not disclaim leases on vehicles and plant & equipment. It will be a matter for the client to negotiate with the finance company concerning their continued possession and use of the leased asset if required. If the lease is up to date, then there should be no issue. Section 301 of the Bankruptcy Act provides that any provision in a lease, contract or hire-purchase agreement which purports to change the agreement, terminate the agreement or allow repossession in the event of bankruptcy is void. However, the client should be advised to contact the finance company, preferably before it receives notification of the bankruptcy from AFSA, to avoid any chance of an employee in the finance company who is unaware of the effect of Section 301 starting repossession action. See Chapter 8 for more information in the event that repossession action is threatened. Partnerships The issue of partnerships and bankruptcy has two major facets for financial counsellors: is your client the partner who is going bankrupt? is your client's partner going bankrupt? Note: All of the above information in relation to preferential payments, undervalue transactions, tax debts and business records may also apply in the case of partnerships. Your client is going bankrupt When a partner becomes bankrupt the partnership is dissolved unless there is specific provision in the partnership agreement stating that bankruptcy does not dissolve the partnership (these clauses are rare). The bankrupt's interest in the partnership is an asset of their bankrupt estate (and therefore vests in the Trustee). It is also possible for members of a partnership to present a joint Debtor's Petition against the partnership. This can be done by all members of the partnership or a majority of members resident in Australia. A Debtor's Petition filed by some, but not all, members of a partnership must be referred to the court by AFSA (s 56C(1)(a)). A Debtor's Petition presented against a partnership must also be referred to the Court if there is a Creditor's Petition pending against one or more but not all of the partners (s 56C(1)(b)). If all of the partners file a Debtor's Petition and there is a Creditor's Petition against all of them, then there is no need to for AFSA to refer the matter to the Court. Similarly, if all the partners file a Debtor's Petition and there are no Creditor's Petitions against any of them, then there is no need for AFSA to refer the matter to the court. The situation of one partner entering bankruptcy is very similar to that of a jointly owned home where one of the joint owners becomes bankrupt - the Trustee will invite the non-bankrupt partner to either make an offer to purchase the bankrupt's interest in the partnership or wind up the partnership (that is sell the partnership assets, pay the partnership debts and make a return of capital to the partners representing their share). The partnership agreement is an important document as it will detail the proportions in which the partners hold an interest in the partnership (that is their respective shares) and should detail how the surplus in a winding up is to be distributed. If the non-bankrupt partner declines to take either option above, and it is commercially viable to do so, the Trustee will have the court appoint a receiver to wind up the partnership and make a distribution of capital. Sometimes problems arise determining the ownership of personal assets (such as motor vehicles, tools, etc) used in the partnership business, which need to be resolved by the Trustee in conjunction with non-bankrupt partner. The bankruptcy of the partner may cause huge interpersonal issues with the other partners especially if they are personal friends or relatives. The financial counsellor can do little more than warn the client about this. The client may have little choice in any event depending on their personal circumstances. Your client's business partner is going bankrupt When your client's business partner becomes bankrupt the partnership is dissolved (unless the agreement provides otherwise). This will happen even if the ex-business partner's debts have nothing to do with the partnership. This will mean that your client will be dealing with a Trustee of the bankrupt estate of the bankrupt partner in relation to the ex-partner's interest in the business. This could result in the Trustee looking to realise the ex-business partner's interest in your client’s business to satisfy the ex-business partner's liabilities. Where a business partner is considering bankruptcy, the solvent partners may wish to consider satisfying the personal debts of the partner facing bankruptcy to protect the partnership. Where your client is facing the scenario of a business partner going bankrupt, they should be referred to independent legal advice. This is NOT an area where financial counsellors can play a significant role, except in picking up the pieces in the usual way if the dissolution of the partnership leaves the client with insufficient income to meet his or her own personal debts. Directors and companies When a client approaches a financial counsellor about their business issues there are a number of key issues that the client will need to consider if they are a director of a company. a. Where client's business is being operated by the company and its failure is the cause of the bankruptcy Insolvent trading Generally, a company is insolvent if it is unable to pay all its debts when they fall due. A director has a positive duty to prevent insolvent trading under s588G of the Corporations Act 2001 (The Corporations Act). Safe harbour provisions contained in ss 588GA and 588GAAB of the Corporations Act came into effect on 19 September 2017. There are two main issues with insolvent trading: The director commits a breach of the Corporations Act if they allow the company to continue to trade whilst insolvent. Accordingly, the financial counsellor needs to make the client aware of the insolvent trading offence and file note that he or she has done so. It is likely that the client may already have breached these provisions. Section 588G of the Corporations Act sets out two levels of contravention: firstly, a civil penalty provision (fine) applies to a director who fails to prevent a debt being incurred where he or she is aware that there are grounds for suspecting insolvency, or where a reasonable person in a similar position would suspect insolvency; and secondly, there is a criminal offence committed where: a director suspected at the time a company incurred a debt that the company was insolvent or would become insolvent as a result of incurring that debt; and the director's failure to prevent the company incurring the debt was dishonest. The director can become personally liable for all the debts of the company if they allow it to trade whilst insolvent. The liquidator of the company will normally lodge a proof of debt on behalf of all the company creditors with the Trustee of the bankrupt estate of the director. For more information on insolvent trading, you can refer the client to ASIC Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors. (Note as at January 2024 the Guide was being reviewed, and so ensure to review the latest Guide). If your client has ongoing questions and concerns, you will need to refer them for legal advice as it is a difficult and not well understood area in relation to the safeguards. Directors guarantees Despite the belief that a company structure will protect directors from the company debts, creditors will often require a personal guarantee from the director(s), particularly if the business has no significant assets of its own. The personal guarantee will normally contain a clause that the director grants a charge over their interest in all their current and future real property (that is the creditor of the company is given a charge over the director's home, investment property, holiday home etc) as security for the company's debt which the courts will enforce in the event that the company does not pay the debt. If the client has signed a director's guarantee, he or she will be personally responsible for the debts (or jointly and severally liable with others). These guarantees are what often turn a business debt issue into a personal debt issue. Bankruptcy will only be useful in circumstances where the debts outstrip the assets taken as security. Note: Directors are personally liable for any company liability in relation to un-remitted tax deductions from the wages of company employees and as from July 2012 directors also became personally liable for any company liability in relation to un-remitted superannuation contributions in respect of company employees. These debts are provable in bankruptcy. Winding up the company Where a company is in financial difficulty, the Director or Directors should seek independent legal and accounting advice. If there is no way out of the predicament, the company will have to appoint a voluntary administrator or liquidator. This is NOT the role of the financial counsellor. For more information see ASIC website. If the client has no personal debts and has not signed a Director's Guarantee they may not need to go bankrupt subject to insolvent trading and tax and superannuation liability considerations as detailed above. Where there are significant personal debts as a result of the failure of the business, including as a result of guarantees, then bankruptcy may be appropriate. If possible, the company should be wound up first so that all the debts can be crystallised. However, if clients are facing urgent enforcement action in relation to personal liabilities this may not be possible. Providing the company has stopped trading and incurring liabilities this should not present a problem because the debts will be existing or contingent liabilities at the date of the bankruptcy. In some cases, the client will not have the funds to engage an insolvency practitioner to wind up their company. The client should be advised to contact ASIC to ascertain their options. Generally, if the company does not lodge the requisite returns, ASIC will de-register the company after a certain period of time. Whilst there are penalties for directors not lodging the requisite returns, it is unlikely that ASIC will take prosecution action against a bankrupt director. b. Where the client happens to be a Director of another business or organisation unrelated to the debts A person may be a Director of a solvent company operating a family business but be going bankrupt because of personal debts. Alternatively, he or she may be a Director on the Board of another organisation, in addition to his or her usual occupation. In either case, the person is disqualified from being a Director from the date of the bankruptcy under the provisions of the Corporations Act. For more details on this and what has to be done by the bankrupt and the company on which they used to be a Director see Chapter 6 Part 5. In the case of the family business, then the client must particularly note that it is not enough to appoint an alternative director - they must remove themselves from all aspects of management of the business and influence (or perceived influence) over the continuing directors. De-registration If the client is going bankrupt because of personal debts but can no longer be the sole director of his or her own company (because of automatic disqualification) the company may be eligible to be simply deregistered: all members of the company must agree to the deregistration; and the company must not be carrying on business; and the company's assets must be worth less than $1000; and the company must have paid all fees and penalties payable under the Corporations Law; and the company must have no outstanding liabilities; and the company must not be a party to any legal proceedings. The client needs to lodge Form 6010 Voluntary deregistration of a company with ASIC. What if your client wants to start a new business while still bankrupt? Where a client is seeking to continue in business or start up a new business while bankrupt, they should seek independent legal and business advice. They should also discuss their plans with AFSA, the Trustee and the ATO to prevent potential offences being committed. A company structure will not be available until the client has been discharged from bankruptcy. Alternatives to bankruptcy In certain circumstances it may be possible to avoid bankruptcy and keep the sole trader business operating by entering in a Personal Insolvency Agreement (PIA) under Part X of the Bankruptcy Act. A proposal could be put to creditors that the client retain their business assets (and their home if there is little equity in it) and in return the business will pay a fixed amount each month to the Trustee of the PIA (and possibly a % percentage of the net profit each year) for a period of say 3 - 5 years. They may also be able to offer other personal assets such a block of land or investment property. See Chapters 5 and 12 for more information about PIAs. Likewise, if the client's assets, liabilities and income do not exceed the Debt Agreement limits under Part IX of the Bankruptcy Act, they may be able to have the creditors accept a Debt Agreement. The costs of administering a Debt Agreement are usually lower than those of a PIA due to fewer statutory obligations on Debt Agreement Administrators compared with Registered Trustees. For more information about Debt Agreements see Chapters 5 and 11. Note: One advantage with a Debt Agreement is that the client is not disqualified from being or becoming a director of a company by entering into a Debt Agreement.

Updated: 1 May 2024 Content Part 1: Debts - will I still have to pay my debts? Part 2: Protected property - What can I keep? Part 3: Divisible Assets - What will the trustee take and sell? Part 4: Income contributions - What happens to money I earn while bankrupt? Part 5: Other consequences of bankruptcy - How else will it affect my life? Part 6: Small business and bankruptcy Part 7: Family law and bankruptcy Part 8: Gambling and hazardous speculation Part 9: Death and bankruptcy Summary There are many different consequences of bankruptcy. Some of the concepts are quite complicated. It is important to have a broad understanding of the principles and to be familiar with problems that might arise so that you know what questions to ask the client and when to seek more advice on their behalf. This section is broken up into segments. Parts 1 - 5 covers: What happens to debts? What property is protected? What property will be taken by the Trustee? Whether the client has to pay income contributions and how much. What other consequences there might be. Financial counsellors should be aware of the content of all these parts at least in broad terms as they are relevant to all clients. Parts 6 - 9 need only be referred to if they are relevant to your client's individual circumstances. They cover in order: Small Business Family Law Gambling and hazardous speculation Death Introduction Your client must understand the following potential impacts of bankruptcy before making an informed decision whether to go bankrupt: Debts - will they go away? Assets (past, present and future) - will the trustee in bankruptcy ('the Trustee') take them? Can the Trustee undo past transactions and get at assets now owned by others? What about assets your client may acquire in the future? Income - will the client have to pay a portion of their income towards their debts ('income contributions') and if so, approximately how much? What other limitations might there be on the client's life as a result of the bankruptcy? These are all covered in this Chapter. Note: The same consequences apply when the client has been made bankrupt on a Creditor's Petition, although in that case there is no decision for the client to make. You can refer to this Chapter to advise your client about what to expect during bankruptcy. You should also refer to the bankrupt's obligations in Chapter 8. If your client has very recently been made bankrupt and does not think this should have happened, refer to Chapter 10 - A sequestration order has been made against my client - Is there anything he or she can do? Advise your client to seek urgent legal advice. Part 7: Family law and bankruptcy Summary The Federal Court of Australia, Federal Circuit and Family Court of Australia (Division 1) (formerly the Family Court of Australia where the provisions of ss 35 or 35A of the Bankruptcy Act operate) and Federal Circuit and Family Court of Australia (Division 2) (formerly being the Federal Circuit Court of Australia) have the power to alter the property interests between the parties to a marriage or de facto relationship at the end of a relationship. In doing so they have regard to the contributions of the parties to the relationship, financial and otherwise before, during and after the relationship and their future needs (including their age, health, earning capacity and the need to maintain children of the relationship). Financial contribution considerations include the assets and debts each party had at the start of the relationship, any inheritances, payouts and windfalls they received during the relationship, along with their earnings. The Court can also order spousal maintenance be paid by one party of the relationship to the other by way of periodic payments, lump sum payment or transfer of property. This is separate to any child support or child maintenance obligations. If one of the parties to a relationship is bankrupt, or becomes bankrupt during the Court proceedings, the Trustee can apply to be joined to the proceedings (usually instead of the bankrupt party). Any property that would have been allocated to the bankrupt party by the Court passes to the bankrupt estate instead. Any property that is allocated to the non-bankrupt party is no longer available to the bankrupt estate (even if it would otherwise have vested in the Trustee). It does not matter whether the bankruptcy or the family law application occurred first. If the parties to a relationship enter into a Binding Financial Agreement under the Family Law Act, the Trustee may challenge the agreement under the Bankruptcy Act as an undervalue transaction or transfer to defeat creditors where appropriate. The Trustee can also apply to set aside the agreement under the Family Law Act in some circumstances. If the Trustee challenges a Binding Financial Agreement in the bankruptcy jurisdiction, the other party to the agreement may seek family law orders instead. This way, even if the agreement is set aside, the usual property settlement arguments can be made about the division of ownership of the property. In very limited circumstances the Trustee can apply to have Court orders set aside. Where there are no Court proceedings on foot the Trustee must either accept the legal interests of the parties (as noted on the title of any property, for example) or rely on equitable common law principles to assert a different ownership arrangement. The Trustee will only do this where there is compelling evidence and a significant sum involved. Background Clients need to get specific family law advice where applicable. The information in this toolkit is very general. Important Note: Western Australia was the only Australian State to establish its own Family Law Courts and did not refer its powers to the Commonwealth for parenting proceedings and de facto property. The Western Australian Family Courts jurisdiction is with the Federal Court and Federal Circuit and Family Court of Australia to deal with matrimonial property, child support and divorce orders. Western Australia has not referred its powers relating to de facto relationships to the Commonwealth as had occurred in other States. The law of Western Australia is therefore different in some respects to that described below. If you are in Western Australia and your client is not married, he or she will need local family law advice. The following section applies primarily to separating or separated couples. The general purpose of the financial provisions of the Family Law Act 1975 (FLA) is to finalise matters between the parties and prevent further proceedings as far as is practicable (s 81, FLA). The Federal Circuit and Family Court of Australia (Division 1 and 2) can make under both maintenance and/or property settlement applications now include transferring vested bankruptcy property back to a non-bankrupt ex-spouse or de facto spouse. However, to balance this, the Trustee also has standing under the FLA, and can apply to be heard or joined in relevant proceedings in certain circumstances and to have orders of the Court or Binding Financial Agreements set aside. This is covered in more detail below. Powers of the Federal Circuit and Family Court to divide up property and debts Summary The court has the power to alter the legal property interests of separating couples, and/or order payment of spousal maintenance of one member of the couple by the other (by way of regular payments, a one-off lump sum or a transfer of property) The court will take into account the: financial contributions by the parties, including before, during and after the relationship non-financial contributions by the parties including contributions as a homemaker or carer future needs of the parties.   The FLA provides for the division of property (and debts) at the conclusion of a relationship. It also provides for orders to be made for the maintenance of one spouse by another in certain circumstances. Applications in relation to marriages are dealt with under Part VIII of the FLA and de facto relationships are dealt with in Part VIIIAB. A de facto relationship is defined as persons who are not legally married to each other, not related by family and having a relationship as a couple living together on a genuine domestic basis (s 4AA, FLA). A de facto relationship can exist between two people of the same or opposite gender and can also exist despite the fact that one or both members of the couple is/are still married to another person. In determining whether there is a de facto relationship, the court will consider all the circumstances of the case including, for example, the length of the relationship; whether they share a residence; whether there is a sexual relationship; their financial arrangements; their ownership, use and purchase of property; their degree of mutual commitment to a shared life, their care and support of children; and their public image (are they known as 'a couple'). There is no particular timeframe required to establish the existence of a de facto relationship, but there are time frames for applying to the Court for a property settlement. To access the financial provisions of the FLA, such as applying for maintenance orders or a property settlement: there must have been a relationship of at least two years' duration; or there must be a child of the relationship (as opposed to a child of another relationship that the couple have cared for); or the court must be satisfied that the party seeking the order has made substantial relevant contributions and the failure to make the order would result in serious injustice; or the relationship is registered under a prescribed law of a State or Territory (s 90SB). A maintenance order can take the form of regular payments or a lump sum payment and/or the transfer of property (ss 72, 74 & 75 for marriages and ss 90SE & 90SF for de facto relationships, FLA). When assessing spousal maintenance applications the Court will consider: whether the applicant is unable to support himself or herself adequately; and whether the respondent has the ability to pay the spousal maintenance for the applicant. The applicant has to establish their inability to maintain themselves adequately arises from one of the following: caring for a child under 18; or as a result of age or physical or mental incapacity for gainful employment; or another adequate reason. A spousal maintenance order can consist (wholly or partly) of a one-off transfer of vested bankruptcy property (that is property that has already vested in the Trustee as a result of one partner to a relationship being bankrupt) or an ongoing payment. There is a list of matters the court needs to consider before making a spousal maintenance order including, for example (this is not an exhaustive list): the age and state of health of the parties their income, property, financial resources, physical and mental capacity for earning an income whether a party has the care or control of a child of the relationship who is under 18 their commitments to support any other person their eligibility for pensions, benefits, etc their eligibility to access their superannuation entitlements the effect of any proposed order on the ability of a creditor to recover a debt the duration of the relationship and the extent to which it has affected the earning capacity of either party what is a reasonable standard of living in the circumstances any financial agreement that is binding on the parties any order that may be made for the division of property any assessment likely to be made under the Child Support (Assessment) Act 1989 any other fact or circumstance the court considers relevant to doing justice. A property settlement which divides up the assets and debts of a relationship can be applied for in either marriages or de facto relationships meeting the criteria above (s 79, FLA for marriages and s 90SM, FLA for de facto relationships). In dividing up property the court takes the following four step approach: It determines what makes up the pool of assets available for distribution. This is done by identifying and valuing the assets and liabilities of the relationship; It looks at both the financial and non-financial contributions made by the parties. This includes wages earned, payouts, windfalls, inheritances and gifts received, plus direct contributions to the acquisition, conservation or improvement of the property of the relationship. Non-financial contributions include to the welfare of the family, including such things as maintaining property with physical labour, carrying out housework and caring for children). The court will consider contributions made before the relationship, ie the assets and liabilities each party had when the relationship commenced, contributions during the relationship and contributions made following separation; The future needs of the parties, set out in s 75(2) FLA for marriages and s 90SF(3) FLA for de facto relationships; It considers what orders would be just and equitable to make, taking into account the above assessment. Usually, a creditor is able to become a party to the property settlement proceedings if an order is sought that would mean that the creditor would not be able to recover his or her debt (s 79(10), FLA) - that is, where the liability of the particular spouse to the creditor would be 'extinguished' if the orders were made. However, where the debtor is a bankrupt (or in a Personal Insolvency Agreement (PIA)) this no longer applies to creditors with provable debts and instead it is the Trustee who has the right to appear (s 79(10A), FLA). The court has to take into account the impact of any orders on the ability of a creditor to recover a debt but does not have to give that consideration greater priority than any other. In dividing up the assets and liabilities the court has the power to bind third party creditors. In most cases the pool of assets is considered after deducting any debts, meaning that the FLA orders should not generally interfere with the ability of creditors to collect their debts (although they may be restricted from pursuing both spouses/partners for some joint debts). However, where one party is insolvent and the other party has a reasonable claim to a significant portion of a substantial asset (usually the family home) the competing rights of creditors and the solvent spouse will often need to be weighed by the Court. Generally, if there are children of the union, their financial needs will rank above the needs of the creditor(s). In the case of marriages, a property settlement or maintenance order can be applied for at any time after separation and up to 12 months after a divorce. With de facto relationships an application must be made within 2 years after the end of the relationship. The court can also give leave for an application to be brought after the expiry of these periods in cases of hardship. This may be crucial in cases where the parties have not sought a property settlement within the relevant time period (possibly because there was no dispute or they were not in contact with one another) and one party goes bankrupt. A party must seek leave of the Court to apply outside these time periods. In determining if leave is to be granted to permit a party to commence property proceedings out of time, the court must be satisfied that hardship would be caused to a party or child of the relationship, if leave was not granted.   Summary - 3rd party creditors and family law The court must take into account the interests of creditors, but this must be weighed against other competing considerations (such as the needs of children) The court can alter the obligations of the parties to the relationship to 3rd party creditors - this would usually mean severing a joint loan obligation in certain circumstances Occasionally the court will allocate property to one party and liability for a debt to another (knowing the creditor will be unlikely to be paid as a result)   What if one of the parties is, or becomes bankrupt during the family law proceedings? Summary The Trustee can: Appear in family law proceedings in the shoes of the creditors Apply to set aside past orders (including consent orders) and Binding Financial Agreements The court can also allocate vested bankruptcy property to the non-bankrupt partner in a relationship (even though the bankruptcy occurred first). The Federal Circuit and Family Court of Australia (Division 1) has jurisdiction under the Bankruptcy Act where necessary because of the bankrupt status of one of the parties to the relationship. All family law matters begin in Division 2, after filing the application a Registrar will consider the issues in dispute and then determine if the application should proceed to Division 1 or 2. If a party to family law proceedings is a bankrupt, or becomes a bankrupt while the proceedings are being dealt with, then the Trustee must be notified of any of the following applications (ss 79G and 90SP, FLA): Maintenance (ss 74 or 90SE, FLA) Declaration of property interests (ss 78 or 90SL FLA) Alteration of property interests - property settlement - (ss 79 or 90SM, FLA) Setting aside orders altering property interests (ss 79A or 90SN, FLA) The same applies if a party enters a PIA under the Bankruptcy Act. The Trustee can be joined (upon application) if the court is satisfied that the interests of the bankrupt's creditors may be affected. Once the Trustee is permitted to join the proceedings, then the bankrupt can only appear with the leave of the court in exceptional circumstances. Because the interests of the creditors are only one of a long list of factors that the court needs to take into account, the Trustee will usually be arguing the case of the bankrupt person under the Family Law provisions more generally - that is, that it will be up to the Trustee to establish the bankrupt's entitlements in the light of his or her contributions, needs, etc as much as to make the case for payment of the creditors. Example: Witt v Witt and Another - (2007) 38 Fam LR 431 In the case of Mr and Mrs Witt the wife applied for a property settlement after the husband went bankrupt (in 2006). The Trustee was notified and appeared in the proceedings. The Trustee sought the sale of the matrimonial home and an equal split of the proceeds between the Trustee and Mrs Witt. The house had been owned by Mr and Mrs Witt as joint tenants, but the joint tenancy was severed by the bankruptcy with a 50% interest vesting in the Trustee. In addition to the home, there were a number of debts, and superannuation in each of the spouse's names. There were also seven children of the marriage (although four had left home by the time of the proceedings) who were largely cared for by Mrs Witt, in addition to some paid work being done by Mrs Witt. The Federal Magistrate made the decision to allow Mrs Witt and the children to remain in the home, in return for retaining responsibility for some associated debts and that Mr Witt's superannuation be split 95/5 in Mrs Witt's favour. This deprived the trustee of almost $50,000 in remuneration and legal fees (including legal fees of the Petitioning Creditor). As part of the Federal Magistrate's reasoning, he noted that Mr Witt had done nothing about paying the judgment debt. Further, he had received the Bankruptcy Notice after separation and had not either paid, come to any arrangement or appeared in any of the proceedings. Mrs Witt had no knowledge of the Bankruptcy Notice, or the subsequent Creditor's Petition until she was contacted by the Trustee after these events had taken place. He considered that it was unfair in the circumstances to deprive the wife and children of their home, especially as the original creditor (the lender in relation to a car loan) would be unlikely to be paid from the sale proceeds in any event as a result of the Trustee's fees being deducted first. He was also influenced by the fact that the wife, a co-debtor under the original car loan but not a judgment debtor, had offered to seek early access to some of her superannuation to pay the original creditor. Also, Mrs Witt had already used a large portion of a personal injury compensation payment she had received to maintain mortgage payments and for the payment of household debts.   Example: Official Trustee in Bankruptcy v Brown and Anor [2011] FMCA 88 (20 May 2011). Ms Brown and Mr Daevys were married for over 10 years. Prior to their marriage they had lived together for almost 1 year. In that period, Ms Brown, had purchased a house with funds of her own and obtained a mortgage in her own name. The couple lived in the house while they were married and both made payments at various times towards the mortgage. Mr Daevys made some improvements to the property and appeared on a development application as an 'owner' with Ms Brown. Mr Deavys went bankrupt in 2004. He was discharged in 2007. While bankrupt he received an inheritance that was not disclosed to the Trustee. He separated from Ms Brown in 2007 and they were divorced in 2009. In 2009 he applied for a property settlement in the family court seeking half the property in Ms Brown's name (believing that as a discharged bankrupt he could now own property). The Trustee of his bankrupt estate intervened and argued that 50% of the property had already vested in the trustee in 2004. As the bankruptcy occurred prior to the Family Law Act amendments in 2005, the Trustee argued that the property was not available for division in the property settlement. The Trustee based his claim on the Cummins case (See Resulting Trusts in Chapter 6 Part 3), arguing that as a married couple who purchased a home intended as a matrimonial home, and in the absence of any evidence as to intention, Ms Brown held 50% of the property in trust for Mr Daevys. The court agreed that the Trustee was entitled to a share under the law of bankruptcy and that a property settlement was not available (because vested bankruptcy property was not available for division under the FLA in 2004). However, the Federal Magistrate distinguished the case from Cummins on the basis that the property was purchased by Ms Brown prior to the marriage and in her own name. The Federal Magistrate preferred to view the case as a 'thwarted joint venture' (see Constructive Trusts in Chapter 6 Part 3) than a 'traditional matrimonial relationship' and divided up the house between Ms Brown and the Trustee on the basis of the differing contributions of the parties (in this case 67% to Ms Brown & 33% to the Trustee). The Federal Magistrate also noted that there was no evidence that Ms Brown had any intention to thwart Mr Daevys' creditors when she placed the house she purchased in her own name back in the nineties. What if the bankruptcy occurs after the Family Court orders have already been made? Once the court has ordered that property be transferred to, or retained by, a party who is not bankrupt, it is no longer divisible amongst the creditors (ss 116(q) & (r) of the Bankruptcy Act) unless the orders are appealed (by the original parties) or set aside. Final property orders can be set aside, varied or substituted orders made (s 79A, 90SN FLA) on the application of a person affected by an order made by the Court or by consent of the parties where: There has been a miscarriage of justice by reason of fraud, duress, suppression of evidence (including failure to disclose relevant information), the giving of false evidence or any other circumstance; or In the circumstances that have arisen since the order was made it is impracticable for the order to be carried out or impracticable for a part of the order to be carried out; or A person has defaulted in carrying out an obligation imposed on the person by the order leading to circumstances where it would be just and equitable to set aside or vary the orders; or Circumstances that have arisen since the making of the order of an exceptional nature relating to the care, welfare and development of a relevant child where the applicant has caring responsibility for the child and will suffer hardship if the court does not vary or set aside the order; or A relevant proceeds of crime order has been made. A trustee in bankruptcy will be considered an interested party in many circumstances. Similar rules apply for trustees of PIAs. A transfer of property cannot be set aside pursuant to s 120 (undervalue transactions) or s 121 (transfers to defeat creditors) of the Bankruptcy Act where the transfer was made pursuant to Federal Circuit and Family Court orders (or any other court exercising jurisdiction under the FLA). This is not a 'transfer of property by a person who later becomes a bankrupt....' within the meaning of s 121(1) of the Bankruptcy Act - it is a transfer ordered by the court. The trustee would instead need to make an application to set aside the Court orders under the provisions above. The same rules apply for orders made by consent - that is, the orders would stand against the Trustee unless the Trustee successfully applied to set the orders aside for one of the reasons set out above. When parties apply to the Court for consent orders, they must complete an Application for Consent orders setting out their current assets, their contributions and the proposed property settlement. The court must conclude that the orders sought are just and equitable in the circumstances before orders are made by consent. Generally speaking, the court should only divide up such property as is available for division after taking into account the liabilities of the parties (property minus debts). There are exceptions, for example, where one party has incurred liabilities with deliberate or reckless disregard for the rights of the other party and the Court feels that the 'innocent' party should not be called upon to contribute to the liability from their portion of the property. This does not mean the liability is disregarded, but that it has been appropriately weighed against the other competing factors. A creditor or the Trustee could challenge such orders (apply to set them aside) if a particular liability had not been considered at all (as opposed to being considered and disregarded by the court as outweighed by other factors). Further, a failure to include details of significant creditors in the material supporting an application for consent orders could also constitute grounds for setting aside the consent orders under ss 79A and 90SN (sub-paragraph (1)(a)). Note: Generally, a Trustee will be very reluctant to apply to court to set aside orders made in the family court jurisdiction (including consent orders). Usually, they will only do so where the creditors have either advanced funds to meet the legal costs or have authorised the Trustee to use funds in the estate and at least one creditor has given the Trustee an unlimited indemnity as to costs should the Trustee be ordered to pay the other person's costs. If your client is the bankrupt (as opposed to the non-bankrupt member of a couple) and has previously had a property settlement, the Trustee will want to know how the proceeds of the property settlement have been spent. The usual rules in relation to undervalue transactions and transfers to defeat creditors will apply. Any remaining funds, or funds recovered through challenging such transactions, will vest in the Trustee. In considering whether to challenge Federal Circuit and Family Court orders, including consent orders, the Trustee is also likely to have regard to whether or not the separation of the couple appears to be genuine or a sham to defeat the creditors. The Trustee will also consider whether the percentage split appears to be fair and reasonable having regard to the circumstances of the parties. What if the parties have made a Binding Financial Agreement under the Family Law Act? Parties can enter into Binding Financial Agreements under the FLA whether they are married, contemplating marriage (that is, the Australian version of a pre-nuptial agreement), ending a marriage or in, or contemplating, a de facto relationship or ending a de facto relationship. There are a number of technical requirements to ensure that a financial agreement is binding and enforceable (s 90G for marriages, s 90UJ for de facto relationships, FLA), and the court will only declare it binding on the parties if it would be unjust and inequitable not to do so. If one party would be dependent on social security payments to support him or herself, then a maintenance application can be made despite a Binding Financial Agreement (Section 90F for marriages, s 90UI for de facto relationships, FLA). Financial agreements can be terminated by the parties by agreement (s 90J for marriages, s 90UL for de facto relationships, FLA) or set aside by the Court (s 90K for marriages, s 90UM for de facto relationships, FLA). Agreements can be set aside by the Court where (among other things): the agreement was obtained by fraud (including non-disclosure of a material matter); or a party to the agreement entered into the agreement: for the purpose, or for purposes that included the purpose, of defrauding or defeating a creditor or creditors of the party; or with reckless disregard of the interests of a creditor or creditors of the party. The Trustee can apply as an interested person for orders setting aside a financial agreement and requesting the court to make alternative orders (ss 90K(3) and 90UM(6), FLA). It should be noted that this provision is expressed more broadly than s 121 of the Bankruptcy Act which requires the main purpose of the transfer to be to defeat or delay creditors; in this case this need only be one of the purposes of the agreement. Where a Trustee applies to have a Binding Financial Agreement set aside, the non-bankrupt former spouse or de facto spouse is able to argue both for the agreement to be upheld and, in the alternative, for a division of property in the form of a property settlement. The court's decision would then require weighing up the interests of the creditors (as represented by the Trustee) and the interests of the non-bankrupt spouse (and possibly dependent children). Unlike property settlement orders, a Binding Financial Agreement can be declared void against the Trustee under s 120 (undervalue transactions) and s 121 (transfers to defeat creditors) of the Bankruptcy Act. If proceedings are commenced under these sections of the Bankruptcy Act, the non-bankrupt spouse or de facto spouse can seek orders under the property division provisions of the FLA as an alternative in the event that the Binding Financial Agreement is set aside (provided they otherwise qualify to apply under these sections). Example: Sutherland v Byrne-Smith [2011] FCMA 632 (22 December 2011) A de facto couple purchased an investment property hoping to renovate and make a profit. They separated before the project was complete. The woman asked the man to enter a Binding Financial Agreement ostensibly under the FLA signing the property over to her and he later went bankrupt. The Trustee challenged the Binding Financial Agreement under ss 120 and 121 of the Bankruptcy Act. The court found that the binding financial agreement should not be upheld because the couple had not cohabited for a period of at least two years and there was no child of the relationship. The court refused to set aside the transfer under 121 because the woman's purpose had not been to defeat the man's creditors, but instead to secure a loan from her father to finish the renovations (her father would not lend the money unless the property was in her name only). The court did, however, set aside the transaction under Section 120 (undervalue transactions) because the man received no consideration for the transfer. The court then ordered that the proceeds of the sale of the house after payment of debts be divided between the woman and the trustee 60/40 in recognition of her greater contribution to the purchase and improvement of the property (this was still not enough to cover her original substantial deposit on the property).   Summary - Binding Financial Agreements under the Family Law Act Binding Financial Agreements can be set aside as undervalue transactions or transfers to defeat creditors under the Bankruptcy Act. They can also be set aside under the Family Law Act if one or both of the parties entered the agreement to defeat creditors, or with a reckless disregard for the interests of creditors. Where a Trustee applies to the Federal Circuit and Family Court to set aside a Binding Financial Agreement, the non-bankrupt spouse can argue for a property settlement instead. Dividing up property where the spouse/defacto may become bankrupt If you have a client who is contemplating a Binding Financial Agreement under the FLA in circumstances where they are aware that their ex-partner is insolvent or likely to become so, you should advise the client to get family law advice which takes this fact into account (that is they should make sure that the family law solicitor is informed about the possibility of bankruptcy and considers what it may mean for the validity of any Binding Financial Agreement). It may be that the client should consider applying for consent orders instead, ensuring he or she provides full disclosure to the court of all the relevant financial circumstances (and creditors). Likewise, if you have a client who is insolvent or on the verge of becoming insolvent and they are contemplating a Binding Financial Agreement under the FLA, you will need to point out, in addition to the above information, that if by transferring property under a Binding Financial Agreement they become insolvent, that is an 'act of bankruptcy' which might have relevance if the person becomes bankrupt in the near future (in other words the Binding Financial Agreement may be found to be ineffective against the claims of the Trustee). It also interesting to note that a spousal maintenance agreement registered in a court cannot be void against the Trustee for lack of consideration (undervalue transactions - s 120, Bankruptcy Act) but can be challenged as a transfer to defeat creditors (s 121, Bankruptcy Act). Again, when considering whether to challenge court orders, including consent orders, the Trustee is also likely to have regard to whether or not the separation of the couple appears to be genuine or a sham to defeat the creditors. The Trustee will also consider whether the split appears to be fair and reasonable having regard to the circumstances of the parties. What if the Trustee makes a claim on property of a previous relationship after the relationship has ended? The Trustee may claim property from a non-bankrupt ex-spouse or de facto spouse in a number of circumstances: the ex-partner is inhabiting property in the name of the bankrupt, or owns property jointly with the bankrupt, which has now vested in the Trustee (or at least the bankrupt's share has vested in the Trustee); or the trustee believes the bankrupt has a claim in equity (see Chapter 6 Part 3 for an explanation of the possible equitable arguments) or under the Bankruptcy Act against property in the name of the non-bankrupt spouse or ex-spouse (for example, because the bankrupt provided the purchase money or a significant proportion of it, or made substantial improvements to the property); or there has been a transfer that the Trustee argues is void against the Trustee (as an undervalue transaction or transfer to defeat creditors). It may be possible to argue against the Trustee's claims in bankruptcy law, and/or to make a family law claim. If the time limits for applying for a property settlement or maintenance order have expired, the affected person may be able to seek leave to apply out of time, depending on the circumstances. If you have a client who receives a letter or notice to this effect, they will need immediate legal advice from a solicitor with appropriate expertise in bankruptcy and family law. If your client is the bankrupt, you cannot assist the ex-spouse or de facto spouse - they will need to get independent legal advice (and independent financial counselling if required). What if there are no Family Law proceedings? If there are no family Court proceedings on foot (commenced by one of the parties to the relationship), then the Trustee cannot commence Family Law proceedings. In those circumstances the Trustee will refer to the current legal ownership of the parties unless there are strong grounds to assert a different equitable interest by the bankrupt. A house which is registered in the name of the non-bankrupt spouse (or de facto spouse), will therefore be relatively safe from claims by the trustee unless: there has been a transfer from the bankrupt spouse to the non-bankrupt spouse at some point in time or the bankrupt has made substantial and traceable contributions to the property or its improvement. Contributions by the bankrupt spouse as a homemaker are unlikely to have an impact except in Family Law proceedings. Equitable ownership and antecedent transactions which may be void against the trustee are covered in Chapter 6 Part 3.

Updated: 28 August 2024 Content Part 1: Debts - will I still have to pay my debts? Part 2: Protected property - What can I keep? Part 3: Divisible Assets - What will the trustee take and sell? Part 4: Income contributions - What happens to money I earn while bankrupt? Part 5: Other consequences of bankruptcy - How else will it affect my life? Part 6: Small business and bankruptcy Part 7: Family law and bankruptcy Part 8: Gambling and hazardous speculation Part 9: Death and bankruptcy Summary There are many different consequences of bankruptcy. Some of the concepts are quite complicated. It is important to have a broad understanding of the principles and to be familiar with problems that might arise so that you know what questions to ask the client and when to seek more advice on their behalf. This section is broken up into segments. Parts 1 - 5 covers: What happens to debts? What property is protected? What property will be taken by the Trustee? Whether the client has to pay income contributions and how much. What other consequences there might be. Financial counsellors should be aware of the content of all these parts at least in broad terms as they are relevant to all clients. Parts 6 - 9 need only be referred to if they are relevant to your client's individual circumstances. They cover in order: Small Business Family Law Gambling and hazardous speculation Death Introduction Your client must understand the following potential impacts of bankruptcy before making an informed decision whether to go bankrupt: Debts - will they go away? Assets (past, present and future) - will the trustee in bankruptcy ('the Trustee') take them? Can the Trustee undo past transactions and get at assets now owned by others? What about assets your client may acquire in the future? Income - will the client have to pay a portion of their income towards their debts ('income contributions') and if so, approximately how much? What other limitations might there be on the client's life as a result of the bankruptcy? These are all covered in this Chapter. Note: The same consequences apply when the client has been made bankrupt on a Creditor's Petition, although in that case there is no decision for the client to make. You can refer to this Chapter to advise your client about what to expect during bankruptcy. You should also refer to the bankrupt's obligations in Chapter 8. If your client has very recently been made bankrupt and does not think this should have happened, refer to Chapter 10 - A sequestration order has been made against my client - Is there anything he or she can do? Advise your client to seek urgent legal advice. Part 8: Gambling and hazardous speculation Summary Where gambling or hazardous speculation is found to have materially contributed to a client's insolvency, they can be charged with an offence under the Bankruptcy Act. Selecting gambling as a cause of bankruptcy in the statement of affairs may increase the likelihood of scrutiny for the offence but is far from the only indicator used. Importantly, gambling must have materially contributed to the client's insolvency and not merely been a factor or existed prior to the bankruptcy. The amounts also, generally need to be very high. Where Financial Counsellors can provide evidence from qualified health care professionals that the client has a mitigating circumstance such as a genuine, documented gambling addiction, this may assist in advocating against a client from being referred to investigation. The offence Where it becomes apparent that gambling may have been a contributing factor leading to a client's insolvency, financial counsellors need to advise the client of the following provision of the Act: Section 271 A person who has become a bankrupt after the commencement of this Act and: (a) within 2 years before the presentation of the petition on which, or by virtue of the presentation of which, he or she became a bankrupt, whether the petition was presented before or after the commencement of this Act, materially contributed to, or increased the extent of, his or her insolvency; or (b) during any period between the presentation of that petition and the date on which he or she became a bankrupt, lost any of his or her property; by gambling or by speculations that, having regard to his or her financial position at the time and any other material circumstance, were rash and hazardous, being gambling or speculations not connected with a trade or business carried on by him or her, is guilty of an offence and is punishable, on conviction, by imprisonment for a period not exceeding 1 year. How likely is it that my client will be prosecuted? AFSA's Enforcement area has primary responsibility for investigating and referring alleged bankruptcy related offences to the Commonwealth Director of Public Prosecutions (CDPP). AFSA's approach to enforcement is outlined for all offences in Inspector General Practice Statement 14. Prosecution action involves four steps: The Trustee is required by s 19(1)(h)&(i) of the Act to consider whether the bankrupt has committed an offence under the Act, and if so, the Trustee is required to refer the apparent offence to Enforcement. Failure to do so may constitute an error and breach of a Trustee's duty. The same requirements apply to debt agreement administrators under s 185LA(1)(d) and (e) of the Act. If the offending is minor or inconsequential (that is, it has minimal or no impact on the administration of the estate), that the matter should not be referred. Enforcement examines the evidence and circumstances involved and then makes a decision whether to refer the alleged offence(s) to the CDPP. This process may involve investigation by Enforcement, which could include the bankrupt being interviewed and providing a statement. In some cases, Enforcement may decide that no further action is to be taken after giving the bankrupt a 'warning letter'. If the matter is referred to the CDPP, the CDPP will examine the matter and evaluate the likelihood of obtaining a successful prosecution. In a number of cases a decision is made not to proceed with prosecution action. If the CDPP decides to prosecute, the matter goes before a Magistrate in a State Local Court (or County Court, Magistrate's Court or equivalent jurisdiction) who decides whether to convict the bankrupt or not, and if convicted, the nature of the penalty.   If you have a client who is being investigated for a potential breach of this provision and you believe that the client has a gambling addiction, then you can advocate for your client by providing evidence to support your claim, including any report from a relevant health professional and evidence of steps the client is taking to address the problem (if any). If your client discloses gambling prior to filing a Debtor's Petition, consider obtaining this evidence prior to filing the petition. The provision is intended to punish and deter those who seek take advantage of the bankruptcy system after expending their available financial resources on gambling activities instead of paying their creditors, or those who become increasingly insolvent as a result of gambling, when it appears likely (or inevitable) that they will become bankrupt. Australian cases show that the prosecutor must be able to demonstrate all the elements of the offence. In one case the defendant was acquitted because the conduct, while hazardous, was not 'rash'. In another case the conduct had not been shown to have 'materially contributed' to the bankrupt's insolvency. There has, however, however been successful prosecutions including the case below: Case Study On 21 February 2017, Mr Rosenberg was sentenced after pleading guilty at the Sydney Downing Centre Local Court to an offence of materially contributing to his insolvency by gambling. Mr Rosenberg filed for voluntary bankruptcy in June 2014. Between June 2012 and June 2014, Mr Rosenberg gambled at various casinos in Australia and New Zealand and participated in online gambling. As a result of these activities, he lost over $1.3 million. The Magistrate found the offence proven and commented that there needs to be a deterrent. Mr Rosenberg was released on a good behaviour bond for twelve months without conviction.   In summary the likelihood of your client being prosecuted for breaching s 271 of the Act is not very high (unless the amounts involved are very high and have materially contributed to the insolvency) and only a very small number of matters that are referred to AFSA result in a conviction. Only 2 charges for breaching s 271 were prosecuted during the period July 2017 to December 2023. Your clients must, however, be informed of the possibility where this is relevant.        

Updated: 1 May 2024 Content Part 1: Debts - will I still have to pay my debts? Part 2: Protected property - What can I keep? Part 3: Divisible Assets - What will the trustee take and sell? Part 4: Income contributions - What happens to money I earn while bankrupt? Part 5: Other consequences of bankruptcy - How else will it affect my life? Part 6: Small business and bankruptcy Part 7: Family law and bankruptcy Part 8: Gambling and hazardous speculation Part 9: Death and bankruptcy Summary There are many different consequences of bankruptcy. Some of the concepts are quite complicated. It is important to have a broad understanding of the principles and to be familiar with problems that might arise so that you know what questions to ask the client and when to seek more advice on their behalf. This section is broken up into segments. Parts 1 - 5 covers: What happens to debts? What property is protected? What property will be taken by the Trustee? Whether the client has to pay income contributions and how much. What other consequences there might be. Financial counsellors should be aware of the content of all these parts at least in broad terms as they are relevant to all clients. Parts 6 - 9 need only be referred to if they are relevant to your client's individual circumstances. They cover in order: Small Business Family Law Gambling and hazardous speculation Death Introduction Your client must understand the following potential impacts of bankruptcy before making an informed decision whether to go bankrupt: Debts - will they go away? Assets (past, present and future) - will the trustee in bankruptcy ('the Trustee') take them? Can the Trustee undo past transactions and get at assets now owned by others? What about assets your client may acquire in the future? Income - will the client have to pay a portion of their income towards their debts ('income contributions') and if so, approximately how much? What other limitations might there be on the client's life as a result of the bankruptcy? These are all covered in this Chapter. Note: The same consequences apply when the client has been made bankrupt on a Creditor's Petition, although in that case there is no decision for the client to make. You can refer to this Chapter to advise your client about what to expect during bankruptcy. You should also refer to the bankrupt's obligations in Chapter 8. If your client has very recently been made bankrupt and does not think this should have happened, refer to Chapter 10 - A sequestration order has been made against my client - Is there anything he or she can do? Advise your client to seek urgent legal advice. Part 9: Death and bankruptcy Summary The Bankruptcy Act provides for the administration of a bankrupt estate after the death of the bankrupt. This can be at the instigation of creditors or the executor of the estate (for example, as an alternative to the State based process in circumstances where there are more debts in the estate than assets and the executor would like to hand the administration over to a Trustee). A common concern of relatives of a deceased debtor is that they may be liable for the debts. This is not the case, but there may be less money or property available (or none in the case of a bankrupt deceased estate) for distribution under a will because debts must be paid out of the estate prior to distribution. Whether a deceased person's share of a jointly owned property is available for creditors (whether the deceased is bankrupt or not) will depend on whether the property is owned by the deceased and another person (or people) as joint tenants or as tenants in common. The administration of insolvent deceased estates Part XI of the Bankruptcy Act allows for the administration of the estates of deceased persons who were either insolvent when they died or when a deceased estate becomes insolvent due to debts incurred by the legal personal representative of the deceased estate (for example, the executor) after death. Creditors can also apply for an administration order to be made against the estate of a deceased debtor. There does not need to be an act of bankruptcy but there must be a debt or debts totalling $10,000 as with any other Creditor's Petition (see Chapter 10 - Help I'm being made bankrupt!). A judgment debt or Bankruptcy Notice is not required. Where there is an insolvent deceased estate, it can also be administered under the appropriate State and Territory laws. For example, the Probate and Administration Act 1898 (NSW) or the Administration and Probate Act 1958 (Vic), provide for the proportional division of the estate among creditors where there are insufficient funds to pay the debts in full. However, it will often be easier for the executor or administrator to apply to the court for an administration order under the Bankruptcy Act and allow the trustee to deal with the creditors and beneficiaries. Administration of a deceased estate under Part XI of the Bankruptcy Act also gives the Trustee the power to recover property that would not be available to creditors under State and Territory probate laws due to the antecedent transaction provisions of the Bankruptcy Act (such as undervalue transactions, preferential payments or transfers to defeat creditors). Once a State based estates administration process has already commenced, the matter can only be dealt with under the Bankruptcy Act with the leave of the court. The Official Receiver's Practice Statement 5 (ORPS5) - Administration of estates of deceased persons which can be found on the AFSA website gives information on the process. As a financial counsellor the most likely scenario is where the executor of a deceased estate decides to file for bankruptcy under Part XI of the Bankruptcy Act. The connection with Australia rules apply with regard to the deceased at the time of death. When an executor applies to make a deceased estate bankrupt, the petition must be presented to the court (not the Official Receiver) and must be accompanied by a Statement of the Deceased Person's Affairs. The required paperwork is detailed in the above Practice Statement. The regulations also require that the legal personal representative give the Official Receiver a copy of the petition within 2 working days after the court endorses it. What happens if the bankrupt dies during the bankruptcy administration period? The administration of the bankrupt estate continues as far as practicable. What if the debtor is served with a bankruptcy notice prior to death? If debtor dies before service of Creditor's Petition, the creditor is required to proceed and present a Creditor's Petition under Part XI of the Act. What if the debtor dies after service of a Creditor's Petition? If the debtor dies after the Creditor's Petition has been presented but before it is served, the proceedings lapse, and the creditor must commence new proceedings under Part XI of the Act. If debtor dies after service of Creditor's Petition but before the sequestration hearing the court can: make order that estate be administered under Part XI make an order to dismiss Creditor's Petition (on the usual grounds - see Chapter 10). Relatives and their liability for the debts of the deceased When a person dies with debts, the relatives can be confused about the extent to which they are liable for those debts. In some cases, creditors may even pressure the relatives for payment (or the relatives may perceive they are doing so because they are receiving phone calls or sorting through mail intended for the deceased). The deceased person's estate is liable for the person's debts, but the relatives are not. This may impact on the relatives if they receive less by way of inheritance than they otherwise would, but it does not mean they are liable to pay the deceased person's debts from their own funds. If there is another person who owns property with the deceased (for example, their children or their partner) what happens will depend on whether they own the property as joint tenants or tenants in common (see Chapter 6 Part 3). If they own the property as tenants in common, the deceased person's share of the property (e.g. 30% or 50%) may be available to creditors. The amount of the share should be clear from the title documents or a title search. If the property is owned jointly, then the full amount of the deceased person's share passes to the other joint owners as a result of the doctrine of survivorship and none of it is available to creditors (unless the joint owner is also a joint debtor or guarantor). The existence of a joint tenancy will not necessarily protect the property entirely from a trustee. Section 249A enables a trustee to secure a charge to the value of any improvement, as defined in s 294 on the property, subject to some exceptions. See the checklist for this chapter in Chapter 13: Tools and Resources      

Updated: 1 May 2024 Content Part 1: Declaration of Intention to present a Debtor's Petition Part 2: Completing the Debtor's Petition and Statement of Affairs In the case of the Statement of Affairs the Chapter looks at: Why a question is asked (what will it be used for)? What to include in the answer. What tricks and traps to look out for.   Part 1: Declaration of Intention to Present a Debtor's Petition Note: The Temporary Debt Protection Form is subject to change, the copy featured in this chapter is current to January 2021. Note: See Chapter 5 for information about the consequences of entering a Declaration of Intention to Present a Debtor's Petition ('Declaration of Intent') and the circumstances in which it is appropriate. AFSA refers to the Declaration of Intent as a 'Temporary Debt Protection Form' but this term is not referred to in the Bankruptcy Act. You must ensure your client understands the importance of ensuring the information in this form is complete and accurate. Paper forms are available, but the client should use the online portal. If the client is completing a paper form, blue or black pen should be used. Generally speaking, financial counsellors should encourage clients to complete their own forms to ensure they are fully engaged with the process and take responsibility for their own information. The client must be ordinarily resident in Australia, or be physically in Australia, or have a residence in Australia, or have a business connection to Australia. Usually giving an Australian address will be sufficient to establish this unless other information indicates there may be no Australian connection - in that case the Official Receiver may initiate further enquiries. From a practical point of view, the client should make sure the name(s) and other details on the form match those being used by any current credit provider, particularly where there is imminent enforcement action that the client is seeking to suspend by lodging the Declaration of Intent. Your financial affairs, secured assets, other assets and unsecured assets In completing the sections in relation to the client's financial affairs, the details need to be to the best of the debtor's knowledge and understanding. That is, the debtor puts the amounts owing to creditors, value of assets, level of income, etc, as they understand them to be, irrespective of how accurate those figures may be. It is most important that your client discloses accurate information about their creditors (to the best of their knowledge) because this information will be used by AFSA to notify their creditors of the freeze on enforcement action. Check the details against the client's statements or contracts if these are available, but do not delay the process if time is of the essence. Creditors do not get a copy of this statement of affairs, only a summary of the details to enable them to assess the debtor's financial position and decide whether they should accept a proposal by the debtor as to an alternative agreement or possible compromise. The Declaration of Intent form incorporates a statement of affairs. The financial information required is very similar to that required in the statement of affairs accompanying a Debtor's Petition. You should warn your client that this information will be available to the Trustee to compare to later information if the client ultimately goes bankrupt (so any mismatch in debts or assets will be immediately apparent and lead to further questions or investigation - see Chapter 6 Part 3 in relation to antecedent transactions). Note the explanation of related creditors in Part 2 of this chapter. The accuracy of the details in this section is vitally important for stopping enforcement action. When e-mailing the Declaration of Intent form to AFSA, always request AFSA to acknowledge receipt (particularly if enforcement action is imminent). This section allows the debtor (client) to authorise a person to talk with creditors. The completion of this section will put the authorised person in the position of having agreed to negotiate with creditors during the stay period. Before doing this, it is very important to consider whether this is: Something the authorised person is qualified to do, and Something the authorised person has the time to do, and Something that is likely to produce results. For many financial counselling clients, the negotiation process may have already occurred. If the debtor is only choosing to use a Declaration of Intent to stay enforcement action and to give them time to complete their bankruptcy forms, then this authorised negotiation period is unlikely to be of any practical use to the debtor. Using a Declaration of Intent to try to force negotiations is a risky strategy especially as it is an act of bankruptcy and requires the debtor to complete a list of debts, income and assets that will be made available to the trustee in the event of a subsequent bankruptcy. Using a Declaration of Intent as a negotiation tool should only be done after legal advice has been sought. Usually, it should be reserved for those situations where bankruptcy appears otherwise inevitable. The Declaration of Intent will not be recorded on the NPII. Your client must read and understand the prescribed information before signing and dating the section below. Lodging the documents Lodgement of the Declaration of Intent is now done online through the AFSA portal. However, paper forms can still be lodged with AFSA by email or post. Where the client cannot access the online portal and enforcement is imminent (and usually it will be if this option is being used) then e-mail is preferable. Email: info@afsa.gov.su Post: GPO Box 1550, Adelaide SA 5001 What happens once a Declaration of Intent has been accepted? If the Declaration of Intent is accepted (see Chapter 5 for reasons why a Declaration of Intent may not be accepted), then the Official Receiver must give written notice of the acceptance of the Declaration of Intent to each of the creditors disclosed in the debtor’s statement of affairs (s54C). This is generally done within 2 working days of acceptance. The debts of your client that would be provable in bankruptcy if the client proceeded to present a Debtor's Petition are then 'frozen' for the stay period. The stay period begins on the day the Declaration of Intent is accepted and ends after 21 days (including the day of acceptance) unless the debtor files a Debtor's Petition, enters a Personal Insolvency Agreement, has a Creditor's Petition presented against them or is subject to a sequestration order within that period. Important: A Declaration of Intent will stop court-based enforcement action, but it will not stop a Creditor's Petition. A debtor is not permitted to lodge a Declaration of Intent while a Creditor's Petition is pending. Once a debt is frozen, the creditor cannot commence or continue with any enforcement process or remedy against the person or property of the debtor. The creditor can, however, commence legal proceedings against the debtor, or take any step in legal proceedings, provided it is not to apply for an enforcement process. The creditor is also given an extension of time equivalent to the period of the stay in which to apply for any enforcement process after the period has expired if the debtor does not proceed with the bankruptcy. What if the Sheriff has already tagged or taken possession of my client's goods? Once the sheriff receives a copy of the accepted Declaration of Intent, they must take no further action. If the property of the debtor has been tagged but not taken, then it cannot be taken during the period of the stay. If the sheriff has taken possession of property but not sold it, then it must not be sold. If the property has already been sold, then the proceeds cannot be given to the creditor. However, any person who has already purchased the goods in good faith will not have to return them. In extremely urgent cases, it would be prudent to contact the sheriff to verify that they have received a copy of the accepted Declaration of Intent and acted on it. Whilst AFSA usually emails the copy of accepted Declaration of Intent to sheriffs and paymasters, AFSA does not follow up to check whether they have acted on it. If it appears that the sheriff or paymaster is non-compliant (not refraining from taking enforcement action), AFSA should be contacted immediately. Note: The practical effect of the Declaration of Intent provisions of the Act is that if a sheriff has already taken action (e.g. taken goods in the morning prior to the receipt of the copy of the accepted Declaration of Intent), the sheriff is not obligated to return the goods to the debtor during the stay period. However, in some cases the sheriff may be able to be persuaded to release the goods back to the debtor (the debtor would usually have to collect the goods at their expense). How do I stop my client's wages being garnisheed? As stated above, AFSA usually notifies the paymaster of the accepted Declaration of Intent by email, however AFSA does not follow up to check whether the paymaster has acted on it. Therefore, it would be prudent to contact the paymaster to verify that they have received a copy of the accepted Declaration of Intent and stopped the garnishee on the debtor's wages/salary. It should be noted here that garnishees issued by the Taxation Commissioner under s 260-5 of Schedule 1 to the Taxation Administration Act 1953 may not be affected by a declaration of intent or bankruptcy because the ATO is treated as a secured creditor once the notice has been issued. If your client is in this position, you should refer them for legal advice. What if my client does not proceed with the bankruptcy? If the client does not come to some arrangement with creditors following the presentation of the Declaration of Intent and does not present a Debtor's Petition, they will leave themselves vulnerable to enforcement action by their unsecured creditors after the expiry of the stay period (for example seizure of their goods by the sheriff and/or garnishee of their wages/salary). If goods have already been seized they will be sold, and any garnishee will recommence. A creditor may also rely on the Declaration of Intent to apply for a Creditor's Petition. If this occurs, see Chapter 10 - Help I'm being made bankrupt! and encourage your client to seek urgent legal advice. What if my client does proceed with the bankruptcy? Goods seized by the sheriff The Act prescribes that upon the bankruptcy of the debtor, the sheriff is required to deliver to the Trustee all the property that has been seized, and the property that is protected property (for example household items, motor vehicles under the prescribed value, etc - see Chapter 6 Part 2) which does not vest in the Trustee, is to be returned to the bankrupt by the Trustee. The Act also prescribes that such items are subject to a first charge for the sheriff 's enforcement costs. However, in practice the Trustee will usually notify the bankrupt that the goods are available for collection from the sheriff who will release them upon payment of the enforcement costs. In the case of say a Disability Support Pensioner, the sheriff may be amenable to a persuasive request that the goods be delivered back to the bankrupt. Garnishee on wages/salary Once the paymaster is notified by the Trustee of the employee's bankruptcy, the paymaster is required to cease enforcement of the garnishee. Any moneys held by the paymaster that have not been paid to the creditor are to be repaid to the employee. The Trustee will decide whether to take action to recover the moneys paid to the creditor by way of the garnishee as preference payments under the provisions of s 122 of the Act (see Chapter 6 Parts 1 and 3). Note: again, as mentioned above, the exception for notices issued under the Taxation Administration Act 1953 relating to the ATO may apply. Refer your client for legal advice if necessary.    

Updated: 1 May 2024 Content Part 1: Declaration of Intention to present a Debtor's Petition Part 2: Completing the Debtor's Petition and Statement of Affairs In the case of the Statement of Affairs the Chapter looks at: Why a question is asked (what will it be used for)? What to include in the answer. What tricks and traps to look out for. Part 2: Completing the Debtor's Petition and Statement of Affairs Note: The Statement of Affairs Form is subject to change, the copy featured in this section of Chapter 7 is current as at May 2024. This section is being updated following the revision of the Debtor’s Petition and Statement of Affairs forms in September 2025. Checklists and file notes In Chapter 13, Tools and Resources, you will find a set of Bankruptcy Checklists. Checklists are important to make sure you cover everything that is necessary each and every time. Even very experienced people can occasionally forget something they know well as a result of the process becoming so routine. However, using a checklist is not enough. Whatever tools you use, you need to end up with a clear record for every client of: The instructions you received from the client; and What you told the client in response to those instructions. This ensures you will have a comprehensive record of the interview in the event of problems later. Emphasise to your client that knowingly providing false and/or misleading information is an offence under the Bankruptcy Act and penalties apply on conviction. The normal 3 year and 1 day period of bankruptcy can be extended to 5 or 8 years in certain circumstances for failure to include information or providing false information. The time limits for the Trustee to take action to claim property can also be extended as a result of non-disclosure. It is best practice to get the client to fill in the forms, rather than the financial counsellor doing it for them. Ordinarily, this will not be an issue as the client will be lodging online through the AFSA portal. Where lodgement through the portal is not possible, getting the client to complete the form themselves helps ensure that the client takes responsibility for the information they have provided to AFSA. Additionally, it makes it more difficult for a client to later allege that the financial counsellor has conveyed their instructions incorrectly or failed to take instructions entirely. This does not mean that the financial counsellor can avoid any responsibility for any advice or information provided, for example, around how to complete the forms, what to include or not include, and what the consequences of the process will be for the client. Comprehensive file notes must be kept by the financial counsellor. Electronic lodgement AFSA requires online lodgement of Debtor's Petitions and Declarations of Intention/Temporary Debt Protection. Paper forms are still available from AFSA, but the process for obtaining these forms directly from AFSA is not straightforward. Financial counsellors should be able to access the form through the financial counselling toolkit website to supply copies to clients if necessary. Who can lodge a Debtor's Petition? Section 55 of the Bankruptcy Act sets out who can lodge a Debtor's Petition, as follows: The person must have the necessary connection to Australia, either: being personally present or ordinarily residing here; or having a dwelling house or place of business here; or carrying on a business here (including through an agent or manager); or being a member of a firm or partnership carrying on business here. The following will disqualify a person (in the absence of permission from the Court) from lodging a Debtor's Petition: being party as a debtor to a Debt Agreement; or having executed a Personal Insolvency Agreement (PIA) except where the PIA has been set aside, terminated or all the obligations discharged. A search of the NPII will be done to determine whether the person lodging the petition is already in a Debt Agreement or PIA. The Official Receiver may also reject a Debtor's Petition where: it is not substantially in the approved form; or it is not accompanied by a statement of affairs; or the statement of affairs accompanying the petition is inadequately completed; or the debtor has been bankrupt on a Debtor's Petition at least once already in the past 5 years, or 3 times ever, AND it appears from the information provided in the statement of affairs that they could pay their debts within a reasonable time; or it appears from the information provided in the statement of affairs that the debtor could pay his or her debts within a reasonable time but is unwilling to pay one or more of them. Where a person is dissatisfied with the Official Receiver's decision to reject their petition, an application for review of the decision can be made to the Administrative Appeals Tribunal (AAT). Where a Debtor's Petition is rejected (either because of incomplete forms or any other reason) it is not recorded on the NPII. A copy of the forms, electronic or physical, will be returned to the debtor with an explanation of why they have been rejected. AFSA keeps a copy on its administrative system only. The Official Receiver must refer a Debtor's Petition to the court (for direction on whether or not to accept it) where: The debtor is one of a group of debtors against which a Creditor's Petition is pending (whether they are joint debtors or members of a partnership); s 55 (3B). One or more members of a partnership have lodged a Debtor's Petition but not all the members of a partnership; s 56C (1)(a). There is a Creditor's Petition pending against one or more but not all the members of a Partnership (if the Creditor's Petition is against all of them there is no need to refer the matter to the court); s 56C (1)(b). Two or more debtors have lodged a joint Debtor's Petition and at least one (but not all) of them is subject to a pending Creditor's Petition; s 57(3B). Usually, AFSA will contact the debtors to discuss whether they wish to withdraw the petition before referring it to the court. Mentally incapacitated debtors In NSW and WA, a Debtor's Petition can be lodged on behalf of the debtor by a person who has been appointed as the debtor's guardian or administrator to manage their financial affairs. In other states and territories, a specific order to this effect must be obtained from the relevant court or tribunal. Financial counsellors and advocates should always be mindful if they are approached by a person, other than the proposed debtor when assisting. Prescribed information Before accepting a Debtor's Petition, the Official Trustee must give the debtor the information prescribed by the regulations. In practice this is included in the Forms. Financial counsellors will in all cases have not only drawn the client's attention to the prescribed information, but also have explained the potential consequences (as outlined in Chapter 6) in significant detail. Client authority If you are lodging the forms on behalf of your client and wish to be contacted in relation to any questions or follow up information required, AFSA require an authority completed by your client before they will disclose any information to you. For this reason, you should get the client to sign an authority as part of your standard bankruptcy interview practice and keep it on the file in case you need it later in the process. A Third Party Authority form is available on the AFSA website. A question-by-question guide Careful attention should be given to completing the bankruptcy forms. There can be consequences of either omitting vital information and/or making misleading statements. Accordingly, you should go through question by question with the client, pointing out common problems. Sometimes the client's answers to one or more questions may prompt you to warn them about a potential consequence that may be serious enough to reverse their decision to go bankrupt. Who will administer the estate Where it appears that a Registered Trustee may consent to act, the Official Trustee will probably choose not to administer an estate. Generally, the Official Trustee will administer estates where there is a public interest in doing so or to maintain stakeholder confidence in the insolvency system. They will make this assessment even if the administration may not result in financial return to creditors or cover their costs of administration. The criteria for offering estates to a Registered Trustee are available on the AFSA website. Generally, estates will be offered to a Registered Trustee on a panel where it is apparent from the statement of affairs that a return may occur, such as there is an interest in real property or other assets. Refer to the section on Trustees' Fees in Chapter 8 Part 2 Sections A to D: Personal details and overview of bankruptcy Sections A to D covers the client's personal details and circumstances of bankruptcy, their employment and income, unsecured debts they owe, money and bank accounts, and general personal assets belonging to the client. Your client must write legibly in blue or black pen if they are completing the paper form by hand. Clients should be encouraged to complete their own paperwork to ensure they are fully engaged with the process and take responsibility for their own information. If they have difficulty in doing this, it is recommended that a scribe and/or an interpreter be involved in the process. This is to ensure that the client feels in charge of the process and takes responsibility for the accuracy of their own information. Remember: information on the debtor's statement of affairs is to the best of their knowledge and recollection. Questions 1 to 3: Name to date of birth It is very important that your client includes all names previously used in the last 10 years. Also, remember to ask about the use of their maiden name, or any previous married name. For clients from other cultural backgrounds who may have anglicised their name, check that you have their traditional name also and be careful to distinguish family names from given names as the order they are given varies from culture to culture (it may be wise to include the reversal of the names as a previous name as creditors also get this wrong). This is necessary for two reasons. Firstly, it is important that the Trustee is able to identify all debts which should be included in the bankruptcy, regardless of the name used. Secondly, as noted above, the bankruptcy may be extended if the Trustee forms the view that the debtor has withheld pertinent information and lodges an objection accordingly. Intentional omissions may lead to prosecution. It may be useful to obtain a copy of your client's credit report in order to determine whether the credit reporting agencies have any additional names associated with your client. Questions 4 and 5: Demographics This information is required only for statistical purposes. It is used by AFSA to compile their 'Profiles of Debtors' publication, which is released from time to time. Questions 6 to 10: Contact details If your client fears that their safety may be compromised by the inclusion of their address on the NPII, they can apply to suppress the address and/or occupation only (the name, date of birth and details of the insolvency process will remain). Evidence is not mandatory but if available it can be used to support your client's request. Evidence can include a copy of any court orders including Apprehended Violence Orders or reports from police, a social worker, a medical practitioner or other relevant professional. This information would need to be provided at Question 6 of the application. It may be helpful to inform your client that information with the symbol of an x inside a circle will not be accessible to the public. A response will be provided to this suppression request. Review by the AAT is available if the client believes the request has been unreasonably refused. Generally, AFSA and Trustees correspond with debtors and bankrupts by email because of its convenience and low cost. If the debtor/bankrupt does not respond to email within a reasonable time, a letter will then be sent. Clients should be encouraged to check their emails regularly (including their spam folder) to see whether there is a query from AFSA concerning the forms they have lodged. Clients should not supply an e-mail address if they do not, or cannot, access it regularly. Providing an e-mail address with a telecommunications provider who may have a provable debt in the bankruptcy (meaning the client is at risk of disconnection and losing access to the email address) is also unadvisable as this may delay dealings with AFSA. Likewise, if a postal box address is provided, this should be cleared regularly. Questions 11 to 12: Occupation and industry This information is used for statistical purposes but is also used to ascertain potential earnings during the bankruptcy. The nature of the client's work may also have an impact when trying to protect their tools of trade. It is important that the client's answer to this question is consistent with any assertion that they may later make that property is protected as tools of trade (for example, a person who has noted their occupation as accountant will have trouble seeking to retain power tools as protected tools of trade). Question 13: Why are you completing this form Consider whether your client has the capacity to decide to go bankrupt. If the client has been made bankrupt through a creditor's petition, they should provide details of the court reference and proceed to the relevant question. Question 14: Relevant Australian connection Section 55 of the Act prescribes that the debtor must have some connection with Australia, the most common one being that they are present in Australia, or they ordinarily reside here. Australian citizenship is not a requirement. If you have any doubts in this regard, contact AFSA for further guidance. If your client is on a visa, particularly any sort of business visa, check with the Department of Home Affairs to determine whether there will be any impact on their immigration status. The debtor is required to disclose all their debts, including debts incurred overseas. Whilst bankruptcy will stop overseas creditors from taking enforcement action in Australia, if the bankrupt returns to the country where the debt was incurred (e.g. New Zealand) the creditor can take recovery/enforcement action against them in that country. In that case they may need to seek advice on bankruptcy or any similar options available in that jurisdiction. It may also be possible that debts in the other country will be enforced against any property of the bankrupt located in that jurisdiction. Question 15: Debt agreement or PIA Section 55 of the Act states that a debtor in an undischarged PIA or active debt agreement (as a debtor) are ineligible to lodge an application for bankruptcy. AFSA will conduct a search of the NPII to determine the debtor's eligibility. If it is determined that the client is ineligible, the application will be returned to the client. Question 16: Individual debtor, partnership or joint petition Generally speaking, your client will be ticking the first option above - 'As an individual debtor'. Where a couple both want to become bankrupt there are distinct advantages to petitioning individually rather than jointly because each client will be able to keep a car below the threshold value. If a joint bankruptcy is intended, all parties should ensure they lodge together. If lodging through the portal, each debtor will need to create separate accounts and lodge on the same day. If lodging by email or post, the forms should be sent together. Section 56A of the Act provides that the majority of the members of a partnership (for example, two of the three partners) can present a Debtors' Petition against the partnership. This may arise where one of the partners is overseas temporarily. Financial counsellors should be very wary about getting involved in this area unless their client has obtained specialist advice and made this available to the financial counsellor. See also the introductory comments at the commencement of this section on Who can lodge a Debtor's Petition? about when a Debtor's Petition must be referred to the court. Question 17: Receiving Advice or information These details may be used by the Trustee for the purposes of contacting relevant parties to obtain copies of documents such as the financial records of the bankrupt's former business, tax returns, and/or other relevant details. This information also enables the Trustee to identify any questionable pre-insolvency advisers and therefore be used to inform the regulatory action of AFSA. The size of the payment may indicate the complexity of the petition. Question 18: Cause of insolvency Generally, this question is used for statistical purposes, however it is also used to flag potential issues or complexities in the petition. Examples include: 'Reduction in income, other than by unemployment' indicates a potential discretionary increase to the income threshold by the Trustee due to hardship (s 139T). 'Marriage/relationship breakdown' flags potential Family Court applications which may delay the Trustee in administering the estate. 'Debts due to injury/ill health' indicates the potential for compensation that is protected property under s 116(2)(g). 'Legal action or potential legal action' flags to the Trustee to notify creditors and Sheriff undertaking legal proceedings or enforcement action to stay any proceedings (s 60(2)) or halt any enforcement (ss 58(3) and 119A). 'Losses from gambling or speculation' may flag further investigation if there was rash or hazardous gambling or speculation materially contributed to insolvency or resulted in a loss of property in the two years before the petition (s 271). For further on this please see Chapter 6 Part 8 of the toolkit. Warning about business failure: Failure to keep proper books of account and costing records in the five years prior to the bankruptcy or failing to preserve such records is also an offence under s 270, potentially punishable on conviction by imprisonment. There is a defence in both cases that the failure to keep or preserve the books was 'honest and excusable' (s 270(2)). The potential sentence increases where the bankrupt has previously been bankrupt or entered another form of insolvency arrangement such as a PIA (covered in Chapters 5 and 12) or Scheme of Arrangement or Composition (explained in Chapter 8). The likelihood of prosecution is remote, unless the client has been involved in other punishable conduct and would usually be taken in conjunction with other alleged offences (see Chapter 8 for information on offences more generally, including examples of successful prosecutions). Question 19: Start of financial difficulty This is a question clients need to think carefully about, as to whether bankruptcy is the right option. The answer gives an indication as to when the client became insolvent which becomes relevant if the Trustee considers that there has been a voidable transfer of undervalued property by the client in the 5 years before bankruptcy (s 120). One of the things that the Trustee may need to establish to support such a claim is that the transfer was for less than market value and that the bankrupt was insolvent when the transfer occurred (see Chapter 6, Part 3). It is also an offence to obtain credit within the two years before bankruptcy if the debtor had no reasonable expectation of being able to repay the debt (s 265(8)). If the date entered here is prior to the last application for credit listed in the debts section of the statement of affairs, this may be an indication that the client did not have the financial capacity to repay that debt (or those debts) and may lead to further investigation. However, the amount involved would need to be significant to trigger prosecution action (see Chapter 8 for information on offences more generally). Question 20: Previous bankruptcy activity (Debt Agreements, PIAs and bankruptcies) It is important that clients answer this question accurately, as the information is recorded by AFSA on the NPII. The Official Receiver's delegate will conduct a search as part of the process of accepting or declining a Debtor's Petition to ascertain whether the client is already recorded on the NPII. You should warn your client that each subsequent bankruptcy (or formal alternative to bankruptcy) increases the chances of their affairs being investigated and offences being prosecuted, especially where the client has again become insolvent whilst currently undischarged from bankruptcy. The client's Debtor's Petition may also be rejected if the Official Receiver forms the view that the client can pay all their debts within a reasonable time AND either: they have previously been bankrupt 3 or more times, or once in the last 5 years; or they are unwilling to pay one or more creditors, or creditors in general. Previous bankruptcies also affect the vesting of prior property that has not been distributed (it is vested in the later Trustee), as well as the treatment of unpaid remuneration due to the prior Trustee (that Trustee may now become a creditor) under Section 59 of the Act. Question 21: Marital status This information will be used by the Trustee to investigate the bankrupt's affairs. Clients are often concerned about what this will mean for the non-bankrupt spouse: Will AFSA notify them? Will they be pursued for the client's unpaid debts? The bankruptcy may affect their non-bankrupt spouse/partner in a number of significant ways: If the bankrupt and their non-bankrupt spouse jointly own property, the Trustee will usually ask the non-bankrupt spouse to purchase the bankrupt's interest in the property for an amount based on current market values (less any mortgage over the property). If the spouse is unable to do this, then the Trustee may seek to sell the property and pay the non-bankrupt partner their share of the equity (For more details on this topic see Chapter 6 Part 3). A spouse or partner may have an equitable interest in property solely owned by the bankrupt. If there are joint loans, or the spouse/de facto partner is a guarantor for a loan of the client, then the spouse/de facto will become solely responsible for payment of that debt and the lender will probably pursue the spouse/de facto partner for the debt (see Chapter 6 Part 1). If the bankrupt has guaranteed the non-bankrupt's spouse's loan or overdraft (or de facto spouse's), the lender could respond by seeking additional security or calling in the amount outstanding depending on the lender's rights under the contract. The spouse/de facto partner may be affected in other practical ways, such as the requirement for the client to pay income contributions or the restriction on travel, or difficulties obtaining credit or insurance jointly in the future (see Chapter 6 Part 5). The spouse/de facto may feel or experience some stigma by association. Remember: There may also be positive impacts, for example, where the income of the family available for living expenses is increased because of the prevention of recovery of provable debts by creditors. It is ultimately the client's decision whether to tell the spouse about the bankruptcy, but in most circumstances their finding out is almost inevitable, and the client needs to be aware of this. This is especially the case where there is joint property or joint loans, or a situation where one spouse/ partner has guaranteed the other's loan or loans. Question 22: Current living arrangements This question may be relevant to the Trustee's assessment of the client's income and benefits such as free or subsided rental accommodation (which can then be deemed as income), and/or the general investigation of whether the client owns any assets divisible among creditors. Question 23: Previous residential addresses The main purpose of this question is for the Trustee to have information that will assist the client's creditors to identify the client. Details of properties previously owned by the client will also assist the Trustee with their investigation into the client's financial affairs (see Chapter 6 Part 3). When completing the details of a previous address a physical address needs to be supplied. A PO Box is not where the person lives, it is the postal address. Where a client is homeless, they will still have to supply a physical address - talk to AFSA about this. Question 24: Passport details A bankrupt is not permitted to leave Australia without the written permission of the Trustee. Whilst the Trustee can request the client to hand over their passport, they generally do not make such a request unless they have genuine concerns that the bankrupt is a flight risk. Alternatively, the Trustee may apply to have the bankrupt listed on a Ports Watch List in these circumstances so that they will be identified and stopped by the Australian Federal Police if they try to leave the country. A bankrupt who wishes to travel overseas while bankrupt can seek the permission of the Trustee to do so by lodging a written request for such permission (including by email). Usually, permission is granted if the travel is associated with the bankrupt's employment, or they are seeking to travel on compassionate grounds. More information on travel restrictions is found in both Chapter 6 Part 5 and in Chapter 8 (including seeking permission to travel). You should ensure that clients who need to travel for work, or who have overseas relatives, are fully aware of the travel restrictions associated with bankruptcy and the penalties for travelling without permission (see Chapter 8). Question 25: Family law proceedings Insolvency and family relationship disputes are often closely linked. The information in this section is required to put the Trustee on notice of any current family law proceedings which may involve your client's property and/or income. The Bankruptcy Act and the Family Law Act allows the Court to make orders in respect of property that has already vested in the Trustee of a spouse's bankrupt estate. Also, a Trustee can become a party to proceedings initiated by a member of the separating couple in the family law jurisdiction or can apply to have family law orders or agreements set aside in certain circumstances. Accordingly, a Trustee needs to know whether any relevant family law proceedings have taken place, are underway or likely. See Chapter 6 Part 7 Family Law and bankruptcy. Question 26: Emergency contact details These details are required to enable AFSA and/or the Trustee to contact the debtor/bankrupt if they are unable to reach the person directly. Accordingly, contact will only be made with this person if the debtor/bankrupt does not respond to direct approaches by AFSA and/or the Trustee. Question 27: Recent employment history This information is used to assess and verify income for contribution purposes (see Chapter 6 Part 4). It is also used for statistical purposes, which in turn is used by various organisations including the Australian Bureau of Statistics and various industry groups. You should ensure that the details disclosed here align with the previous answers concerning income. In certain cases, the Trustee can deem the client's income to be at industry scale for income contribution assessment purposes if it appears the client's income is lower than would be expected, or if no industry instrument is in place, what the client could be expected to be paid in an arm's length transaction. For example, if the client were employed as a full-time medical practitioner being paid an annual salary of $35,000 by a company of which his brother is the beneficial owner, the Trustee is likely to investigate the income and expenses of the company, as well as the average income of comparable medical practitioners, to arrive at a deemed income figure. You should explain to your client that there is no restriction as to the amount that they can save from their income during bankruptcy. However, such savings should be held in a bank account (including an interest-bearing deposit) and not used to buy an asset (for example shares, land, house, etc) as the Trustee may claim such assets as after-acquired property (see Chapter 6 Part 2 and Part 3). Question 28: Past and future income Income received in previous 12 months This information is used both by AFSA and the Trustee. AFSA uses the information for statistical purposes. The Trustee uses the information when determining the cause of your client's insolvency and comparing your client's current income to their previous income to see whether there has been any significant change. This information could inform a decision of the Trustee as to whether investigations are warranted - is current income being under-reported (see Chapter 6 Part 4)? Has the bankrupt sought to hide assets or otherwise transacted to defeat their creditors (see Chapter 6 Part 3)? It is also a good idea to let your client know that the Trustee can investigate their financial affairs going back a lot further than the past 12 months (see Chapter 6 Part 3). Income expected in next 12 months The details are primarily used by the Trustee to undertake the initial income contribution assessment (see Chapter 6 Part 4). If your client anticipates that nothing will change, they can repeat the information from the previous 12 months provided earlier. However, it is important that your client does not underestimate their future income. If they do so, the Trustee may reassess their contribution liability at the end of the period which may result in having to make back-payments of contributions from the first year in addition to the contributions assessed for the following year. If your client indicates that, whilst they are not currently receiving income from the estate of a recently deceased person, they expect to receive a substantial amount of income from the estate prior to their discharge, you may need to revisit the consequences of bankruptcy and the decision to proceed (see Chapter 6 Part 3). As the definition of income in the Bankruptcy Act is very wide, where a reverse mortgage provides the borrower with periodic payments, those payments are usually classed as income for income contribution calculation purposes. However, there are many varied forms of reverse mortgages, and you will need to examine the method by which the borrower receives the funds. Usually if the ATO does not consider the payment(s) being received as being 'taxable', they would not be classed as income. If your client receives child support that amount is not classed as income for contribution assessment purposes. However, any child support received in the previous 12 months or expected in the next 12 months should be listed. You should inform your client that they must notify their Trustee of any changes in their income as they occur during their bankruptcy. In addition, if they are assessed as a contributor at the end of each year during their bankruptcy, they will be required to provide evidence of their income (for example, copy of PAYG payment summary, tax assessment) for the past year. The Trustee will also consider whether the client is replacing income and/or repayment of a debt with other benefits. Other benefits may be deemed to be income and affect the amount of the contributions required (see Chapter 6 Part 4). The client should be asked about their motor vehicle usage. For example, the client may have the use of a motor vehicle as part of their employment package or even under an arrangement with a family member. Only regular use of a vehicle need be included - occasional borrowing is not relevant. Generally, ownership is determined by way of registration unless other evidence is available. In some cases, a relative will make a vehicle worth more than the threshold amount available for use by the bankrupt. This could result in the bankrupt being assessed as paying a higher income contribution because this could be considered a benefit. Examples would include: a car owned by a friend or relative but used by the bankrupt on a daily basis a company car available to the bankrupt for personal purposes. Question 29: Salary sacrificing arrangements The Trustee requires these details for income contribution assessment purposes and uses the grossed-up income when calculating the client's gross income before tax (see Chapter 6 Part 4). You should inform your client that they can continue their salary sacrificing arrangement with their employer, including any payment of additional voluntary super contributions, however the income contribution payable to the Trustee will be based on the grossed-up amount. In circumstances where the client is using salary sacrifice to pay a car loan or home loan for example, they should be warned that any equity they accumulate places the asset at greater risk of being taken and sold by the Trustee. Likewise, if the client is having additional tax deducted so as to reduce their current income and increase the amount of a subsequent tax refund, they should reconsider this arrangement as there may be no real benefit - the tax refund is added to their income when calculating the next year's contributions. The only possible benefit would be if the client had a significantly lower income in the subsequent year and therefore did not meet the income threshold in that year (even taking into account the amount of the tax refund). Note: The grossed-up income reflects the gross salary that would have to be earned to purchase the benefit with after tax dollars. This means that if you take advantage of a salary sacrificing arrangement the assessable income amount the Trustee uses for income assessment purposes is higher than if you took all of your salary as income and not used a salary sacrifice arrangement. Question 30: Private hospital insurance This information is used for statistical purposes as well as determining whether the bankrupt is subject to the Medicare levy surcharge. Also, the Trustee looks at it when considering a contributor's hardship application based on excessive medical/dental expenses. Question 31: Dependants The main purpose in seeking these details relates to the process of assessing the bankrupt for income contributions (see Chapter 6 Part 4). The information is needed to determine whether the bankrupt is entitled to claim his/her spouse and/or children as dependants when determining the level of after-tax income that the bankrupt can retain before they become liable to pay income contributions to the Trustee (see Chapter 6 Part 4). Section 139K defines a dependant as someone: who resides with the bankrupt; AND is wholly or partially dependent on the bankrupt for economic support; AND that their income is not more than the indexed amount (refer to the AFSA website for current indexed amounts). Question 32: Child support The primary use of this information relates to assessment of the bankrupt for income contributions (see Chapter 6 Part 4). If your client pays child support, then that amount is deducted from their income when assessing their liability for income contributions. Question 33: Tax refund It is a good idea for the client to have any outstanding tax returns lodged prior to applying for bankruptcy. It is not essential if the bankruptcy is urgent. The ATO is notified of all new bankruptcies and upon receipt of such notification will check its records to ascertain whether there any outstanding returns. If there are outstanding returns the ATO will then require the bankrupt to lodge those returns. If lodging the debtor's petition is urgent, you should inform the client that they should start organising the lodgement of the outstanding returns to avoid getting into trouble with the ATO. Note: Any refunds due to the client for tax payable prior to the date of the bankruptcy are classed as assets in the bankrupt estate, irrespective of when the refund becomes payable. Refunds received for periods after the date of the bankruptcy are considered income and will not vest in the Trustee but will be included in the income contributions assessment. Where a tax refund covers a period both before and after bankruptcy, it will be apportioned with the part attributable to the period prior to bankruptcy vesting in the Trustee and the remainder being counted as income for the relevant income contribution assessment period. However, if the client has a debt owing to any Commonwealth agency (for example the ATO, Child Support Agency, Centrelink) the ATO will usually deduct those debts from the refund, which it is entitled to do (see Chapter 6 Part 3). If the client gets a substantial refund prior to bankruptcy and spends it in lieu of paying their creditors they will need to fully explain the reasons for their actions. Failure to do so could lead to an objection being lodged against their discharge and/or prosecution action. If paid to one creditor it could be considered a preferential payment and be clawed back by the Trustee. Other antecedent transactions provisions may also be relevant (see Chapter 6 Part 3). Question 34: Unsecured creditors This can be the most difficult section to complete for many clients, particularly where they have a lot of debts spanning many years. You may need to prompt the client to assist with the recollection process. Type of unsecured debt: This may include, for example, credit cards, personal loans, charge cards, unsecured motor vehicle loans, shortfalls on secured motor vehicle loans, home loan shortfalls, tax, energy (electricity or gas), water, fines (note potential loss of licence/rego for non-payment), loans from friends or relatives, education fees (note HELP/HECS is not provable but still must be included), unpaid rent from previous premises, other continuing credit such as interest free purchases, store accounts and Buy Now Pay Later (BNPL) debts, legal fees, costs owing from legal proceedings, unpaid medical bills, court imposed penalties and fines (note not provable but still must be included) and more. You should ask your client whether they have any of these. Note: Outstanding BNPL accounts should be included, both in the interests of full disclosure and in case the client cannot ultimately pay. Clients may want to pay their BNPL and nothing else so that they can retain access to their account. They can pay any debt voluntarily with post-bankruptcy income, so that in itself should not be a problem, but please note that the BNPL provider may cancel the account when notified of the bankruptcy. Creditor: This can be confusing to complete where the loan has been outsourced to a debt collector or assigned (sold). Clients are usually unsure whether the debt collector is an agent or has purchased the debt. Sometimes, if the debt is particularly old, they are unsure who the original creditor was. The Trustee will contact the creditor listed so if the debt is with a collection agent, but the original lender is listed on the form, the debt collector may not be informed as promptly that the debtor is bankrupt. One solution is to list the debt under the original creditor's name but note that it is being collected by a collection agent and include the agent's name and address also. Alternatively, the debt collector could be included as the creditor with the original creditor listed in the nature of debt column alongside the type of debt (for example, Creditor - Credit Corp, Nature of Debt - Westpac credit card). Where there has been a motor vehicle accident it is good practice to list the other driver(s), the owner(s) of the vehicle if different and known, any insurance company involved and any debt collector. This will mean all potential parties are notified of the bankruptcy and will reduce the likelihood that any of them contact the debtor later (instead of the Trustee). Please read the section on Unliquidated debts in Chapter 6 Part 1, before assisting a client to go bankrupt for a motor vehicle accident debt. If the debt is still unliquidated then it will not be provable in the bankruptcy and the client will continue to be liable for the debt despite the bankruptcy. Mth/Yr incurred: Clients will often have trouble remembering this for their older debts. If they do not have the relevant paperwork, they will need to estimate. Assist them by suggesting time significant events that the loan may have been before or after - for example, the World Cup or Olympics, a significant birthday, marriage or divorce, the birth of a particular child. The answer to this question may have some relevance to whether the client is guilty of the offence of incurring a debt they had no reasonable expectation of paying within the two years prior to bankruptcy. The date a debt is incurred is a factual matter that can usually be independently verified in most cases and the client should try to be as accurate as possible. Prosecution on this count would be very rare without other offences. Related Entity: A related entity is defined in Section 5 of the Act and includes a relative, any sole trader, partnership, company or other organisation that is owned or controlled by the client's relative or their spouse's relative. It also includes any businesses, companies or trusts in which your client, their spouse, or their respective relatives may have an interest. For example, the client's niece may be a director of the company to whom the client owes money. Joint Debt: This will tell the Trustee whether the creditor has recourse against another party. Your client should understand that if the other co-debtor is not also bankrupt, the creditor can and probably will pursue the co-debtor for the entire debt remaining (not half!). If the co-debtor pays out the debt in full, the co-debtor can then claim as a creditor in the client's bankruptcy for 50% of the debt (but they will only receive money back when there is sufficient money in the bankrupt estate). Where you have a couple going bankrupt, each person should show the total amount of the joint debt owing as it is most likely that they are jointly and severally liable for the debt. Forgotten Debts You should reassure your client that although the objective is to remember as much information as possible, if a debt is genuinely forgotten it can be included later by notifying the Trustee. Likewise, if a creditor for a provable debt is omitted from the statement of affairs, the creditor is still bound by the bankruptcy (that is the creditor cannot take any recovery action against the client). There will be cases where your client was in a partnership business with their spouse and they have now separated and the other spouse has all the business records. Accordingly, your client will probably have little recollection, if any, of the business debts. The client is only expected to disclose what they can recall and if business creditors appear later, the client can advise the Trustee accordingly. As the Official Receiver is unaware of the extent of your client's debts, their Debtor's Petition will not be rejected if your client has inadvertently omitted a creditor (or creditors). It is stressful for the client, however, when other debts pop up later. If the bankruptcy is not urgent, a copy of your client's credit report may provide clues to forgotten debts, remembering that the current credit provider may no longer be the original credit provider if the debt has been assigned (sold). Whilst it is an offence under the Act to intentionally exclude a creditor from the statement of affairs it would be unlikely that AFSA would take prosecution action. Such action is more likely to be taken where there is a distribution to creditors from the sale of assets and/or contributions and it can be established that the creditor was deliberately omitted in an attempt to exclude it (or them) receiving a dividend from the bankrupt estate. Question 35: Repayments over and above normal repayments The question asks for any amounts paid more than $1,000 over a normal repayment due. Under s 122 of the Act, the Trustee is empowered to recover certain payments made to the bankrupt's creditors in the period leading up to the bankruptcy, commonly known as preference payments, especially where the creditor was 'pressing' for payment because they realised that the debtor may be insolvent. Pressure could include frequent requests for payment, other forms of debtor harassment, or normal enforcement procedures. Where that is the case, the client may want to notify the person of the possibility of the Trustee seeking to recover the money paid. This is particularly common with business failures where creditors (such as suppliers) have to be paid to try and keep the business going. When a business is failing or closed, and the debtor is looking to pay debts they need to be mindful of preferential payments. Property or money received by creditors in the period leading up to the bankruptcy under enforcement action (such as a writ or garnishee) must also be paid to the Trustee less the costs of enforcement. If the relevant property would have been protected in bankruptcy, then it must be returned to the bankrupt (see Chapter 6 Part 2 for what property is protected). Question 36: Repossession This is where the client lists any secured assets that have been repossessed or surrendered to the secured creditor in the past 12 months. If the client is aware that security property has been sold and there was a shortfall, that debt should also be listed under unsecured creditors. If the client is unaware if the property has been sold and repossession occurred longer than 12 months ago, then it should be included under the question concerning the client's assets. Question 37: Coins and notes This question relates to 'cash on hand' (in the client's pocket, wallet, buried in the backyard, etc). Question 38: Accounts While not expressly excluded in the Regulations from property available for payment of debts, the Official Trustee recognises that a debtor becoming bankrupt should be able to access cash to pay for reasonable living expenses and so will generally not take cash on hand and money in bank accounts up to a maximum of $2,000. However, registered trustees are not bound by that policy and may not be so generous. The Act is silent on the issue, but most registered trustees will permit the bankrupt to retain a reasonable amount to meet their ongoing living expenses. It would be unusual for your client to have a large amount of cash or money in the bank when they seek financial counselling assistance. If they do you will need to warn them that they will not be permitted to retain it (see also Chapter 8 in relation to frozen accounts). If your client has no primary form of transport but some money in the bank (for example, over $2,000) they may wish to acquire a car worth less than the prescribed amount prior to going bankrupt. The Trustee will request and review bank statements for material transactions and/or undisclosed assets. They will request the bank to provide details of all accounts where the bankrupt is a signatory or borrower. Question 39: Superannuation The Trustee will issue a notice on the regulated fund to provide details. Note that a bankrupt cannot be a trustee of a self-managed super fund (SMSF) and must cease acting in this position and notify the ATO within 28 days. As a member of a SMSF must be a trustee or a director of a corporate trustee, the effect is that the bankrupt can no longer have a SMSF. There is a period of 6 months to arrange the transition of the assets to another fund, such as a public superannuation fund. Specialist advice will be required for illiquid assets. Funds held in a superannuation fund at the date of bankruptcy are generally protected in bankruptcy as long as it is in an eligible superannuation plan as defined in s 116 (2) of the Act. Likewise any moneys withdrawn from such a fund after the client becomes bankrupt are protected. Any property purchased with those moneys where the whole, or substantially the whole, of the purchase price comes from those protected moneys, is also protected. However, funds withdrawn from a superannuation fund before bankruptcy are not protected. Accordingly, clients should not withdraw their superannuation and then go bankrupt! If they have recently withdrawn money from their superannuation fund, then you need to warn them that this, or any assets purchased with it, will vest in the Trustee and be available for distribution to creditors. The Trustee also has extensive power to claw back money or assets placed into superannuation accounts to defeat creditors (see Chapter 6 Part 2). Note: Payments under a Total and Permanent Disability claim made paid out from a superannuation account may be treated differently. See Chapter 8. Question 40: Shares Generally, the Trustee will sell the shares that are not subject to any restrictions to obtain moneys for creditors. If there are restrictions, expect the Trustee to make further inquiries. It may be prudent to provide an attachment to the form with further detail. Question 41: Vehicles This question refers to vehicles which the client owns or has an interest in. Make sure you have advised your client that any vehicle worth more than the prescribed limit (including the costs of selling the vehicle) could be taken and sold by the Trustee. Any proceeds of sale up to the prescribed limit will be refunded to the client for the purpose of purchasing another vehicle to serve as a primary means of transport. However, as the Act does not specify that those moneys are to be spent on purchasing another vehicle, the client will not breach the Act if the moneys are not spent on another vehicle. Second vehicles will also be sold unless the combined value of the vehicles is less than the prescribed amount. Where the bankrupt is paying off a secured motor vehicle loan the decision whether or not to sell the vehicle will depend on the amount of the bankrupt's equity. The creditor cannot repossess the vehicle while the client is meeting the repayments (section 301 of the Act), but the Trustee may reassess whether to sell the vehicle if the client's equity increases considerably due to repayments made. Of course, the vehicle will also depreciate over time. See Chapter 6 Part 2 for more details on the treatment of motor vehicles, including those that are subject to finance. Care should be taken where a car is owned and being driven by (for example) the client's teenage child is registered in the client's name to reduce the insurance premiums, as car registration is considered to be prima facie proof of ownership. Other evidence will be required to establish that the vehicle does not belong to the bankrupt. There may also be ramifications of misleading the insurance company about the ownership of the vehicle or the identity of the regular driver such as refusal to pay a claim and cancellation of the insurance policy. Question 42: Other items The client should be advised to place a realistic market value (that is, not the insured or replacement value) on any such items, especially jewellery which they have inherited from a relative and has a great sentimental value to them. As Trustees normally sell such assets by public auction, the client can use an auction or garage sale value. Tools of trade up to a prescribed value are protected and, in addition to normal work tools, include such items as computers etc used by the self-employed (see Chapter 6 Part 2). Home computers are also considered to form part of household items (and therefore protected) provided the equipment is of reasonable value. Remember: only equipment valued below the relevant threshold can be retained in bankruptcy, although the Trustee will take into account the estimated cost of selling the goods. For the current thresholds checked the indexed amounts on the AFSA website. Also, the tools of trade that are protected include only those that relate to the client's current or usual occupation. If, for instance, the client had tools for a trade that they are no longer physically capable of carrying on, those tools would not be protected. Similarly, tools or equipment which the client could not use (because they did not have the relevant skills or qualifications) would not be protected. Ensure the tools of trade claimed are consistent with the occupation listed earlier in the form. Question 43: Distribution from estate Your client must understand that any interest they have in a deceased estate in respect of a person who dies either before or during the period of bankruptcy (for example, money, shares, real estate etc) will vest in the Trustee (that is, will be taken to pay the debts plus the costs of administering the bankruptcy). This applies even if the executor does not make the distribution until after the date of discharge (see Chapter 6 Part 3). Where the inheritance is in the form of income (usually for a prescribed amount of time, for example, 5 years) then the client is entitled to receive the periodic payments of the income during bankruptcy, however this will be included as income when assessing the client for liability for income contributions. Where your client thinks that it is at all likely that they will receive an inheritance in the next 3 years (including from someone who is already dead) they should explore other options thoroughly before choosing bankruptcy. They should also understand that it will not be a simple matter of paying the debts later to annul the bankruptcy - they will need to also pay the Trustee's fees and expenses which can be substantial (potentially up to thousands or even tens of thousands of dollars) (see Chapter 8). If the inheritance is significantly more than the amount owed, including the amounts payable in Trustee's fees and expenses and interest, the surplus will be returned to the client and the bankruptcy annulled. If the client knows that they are named as a beneficiary in a person's will and that person is still alive, the client has the option of letting them know about the imminent bankruptcy. The person could then decide whether to change their will (for example, by way of a codicil to the effect that should a beneficiary be an undischarged bankrupt when the person dies, the client's inheritance will be paid to another named person or divided between any other beneficiaries). Again, it is entirely up to the client whether to make this disclosure. Warning: Be careful not to be seen as giving legal advice on this issue. The person with the will should seek their own legal advice. Sections E to J: Secured creditors, other assets, and potential claims These sections contain questions about any real estate, financial assets, and other investments or assets the client may have an interest in. Any secured creditors not previously listed should be noted under other assets. These sections also contain questions about any businesses carried on the by the client as well as legal action(s) they may be party to. Question 44: Real estate Usually, your client will have a reasonably accurate estimate of the value of their property. They should include their best estimate based on any information available to them (for example, an informal valuation provided by a real estate agent or website, the sale price of similar properties in the area). Subject to the following, any real estate will vest in the Trustee and is likely to be sold for the benefit of the bankrupt's creditors. If the property was acquired with personal injury compensation paid to your client (or other protected money), clear reference should be made to this fact because the property may be protected. If substantially the whole of the money paid for the property was protected money then it cannot be sold. If a proportion of the purchase funds were made up of protected money, then the property can be taken and sold by the Trustee, but the bankrupt should be refunded an amount equivalent to the current value of the protected contribution, provided it can be adequately traced through appropriate documentation or other evidence (see Chapter 6 Part 2). While there is no designated space for providing this information, your client can always upload or provide supporting documentation as an attachment to the form. The Trustee will most certainly require documentation to verify your client's assertion. If possible, copies of the requisite documents should be attached to the forms or a note to say that documentary evidence will be sent to the Trustee as soon as it is obtained. Note: It is only property purchased wholly or substantially with personal injury compensation or other protected money paid to the bankrupt that is protected. Property owned or partially owned by the bankrupt, but purchased with compensation paid to another person, such as the bankrupt's spouse is not protected. This means that the bankrupt's share of such property would be available to the Trustee (see Chapter 6 Part 2). Details as to whether the property is occupied or vacant and who resides in it are required to assist the Trustee in insuring and selling the property. The name and address of the person collecting the rent includes a real estate agent managing the property. If the rental being collected is paid to the holder of a mortgage over the property, details to that effect should be noted on the form. Normally the Trustee will inform the tenants of the property of the bankruptcy and will probably require them to pay their rent to the Trustee. The client should be warned about this. The Trustee will register a caveat on the title, and will obtain either a valuation or market appraisal. The Trustee will contact any mortgagee(s) and caveators, and establish the validity of the interest. The Trustee will then determine the available equity. Where the property is already listed for sale or auction with an agent, the Trustee will usually continue with that agent unless the Trustee has grave concerns about the agent's capacity to obtain a realistic price for the property. All fees and commission payable to the agent will be paid from the sale proceeds. Should the Trustee for some reason replace the agent, any debt owing to the replaced agent will become a debt provable in the bankruptcy. Explain to the client that the Trustee is likely to sell the property if the client's equity is sufficient to produce a surplus after deducting the costs of the sale. The client should understand that even if the Trustee does not wish to sell the property now (usually because the client has very little equity) this could change in the future. The Trustee has many years in which to sell property (at least 6 years from discharge when the property has been promptly disclosed) and can choose to do so long after discharge by extending the re-vesting period in writing. However, with the family home, usually the Trustee will give the bankrupt first option to buy back their equity in the property when discharged. Should your client be considering the strategy of attempting to buy back the equitable interest in the property at discharge, it is advisable to state this at the time of going bankrupt. Your client should be warned that there are risks associated with this plan (see Chapter 6 Part 3). If there is another person who has an interest in the same property (for example a current or former spouse or de facto spouse, or another family member), and that person is not going bankrupt, the Trustee will usually give the co-owner(s) the opportunity to buy out the equitable interest of the bankrupt person (see Chapter 6 Part 3). If the co-owner(s) are unable to do this, the property is likely to be sold and the equivalent of the non-bankrupt owner's share returned to them. You should ensure that your client understands that this will happen, although it is his or her decision whether they discuss this with the co-owner(s). If the client has an interest in more than one property, then additional pages of the form can be obtained by contacting AFSA. If your client does have an interest in multiple properties you should discuss with your client why they have not been sold, or the client's share sold to a co-owner, for example, in an effort to repay the debts (of course if the client has been made bankrupt by a Creditor's Petition they may not have had an opportunity to do this and it is too late now). If the property is an investment, Capital Gains Tax may apply to the sale proceeds, in which case the Trustee will be liable to remit the tax. Question 45: Investments The Trustee will sell these assets to obtain moneys for the creditors. Interest in a timeshare vest in the Trustee. Questions 46 and 47: Digital assets and accounts The client must disclose any cryptocurrency they own or have an interest in. These will form part of the estate unless protected and will be sold by the Trustee. The Trustee may also undertake debtor profiling, such as assessing whether the debtor has a high debt to income ratio, to inform a decision to investigate for cryptocurrency activity, for example, reviewing bank statements for transactions to and from cryptocurrency exchanges. The client must also disclose any accounts not previously listed such as cryptocurrency exchange accounts, betting accounts, and online payment accounts. Clients tend to not disclose these accounts, however the Trustee can identify them from bank statements. Question 48: Money owed to the client This section will assist the Trustee in deciding whether to take action to pursue any of the above amounts for the benefit of the bankrupt estate. Where the client considers that a debt is recoverable, they should include notes about the debt and the debtor, including current contact details, financial status and any supporting documentation to assist the Trustee to recover the debt. Note that collection can be difficult, particularly if they are business debts which are often disputed due to poor quality workmanship etc. This can be provided as an attachment. See also Chapter 6 Part 5 section titled Legal proceedings by your client for a discussion of the types of claims that may not vest in the Trustee. Child Support Arrears need not be included because they do not vest in the Trustee. Note: Any Child Support paid to the client during the bankruptcy can be retained by the client and the payments are not included as income when the client is assessed for income contributions. Question 49: Clients contribution to other assets Again, this information is to assist the Trustee in locating any divisible property of the bankrupt. If the client has contributed towards the acquisition of property held by another person (usually a relative) the Trustee has a number of options available. If the client considers that the monies they provided were a 'gift' to the other person, in certain circumstances the Trustee may claim those monies from the other person on the basis that the gift was an undervalue transaction or transfer to defeat creditors. If it was not by way of a gift, the Trustee may either claim that the monies were loaned to the other person so the amount is now a debt payable to the Trustee or the Trustee may claim that client has a beneficial interest in the property by way of a resulting trust (see Chapter 6 Part 3). Likewise, you should remind the client that they are required under the Act to make a full and proper disclosure of all their financial affairs, and if they make a disclosure in this section, they should consider informing the affected third party of the disclosure. Question 50: Any other assets This is where the client should list any assets and secured creditors that have not been previously listed. Any unprotected asset (for example, cars, boats, antiques, jewellery, real estate etc) of the bankrupt will vest in the Trustee regardless of the fact that it is in the possession of another person at the time of the bankruptcy. The client should tell the third party that they have disclosed the asset to the Trustee and that the Trustee will be contacting them regarding the asset. Normally the Trustee will give the person the first option to acquire the asset from the Trustee. Question 51: Sales, transfers or gifts (in the last 5 years) This section is designed to assist the Trustee in the investigation of the client's affairs, particularly with a view to identifying transactions that may be void against the Trustee. Such transactions mainly relate to those where the client sold a property but did not receive the full market value for it. For example, the property had a market value of $500,000 and a mortgage debt of $400,000 but the purchaser only paid out the current mortgage debt and did not pay the client for the $100,000 equity. This is commonly known as an undervalue transaction. Transfers to defeat creditors are also void against the Trustee. The Act empowers a Trustee in certain circumstances, to either claw back the property from the person who received it (such as your client's partner, ex-partner, relative or associate) or require that person to pay the Trustee the amount representing the difference between the actual market value of the property and the amount that the bankrupt received for it. In the case where the property is transferred back to the Trustee, the Trustee is required to refund the amount paid by that person, if anything. The Trustee can undo transactions going back a number of years (see Chapter 6 Part 3). Clients should remember that there are penalties for false and misleading information including omissions. However, they should also be careful not to overvalue any assets, as this could result in unnecessary investigation. Advise your client to be realistic. Question 52: Lump sum contributions to superannuation The purpose of this question is to ascertain details of lump sum contributions made to the client's superannuation fund. The Trustee will investigate whether there have been any contributions, whether by the bankrupt or a third party, that are void against the Trustee and potentially recoverable. Superannuation contributions made by the client may be void against the Trustee if the amount would have otherwise been available to creditors and the main purpose in making the contributions were to defeat creditors, for example, if the client increased their contributions significantly shortly prior to bankruptcy. Similarly, contributions by a third party, such as an employer, made pursuant to a scheme between the client and the third party may be void and recoverable where it can be shown that the property would have formed part of the bankrupt estate, and the main purpose of the client was to defeat creditors. Sections H - J: Businesses details Warning for financial counsellors: Business bankruptcies can be quite tricky, and require a level of expertise, especially if the business is still operating. Always seek guidance from your supervisor and/or AFSA. Where a self-employed client is petitioning for bankruptcy in relation to personal debts which are unrelated to the business, make sure they are aware of the limitations of bankruptcy (such as the ban on being a director of a company, the likely winding up of any partnership, the rules about trading in another name, and the obligation to disclose the bankruptcy in certain circumstances - see Chapter 6 Part 6). Where the client is essentially a contractor with no other assets than protected tools of trade, continuing self-employment while bankrupt may be a viable option. On the other hand, a business requiring expensive stock of equipment, owned and operated by the bankrupt, is unlikely to be able to continue because these assets would vest in the Trustee. If the business has ceased operating and the sole cause of the client's bankruptcy is business debts incurred by a company, then it is important to establish that the client is personally liable for the debts. Where this is not clear your client should seek legal advice before proceeding with the bankruptcy. Where the client has received legal advice to the effect that they are personally liable, or that the costs and risks of disputing liability are so great as to make it impractical, then keep a copy of the advice on the file and/or make a detailed file note. Question 53: Sole trader/partnership See Chapter 6 Part 6 for general information on Small Business and bankruptcy. The question about whether the client has operated a business should be answered as accurately as possible or your client could risk prosecution for providing false or misleading information. Closed and failed businesses must be included if they were operational at any time in the previous 5 years. Your client may have very little by way of records and/or recollection of their business, especially if it closed, say, 4 years ago. They should disclose as much as they can recall; however, you should give them some prompts to help them recall by asking questions about the nature of the business etc. Where there are reasons why the client cannot obtain the information (domestic violence, for example), a note of this should be attached. The information in this section and below is used by the Trustee when investigating the bankrupt's past financial dealings, and for determining if a business can continue to trade. The information is also gathered for statistical purposes and used by various bodies such the Australian Bureau of Statistics and industry groups. You should endeavour to obtain all available business documents, accounts, ABN, information on winding up etc from your client before proceeding with these questions. Question 53: Recently ceased business This information is also used by the Trustee for investigation and statistical purposes. Question 53: Lease The Trustee requires these details so that the Trustee can contact the landlord urgently to ascertain details of the occupancy and whether the Trustee needs to disclaim the lease to avoid becoming personally liable for the ongoing rent. Question 53: Current assets This information assists the Trustee in locating and selling any divisible property to obtain moneys for the creditors. Also, if the assets are stored in rented premises, the Trustee will take steps to have the assets removed so that the landlord can regain occupation of their premises. Remember: Tools of trade are protected in bankruptcy (up to the prescribed value) but Plant and Equipment are not. Advise your client to get legal advice or talk to AFSA if this is a grey area, keeping in mind that AFSA cannot give legal advice. These questions are asked to assist the Trustee to ascertain whether there are any asset related issues requiring attention, such as contacting the creditor who appears to have a charge over the assets. Question 53: Recently disposed of assets This information is used by the Trustee when looking for undervalue transactions and/or transfers to defeat creditors (see Chapter 6 Part 3) and determining the reasons why the client became insolvent. Question 53: Partnership Where a partnership business is still operating and the other partner is not going bankrupt, then the partnership will usually come to an end (that is it will be dissolved) when your client becomes bankrupt unless there are more than two partners. The partnership deed will determine what will happen in the event of one of the partners becoming bankrupt and dissolution is less certain for partnerships of more than two people. In a two-person partnership, the other partner, who is usually referred to as the 'solvent partner', will be responsible for winding up the partnership and accounting to the Trustee of your client's bankrupt estate. Depending on the nature and financial state of the business the solvent partner can do an 'actual' winding up where the partnership assets are sold, and the liabilities paid, and the client's share of any surplus remaining is paid to the Trustee. Should the solvent partner (or partners) wish to carry on the business, a notional winding up can be done whereby the partnership assets are valued and the liabilities determined, and the solvent partner (or partners) pay the Trustee for the bankrupt's share of the notional surplus (see also Chapter 6 Part 6). The partnership agreement is an important document as it will detail the proportions in which the partners hold an interest in the partnership (that is their respective shares) and should detail how the surplus in a winding up is to be distributed. Where the other partner is also going bankrupt it is preferable for them not to go bankrupt together but on separate Debtor's Petitions. Usually, one partner will have a better understanding of how the partnership was structured and operated, and usually this partner will hold the records. Question 53: Current employees This question is used to assist the Trustee to investigate the affairs of the bankrupt. Question 53: Person responsible for financial statements and tax returns The financial counsellor may need to prompt the client about the whereabouts of the business records. Failure to keep proper books of account and costing records in the five years prior to the bankruptcy, or failing to preserve such records, is an offence under s 270, potentially punishable by imprisonment. There is a defence in both cases that the failure to keep or preserve the books was 'honest and excusable' (s 270 (2)). AFSA would only take prosecution action in this regard where there was a very substantial amount owing to creditors of the business and/or it appeared that it had a very high turnover, but no records were kept (possibly to avoid paying tax). Question 54: Companies Where your client is currently a director of a company, you should inform them that they should resign as a director when they become bankrupt because it is an offence under the Corporations Act to be a director whilst being an undischarged bankrupt. Once they are discharged from bankruptcy, they can be a director again (see Chapter 6 Part 5 for more information and the forms that need to be lodged with ASIC). Whilst the same applies to a debtor who enters into a PIA under Part X of the Act, it does not apply to a debtor who enters into a Debt Agreement under Part IX. Where your client wants to continue in a director's role and otherwise meets the criteria for a Debt Agreement, they might want to consider a Debt Agreement as an alternative - see Chapter 5. This information also assists the Trustee to determine whether your client has any proprietary interest in a company, which has a realisable value and can be sold by the Trustee. It will also assist with the financial investigation to determine whether there have been any undervalue transactions or transfers to defeat creditors. Question 54: Companies This information assists the Trustee to contact the administrator/receiver/liquidator to ascertain details of the administration and whether there is any likelihood of any distributions or other money owing to the bankrupt that would be payable to the bankrupt estate. If there is any question mark over whether your client may have engaged in insolvent trading (see Chapter 6 Part 6) the company debts might also need to be listed in the statement of affairs. The client can provide a supplementary attachment listing these as company debts with a note to the following effect: 'These are debts of a company of which I was a director (or sole director). I do not believe that I am personally liable for these debts but the company is currently in administration/liquidation (whichever applies).' If there are debts of the company for which your client is personally responsible as a result of a personal guarantee these should be included in the appropriate place in the statement of affairs. Question 54: Trustee company This question is to assist the Trustee to investigate the affairs of the bankrupt. Question 54: Unpaid debts This information is again used to assist the Trustee to determine whether there is any likelihood of distributions or other money payable to the bankrupt estate. Question 54: Person responsible for financial statements and tax returns This information is used by the Trustee to contact the person and obtain the records if the person is not willing to give them to your client. This is likely to be the case if the person has not been paid and is a creditor in the bankruptcy. The Act empowers Trustees to obtain the records from these persons. Question 55: Trusts This is a very tricky area. Financial Counsellors are encouraged to proceed with great care. Clients should be told to seek legal advice in relation to any relevant trust. Brief information about trusts and the circumstances in which apparent trust property may be accessible by the Trustee is included in Chapter 5 Part 3. Where a client has a trust the financial counsellor should make it clear that they do not give advice on trusts and that if the client wishes to proceed with the bankruptcy without seeking advice, or in contravention of their legal advice, that they will have to fill in that part of the form themselves without guidance from the financial counsellor. The financial counsellor should make detailed notes of any advice obtained. Where the client has obtained legal advice on how to complete the Trust section and, most importantly, whether the trust funds are likely to be subject to a claim by the Trustee, the financial counsellor should obtain a copy of that advice. The Trustee will request the Trust Deed(s) and obtain all financial records. The Trustee will investigate whether the bankrupt was solvent when the trust was established and will investigate details such as income splitting arrangements and property held. Question 55: Trust liabilities, assets and past distributions The Trustee will also review this information with a view to uncovering potential undervalue transactions, transfers to defeat creditors, potential income and other matters of relevance to the administration of the bankrupt estate. Question 56: Legal actions Your client is required to disclose these details to enable the Trustee to decide whether to continue the action (the bankrupt's contractual rights, for example, vest in the Trustee). Generally, a bankrupt cannot continue civil proceedings in their own right (with the exception of some claims for personal injury or wrong). Whilst claims for personal injury to the bankrupt or a member of their family are protected and can be continued by the bankrupt, they also need to be disclosed here (see also Court Proceedings in Chapter 6 Part 5). Criminal charges against the bankrupt will continue regardless of the bankruptcy, but it may be useful for the Trustee to have notice of any impending fines or unavailability of the bankrupt due to incarceration (in case it is misunderstood as a failure to cooperate). If your client is subject to a Creditor's Petition, details of the creditor and their solicitor should be shown so that they can be contacted and advised of the Debtor's Petition. Question 57: Proceeds of crime order It would be very rare that your client would be subject to such an order as they are usually made against people who have valuable assets (for example, houses, boats, planes, large amounts of cash etc). If such an order has been made, the property subject to the order is not available to the Trustee. Question 58 and 59: Additional information and submission There may be additional information that your client may choose to provide with the application which could potentially save them from responding to letters/phone calls from the Trustee seeking further details and/or clarification of issues. For example, if the client's home has been acquired with the proceeds of a personal injury compensation claim (see Chapter 6 Part 2), details of the payment and contact details of the solicitor who acted on the claim and purchase of the house could be included. If your client is using the paper form, this information should be included as separate marked attachment. Attaching copies of supporting documents in that regard is also recommended (do not attach originals). If your client has a large number of unsecured debts and needs an additional page(s) to disclose all their unsecured creditors, these are available on the AFSA website. It is good practice for you to keep copies of additional unsecured creditors pages along with the rest of the paperwork. Section L: Acknowledgment and Proof of identity Stress to your client that this is a legal document and there are penalties under the Bankruptcy Act for providing false or misleading information. The debtor must sign and date the forms no more than 28 days prior to receipt by the Official Receiver. Forms dated earlier than this will be rejected. Accordingly, the debtor should not sign until all the required information has been located and the forms are complete and ready for lodgement. Make sure the form is signed and dated in the correct format. As your client is signing to say that they have received and read the prescribed information, it is recommended that you talk through the prescribed information with your client again, even if you have already discussed these things at a previous interview. Complaints about bankruptcy often relate to misunderstandings about the potential consequences. Ordinarily, the client lodging online is required to provide proof of identity at the time of registration. Clients who lodge using the paper forms are required to have appropriate identification sighted by an authorised witness, which includes a financial counsellor. The instructions contain a list of acceptable forms of identification. You should sight these documents and confirm that the details have been correctly transcribed. The financial counsellor should provide their National Registration Number as their qualification. Section M: Declaration of person assisting with completion of forms If you are using an interpreter, you need to ensure that they are qualified for the role and that they understand about confidentiality. They will have to be prepared to sign the documents including the declaration that they have read the prescribed information to the client - if they are not you will need to arrange an alternative interpreter. Using a scribe Some services have a policy that financial counsellors never fill in the forms. If the client does not have the capacity to complete the forms, then a scribe is used, either an associate of the client or another staff member at the agency. In this way the delineation is clear - the financial counsellor is providing advice and assistance, and the client is taking responsibility for the accuracy and completeness of the information (to the best of their knowledge) and the decision to go bankrupt.

Updated: 29 October 2025 Part 1: Life in Bankruptcy Part 2: The light at the end of the tunnel - getting out of bankruptcy Part 3: Challenging Trustees' Fees Summary Life as a bankrupt comes with obligations and restrictions. Clients must now: co-operate with the Trustee; notify the Trustee of all material changes of circumstances (eg income increases or decreases, property acquired, money inherited or won etc); inform the Trustee in writing of any change of name; complete paperwork and possibly attend creditors’ meetings (rare for financial counselling clients); provide the Trustee with access to records and information; possibly pay income contributions; and disclose their bankruptcy if they borrow money, enter lease or hire purchase agreements, offer to supply goods and services, or pass cheques worth more than the threshold amount. Part 1: Life in Bankruptcy This chapter includes information about: obligations and offences freezing of accounts income contributions - hardship and enforcement permission to travel provable debts (collection attempts) secured loans insurance claims External Dispute Resolution early release of super other issues. Sample letters are included where applicable. A handout for your client to help them remember their obligations and where to go for help is also included. Clients can find their mandatory disclosure confronting. Although bankruptcy can relieve stress and empower the client to move on with their lives, a poorly prepared undischarged bankrupt may be subjected to a whole new range of stresses. The role of financial counsellor shouldn't necessarily end with the lodgement and acceptance of the bankruptcy. The client may continue to experience significant practical and emotional challenges as a consequence of the bankruptcy. They may need assistance to fill in any forms the Trustee may require, or to advocate in relation to what constitutes protected property. They may want help to develop strategies to minimise the likelihood they will become bankrupt again in the future. They may face difficulties paying income contributions, seeking permission to travel, or paying secured loans. Once the bankruptcy has been accepted, the undischarged bankrupt's affairs fall under the control of the appointed trustee in bankruptcy (the Trustee). The job of the Trustee is to ensure that any income or assets not protected in bankruptcy are made available to the creditors. The Trustee may be someone from AFSA or a private registered trustee (any reference to 'the Trustee' includes AFSA where the Official Trustee is administering the estate). In some cases, the Official Trustee is the initial trustee before the estate is subsequently transferred to a private trustee. The client has no say in such a transfer. The main role of the Trustee is to obtain funds for distribution to creditors from one or more of: the sale of assets that are not protected in bankruptcy the recovery of property that was transferred to third parties before bankruptcy income contributions. For some financial counselling clients this will have no relevance because they have no assets and very limited income. During the bankruptcy the Trustee may seek further information from the undischarged bankrupt including proof of income, financial statements, contracts and so forth. The undischarged bankrupt has a responsibility to supply this information to the Trustee and keep the Trustee informed of any change in their personal circumstances including income, relationship status or place of residence. Additionally, the Trustee may investigate transactions between the bankrupt and their relatives and friends which could involve those persons being required to appear in Court and give evidence about their dealings with the bankrupt. During the period of bankruptcy, the bankrupt will be regarded as an undischarged bankrupt. The period of bankruptcy ends three years and one day from the date on which the statement of affairs is filed, unless the period is extended by the Trustee lodging an objection. When the person is discharged from bankruptcy, they will become a discharged bankrupt. The restrictions discussed in Chapter 3 and Chapter 6 will apply to undischarged bankrupts, who must comply with the bankruptcy laws and regulations and co-operate with the Trustee. Failure to do so can result in a breach of the Bankruptcy Act leading to potential extension of the period of bankruptcy for up to 8 years and the possibility of prosecution. Clients need to understand that as long as they are completely honest and forthcoming with information for their Trustee, the process should run smoothly. If they withhold information, or attempt to hide assets or money, or otherwise deceive the Trustee in any way, they are likely to be in serious trouble. Any decision of a Trustee is potentially reviewable, although repeated unsubstantiated complaints will not assist in influencing the Trustee to exercise their discretion in the bankrupt's favour. This Chapter contains information about seeking a review or making a complaint in two specific areas - hardship in relation to income contributions and seeking a review of the Trustee's remuneration and expenses. If you wish to assist your client to complain about, or seek a review of, these or any other aspects of the Trustee's conduct/decision-making, write to: AFSA Regulation and Enforcement Phone - 1300 364 785 Online - submit the relevant feedback form linked at paragraph 4 on the AFSA website. Post - GPO Box 2604, Adelaide SA 5001. Reporting and other obligations of bankrupts Obligations to the Trustee and the court The undischarged bankrupt must give the Trustee all books and financial records of the bankrupt's examinable affairs, and the bankrupt's passport (if any), 'forthwith' (s 77(1)). Often the Trustee will not require the passport to be physically surrendered, so the client should wait to see if it is requested. Passports and financial records should NOT be lodged with the Debtor’s Petition or statement of affairs. Throughout the bankruptcy, and in accordance with s 77(1), the bankrupt must also: attend the Trustee whenever the Trustee reasonably requires give the Trustee any information about his or her conduct or examinable affairs that the Trustee requires notify the Trustee as soon as practicable after becoming a bankrupt of any material change in his or her position since the lodgement of the statement of affairs notify the Trustee of any further material change in position as soon as practicable after that change occurs (for example, an increase in income) attend a meeting of the creditors whenever the Trustee requires and give such information at the meeting in relation to his or her conduct or examinable affairs that the Trustee requires execute such instruments and do whatever is required in relation to his or her property to give effect to the requirements of the Bankruptcy Act, the Trustee or any orders of the court disclose to the Trustee any property received or acquired that would be divisible among creditors as soon as practicable after it is received or acquired (for example, an interest in a deceased estate (such as an inheritance), major lottery prize etc) 'aid to the utmost of his or her power' in the administration of his or her estate. If the bankrupt is prevented by illness or other reasonable cause from doing any of the above, they may have a defence (although such failure should be corrected as soon as it is practical to do so). A person's examinable affairs are defined under s 5(1) as: the person's dealings, transactions, property and affairs; and the financial affairs of an associated entity of the person, in so far as they are, or appear to be, relevant to the person or to any of his or her conduct, dealings, transactions, property and affairs. A material change is defined under s 77(2) as: 'a change in the particulars contained in the bankrupt's statement of affairs, where the change could reasonably be expected to be relevant to the administration of the bankrupt’s estate.' Case study A bankrupt's only asset was a caravan. The Trustee had indicated her intention to sell the caravan. The bankrupt had been living in the caravan but had received an offer of rental accommodation in a share housing arrangement that suited his needs and income. The Trustee strongly suggested that the bankrupt should stay in the caravan until a buyer had been located. The bankrupt did not want to do this because a suitable rental opportunity might not be available at a later date. Although the bankrupt should aid the Trustee to the utmost of his or he power in the administration of the estate, this does not extend to being required to live in a particular place. The bankrupt is free to take up the offer of rental accommodation. The bankrupt must notify the Trustee immediately in writing of any change in the bankrupt's name, address (of the bankrupt's principal place of residence) or in their daytime telephone number (s 80(1)). If the bankrupt in fact assumes or begins to use a different or additional name, this will be deemed to be a change of name and must be notified in writing (s 80(2)). Failure to comply with this section is a strict liability offence carrying a penalty of 6 months imprisonment (s 80(1)-(1A)). Prosecution is only likely in the context of a other offences having been committed, for example, trying to hide income or assets using the alternative name. Clients should nevertheless be told the seriousness of the obligation. A bankrupt can be summonsed to court to be examined in relation to their affairs (including after they have been discharged from bankruptcy) upon the application of a relevant creditor, the Trustee or the Official Receiver (s 81(1)). A person who fails to appear in accordance with such a summons can be arrested. Offences A bankrupt, or a person subject to a Bankruptcy Notice or Creditor's Petition, can be arrested and brought before the court and in some cases imprisoned under s 78(1) if they: abscond (run away or hide) to avoid his or her debts or to delay bankruptcy proceedings remove or conceal their property to prevent or delay the Trustee from taking possession remove, conceal or destroy books or other financial records relevant to their examinable affairs. In such cases the court can also order that books, records or property be seized and delivered into the custody of a particular person. Only a bankrupt (not a person subject to a Bankruptcy Notice or Creditor's Petition) can be arrested and brought before the court and in some cases imprisoned under s 78(1) if they: conceal or remove any of their property without the permission of the trustee neglect or fail to comply with any order of the court or other obligation under the Bankruptcy Act without good cause. Other offences include: failing to disclose property (s 265) disposing of or creating a charge over property with intent to defraud the creditors (s 266) making a false declaration (including but not limited to in the statement of affairs) (s 267) failing to keep proper books of account (or failure to preserve such books of account) in the 5 years prior to bankruptcy (except where such failure was honest and excusable) (s 270) gambling and hazardous speculation as covered in detail in Chapter 6 Part 8 (s 271) leaving Australia prior to bankruptcy (in the 6 months before or after presentation of a Petition) with the intent to defeat or delay creditors (see Note below) (s 272) leaving Australia while bankrupt without the Trustee's written permission (s 272) failing to disclose the person's bankrupt status (s 269) when doing any of the following for an amount above the relevant threshold ($7,173 as at October 2025 for current indexed amounts check the AFSA website): obtaining credit obtaining goods or services from a person: by giving a bill of exchange or cheque drawn, or a promissory note by giving 2 or more of the above which add up to more than the threshold. entering into a hire-purchase agreement, or entering into a contract or agreement for the leasing or hiring of any goods obtaining goods or services on credit promising to supply goods or render services. running a business in a name other than the name used in the bankruptcy documentation (for example under an assumed name, in the name of another person or, either alone or in partnership, under a firm or business name) (s 269(1)(b)) failing to keep books explaining income and other transactions during bankruptcy unless notified in writing that this is unnecessary (s 277A) having incurred a debt within the 2 years prior to becoming a bankrupt without having any reasonable or probable expectation of being able to pay (s 265(8)). Minor technical breaches are unlikely to be prosecuted and in many cases the option of extending the bankruptcy (see below) will be preferred to the rigorousness of mounting a criminal prosecution. However, Trustees have an obligation to report any apparent offence to AFSA, who will then investigate and assess whether the matter is worthy of a report to the Commonwealth Director of Public Prosecutions (CDPP). The CDPP will then conduct its own analysis of whether there is sufficient evidence to proceed to prosecution. Ultimately, the court will decide the matter on the evidence. Note: Simply travelling overseas within the 6 months before bankruptcy is not an offence. It must be with the intent to defeat or delay creditors. There must be evidence that the client did not intend to return, did not return, or was in some way divesting him or herself of assets in the course of the journey. Examples of successful prosecutions: Case Study 1 A Victorian man was convicted in the Melbourne Magistrates Court, after pleading guilty to a breach of the Bankruptcy Act. Mr Giuseppe (Joseph) Catalano was charged with obtaining services without disclosing his bankruptcy, after failing to tell a private school that he had an undischarged bankruptcy when enrolling his son and committing to the school's fees. He was fined $2,500 and has been ordered to pay restitution to the school, an amount of just under $20,000. Mr Catalano was first declared bankrupt in 1997 by an order of the court and has not yet submitted his Statement of Affairs. As a result of this failure to comply, Mr Catalano will remain bankrupt until his Statement of Affairs has been accepted by the Official Receiver. In addition to the first bankruptcy in 1997, Mr Catalano declared bankruptcy for the second time in February 2015. As part of the bankruptcy declaration, he acknowledged the legal requirement to tell a supplier that he had an undischarged bankruptcy. At that point, he owed the private school almost $30,000. Source:  Victorian man convicted after failing to disclose bankruptcy, AFSA media release, 10 May 2021   Case Study 2 A Victorian woman was sentenced to 2 years imprisonment by the Victorian County Court after pleading guilty to 13 offences under the Bankruptcy Act. Thao Thi Luong was prosecuted for disposing of property with the intent to defraud creditors, both in the 12 months prior to her bankruptcy and during her bankruptcy. She will serve 5 months imprisonment and will also be subject to conditions upon release – including a three year good behaviour bond, with $4,000 as security. Ms Luong was made bankrupt by a court order in January 2019, with accrued debts of more than $1.5 million. After her initial bankruptcy notice was served in August 2018, Ms Luong withdrew and disposed of more than $50,000 from a range of bank accounts that she was a signatory to. A creditor's petition was filed in November 2018, and Ms Luong withdrew and disposed of a further $95,000 between December 2018 and January 2019. Of this amount, $45,000 was received from Crown Casino. Information about the bank accounts in her name was not provided to her bankruptcy trustee nor included in her Statement of Affairs. Source: Victorian woman jailed for serious bankruptcy offences, AFSA media release, 6 October 2021   Case Study 3 A New South Wales man was fined after pleading guilty to 4 counts of disposing of property within 12 months of filing for bankruptcy and one count of making a false declaration following an investigation by AFSA. Mr Mahfoud Assi was convicted in the Parramatta Local Court, sentenced to 18 months of community corrections orders and fined a total of $9,000 for his offending. Mr Assi was declared bankrupt in July 2020. In administering Mr Assi's estate, the Official Trustee discovered that within 12 months prior to bankruptcy, Mr Assi withdrew $120,000 across 7 cash withdrawals from his bank accounts. Two days prior to filing for bankruptcy, Mr Assi also transferred ownership of a boat. Mr Assi subsequently made a false declaration on his Statement of Affairs by not declaring the transfer of the boat. The matter was prosecuted by the Commonwealth Director of Public Prosecutions on behalf of AFSA. Suspected wrongdoing, criminal misconduct, dishonesty, or fraud in a personal insolvency can be reported to AFSA at Reporting a tip-off. Tip-offs can be made anonymously. Mr Assi pleaded guilty to 5 counts under the Bankruptcy Act 1966. Counts 1 - 4: Dispose of property objectively valued at $20 or more and within a period of 12 months after the disposal of that property a petition for bankruptcy was presented, contrary to s 265(7) read with s 265(4)(a) Count 5: Knowingly make false declaration in statement of affairs contrary to s 267(2) For counts 1- 4 he was convicted and sentenced to serve two 12-month community corrections orders concurrently and fined a total of $9,000. For count 5 he was convicted and sentenced to an 18-month community corrections order concurrent with counts 1-4, for making a false declaration. Source: NSW man sentenced following property disposal prior to bankruptcy, AFSA media release, 29 September 2023 Freezing of accounts If your client has an account with funds in it, the funds in the bank account vest in the Trustee at the date of bankruptcy. Bank accounts can be frozen if they contain funds but in practice the Trustee may allow an account to hold a threshold amount before freezing the account ($5,000 when the estate is administered by AFSA but potentially lower when handled by a registered trustee - about $2,500). Your client should make sure they have an account with less than this amount in it for general cost-of-living expenses. Direct debits, if any (such as for rent, secured loans, utilities etc), should be set up from this account only. This should be the same account into which the bankrupt's wages or Centrelink benefits are paid. It is prudent to get a balance of the account on the day Debtor's Petition is lodged. Your client is allowed to accumulate money (savings) from earnings after the date of the bankruptcy (subject to any assessed income contributions) but should be able to trace the origin of the funds in the event of a dispute with the Trustee. If the money is directly deposited by their employer there should be a clear audit trail, provided these funds have not been mixed with others. Income should NOT, however, be used to purchase assets (including shares) until after discharge from bankruptcy, as such assets will vest in the Trustee as after acquired property. Case Study Marc Di Cioccio, during his bankruptcy, earned income below his 'actual income threshold amount'. He was able to save some of this income partly because he was in prison. With the money saved, he acquired shares in several companies. Later, after his release, Mr Di Cioccio informed the Official Trustee that he intended to buy a car. The Trustee asked where the money was going to come from for the purchase, and Mr Di Cioccio said that he intended to sell the shares. The Trustee informed Mr Di Cioccio that those shares vested in Trustee, because s 58(1)(b) of the Bankruptcy Act states that 'after-acquired' property of the bankrupt (ie property that is acquired by the bankrupt on or after the date of the bankruptcy) vests in the Trustee. The Federal Court agreed with the Trustee. The Trustee sold the shares and put the money from the sale towards Mr Di Cioccio's debts. Source: Di Cioccio v Official Trustee in Bankruptcy (as trustee of the Bankrupt Estate of Di Cioccio) [2015] FCAFC 30 (11 March 2015) Occasionally, an overzealous Trustee may freeze accounts with even small amounts in them. In the event that your client's cost-of-living account has been frozen, they should contact their Trustee in the first instance. If they are unable to resolve the matter directly with the Trustee, you may be able to advocate for them. You will need to show that either: the client needs the funds to cover essential living expenses and are suffering genuine hardship as a result of their inability to access them that the funds (or a portion of them) have been saved from income since the date of the bankruptcy (a balance of the account at the date of bankruptcy will assist in this process). If the Trustee will not release the funds, you or your client can complain to AFSA. Note: The Trustee may have a genuine claim against funds the bankrupt has wrongly retained, for example, proceeds of an insurance claim in relation to loss or damage in relation to property which has vested in the Trustee. In that case your client should seek legal advice. Income contributions If your client earns income above the applicable threshold as disclosed in the statement of affairs, they will usually receive an Assessment Notice within a week or two of lodging their statement of affairs, provided the required evidentiary information is attached. The Assessment Notice should contain: the basis of the calculations who the bankrupt should contact at the Trustee's office if they have questions their appeal rights and the applicable procedure their hardship rights and the applicable procedure. Contribution Assessment Periods, or CAPs, each run for 12 months with the first commencing from the date of the bankruptcy. Prior to the completion of each CAP the bankrupt must complete an Income Statement and provide evidence of their actual income received in the current CAP, and the expected income for the subsequent CAP. There are penalties for failure to supply this information. Further, the bankrupt risks the Trustee drawing his or her own conclusions. As already emphasised in Chapter 6, clients would be well advised to notify the Trustee of any significant change in their circumstances during a CAP or face the possibility of either paying too much, or accumulating significant arrears when the evidence of actual income is supplied at the conclusion of the CAP. The Trustee is entitled to take into account a wide range of other sources of information if they are dissatisfied with the information supplied with the statement of affairs or Income Statement, or they have uncovered inconsistent information as a result of their investigations of the bankrupt's affairs. At the end of each CAP, the Trustee compares the bankrupt's actual after-tax income to the projected figure used in the income contribution assessment for the CAP. If there is a significant variation, a reassessment is done. If the bankrupt's income increases or decreases significantly during a CAP, a reassessment is done. A reassessment can be done at any time even after the bankrupt has been discharged from bankruptcy. Bankrupts who have no apparent capacity to pay contributions at the outset of the bankruptcy may not always be sent Income Statement forms. They should nonetheless notify their Trustee if there is a significant increase in their income. The bankrupt has a right to appeal the Trustee's assessment of contributions if they are dissatisfied with the assessment: see Chapter 6 Part 4. Note: for more information on any aspect of income contributions see Official Trustee Practice Statement 1 Income Contributions Issued I 7 February 2008 Updated 1 July 2021. Hardship Section 139T(1) of the Bankruptcy Act provides that the bankrupt can apply to the Trustee to increase the applicable income threshold (effectively reducing their income contributions) if payment of the assessed contributions would cause the bankrupt hardship for one or more of the reasons set out in s 139T(2), including where: the bankrupt, or a dependent of the bankrupt, has expenses for ongoing medical attention or the supply of medicines as a result of an illness or disability the bankrupt has childcare costs which enable the bankrupt to continue in employment the bankrupt lives in private rental accommodation and pays rent the bankrupt incurs substantial expense travelling to and from work (whether by public or private transport) another member of the bankrupt's household, who ordinarily contributes to the household expenses, cannot do so due to unemployment, illness or injury. The Act provides for other reasons to be included in the regulations but to date none have been added. The client must give the Trustee evidence of the reason for, and value of, the expenses. The client must be responsible for paying the expense from their own income, and must be able to show that this expense, when viewed in the context of the client’s contributions and remaining living expenses will cause 'hardship'. High expenses alone will not justify a change if there is no hardship as a result. Case study - hardship and contributions Steve Phillips became bankrupt when a sequestration order was made against his estate. The bankruptcy was extended past the statutory 3-year period when the Trustee filed a notice of objection to discharge. During this period, Mr Phillips was diagnosed with cancer, which required him to undergo several surgeries and to miss some work. Mr Phillips claimed that he had incurred costs for his health treatment, and had his income diminish by taking a prolonged period off work. Mr Phillips showed the Tribunal evidence of his ill health and evidence that the treatment and medication for his health condition was costly, mostly in the form of medical records. However, he failed to provide evidence that he would be required to pay for these costs himself, ie from his own income. Additionally, he failed to provide evidence that he had been unable to work for the period and thus could not support his claim that his lowered income was the result of his ill health. As a result, the Tribunal was not satisfied that Mr Phillips was suffering or going to suffer financial hardship and refused to increase his income threshold amount accordingly. This arguably harsh result underscores the importance of robust evidence in support of every element of the hardship application. Source: Phillips v Inspector-General in Bankruptcy [2012] AATA 788 (13 November 2012) A sample letter to apply to the Trustee for relief on hardship grounds is provided below. Attach evidence of the expense(s) causing hardship and the reason for the expense, and an income and expenditure statement demonstrating the resultant hardship. If your client's bankruptcy is being administered by the Official Trustee then the letter is addressed to the Official Trustee, care of AFSA. AFSA may assist the client to prepare this letter if you are not able to do so. The Trustee will make a determination whether or not to raise the threshold for the relevant CAP. The Trustee must then make a new income contribution assessment for the relevant period and notify the bankrupt in writing. If the Trustee is not satisfied that the bankrupt will suffer hardship, then the Trustee must refuse the application. In that case the Trustee must write to the bankrupt setting out the following: the Trustee's decision the evidence or other material on which the decision was based the reasons for the decision a statement to the effect that the bankrupt may request the Inspector-General to review the decision. If the Trustee does not respond to the bankrupt's application within 30 days, the Trustee is taken to have refused the application and the bankrupt may apply to the Inspector-General for a review. There is no time limit on making an application to the Trustee on grounds of hardship. Once the decision has been made (or the 30 days have passed), the bankrupt has 60 days to lodge a request for a review. The Inspector-General has 60 days to make a decision on the Review. That decision may: uphold the Trustee's decision; or set aside the Trustee's decision and making a fresh assessment of the application. The bankrupt must be notified of the decision, the reasons for the decision, and the right to appeal to the AAT. An appeal to the AAT must be lodged within 28 days of the bankrupt receiving written notice of the decision from the Inspector-General. Sample letter: Application for variation of income threshold on grounds of hardship To: [insert Trustee's name and address] Dear Sir/Madam Re: Income Contributions of [insert client's name and bankruptcy number] - application for Hardship under Section 139T I am assisting the individual named above. I attach my client's authority. I refer to your income assessment dated [insert date of assessment notice received by the client]. My client is suffering or will suffer hardship as a result of paying the income contributions required in your assessment as a result of: [List the reasons, paying particular attention to the list at s 139T(2) of the Bankruptcy Act, but also including any additional factors you consider relevant, for example My client pays private rent of $......... dollars My client suffers from: give details of disability or medical condition My client cares for his or her elderly parent including paying for......] I have included an income and expenditure statement for my client which shows that after paying ordinary living expenses, the specific items above, and the assessed contributions, my client will have a deficit of $[insert dollar amount] per fortnight [or month - choose the same period the contributions are payable]. I submit that my client can afford contributions of no more than $[insert dollar amount]. [Alternatively, if supported by the evidence, you could include I submit that my client cannot afford to make any income contributions at this time.] I attach the following evidence: [List the evidence you will attach, for example: Rental receipts Medical reports/ certificate Receipts/invoices for medications or consultations/operations Partner's separation certificate and/or Centrelink details Childcare invoices or receipts Travel tickets or petrol/vehicle maintenance expenses Evidence of address of place of work. Include any evidence that is relevant to the reasons you have given]. I look forward to your written response within 30 days in accordance with s 139T(4) of the Bankruptcy Act 1966. Yours faithfully [Insert signature, name, position and contact details] This letter can also be written for the client to send on his or her own behalf. The Trustee's decision will be affected by the severity of the client's hardship, the quality and relevance of the supporting evidence, and the relationship that the bankrupt has had with the Trustee to date including, among other things, whether the bankrupt has been communicative, complaint with requests for information and prompt in paying their contributions to date. If your client has been less than flawless on any of these counts but has a good reason - for example, a disability or mental health condition, or a personal trauma - which has made them exhibit problematic behaviour, or have difficulty communicating effectively, you should include this explanation in your letter (with your client's consent). If the Trustee refuses, you may also need to assist your client to apply to the Inspector-General. If the Trustee does not respond, follow up. If a response is still not forthcoming, you can use the alternative variation of the Sample Letter below. Sample letter: Request review of the Trustee's decision to refuse hardship The Inspector-General in Bankruptcy Australian Financial Security Authority Dear Sir/Madam Re: Income Contributions of [insert client's name and bankruptcy number] - application for Review of Hardship Decision under Section 139T I am assisting the individual named above. I attach my client's authority. On [insert date of original letter to Trustee] I assisted my client to apply/my client applied [delete whichever is not applicable] to his/her trustee in bankruptcy for a review of his/her bankruptcy threshold on grounds of hardship. I attach a copy of that application and the accompanying evidence. On [insert date you or client received Trustee's decision] I/my client [delete whichever is not applicable] received a response from the trustee dated [insert date on the response] which I also enclose. (Alternatively I have not/my client has not [delete whichever is not applicable] received a response from the trustee and more than 30 days have passed since he/she [delete whichever is not applicable] would have received the application, being posted/e-mailed/faxed on [delete whichever is not applicable] [insert date]. In accordance with s 137T(5) of the Bankruptcy Act 1958, the trustee is taken to have refused the application.) I ask the Inspector-General to review the trustee's decision. In conducting your review, I ask the Inspector General to take into account the following: The evidence supplied by my client in the attached application [List any response you may have to the Trustee's reasoning - for example, why your client has to live in a particular area, or incur a particular expense the trustee finds excessive] The following additional evidence [only include this if there is additional evidence that has come to light, or that is required to respond to the Trustee's reasons. List each document here and include in the attachments.] I look forward to your response within 60 days. Yours faithfully [Insert signature, name, position and contact details] If you don't receive acknowledgement from AFSA, you should follow up to check the application has been received. If the response is to uphold the Trustee's decision, or there is no decision within 60 days, you should refer your client for legal advice. In the latter case you may wish to follow up with AFSA first to see if the decision is likely to be forthcoming shortly. Trustee's options for pursuing unpaid income contributions If your client falls behind in their contributions the Trustee has several options for recovering the arrears. A notice will be sent to the bankrupt requiring rectification of the arrears. This notice will usually give the bankrupt 14 days to pay the arrears or enter into a repayment arrangement. If the bankrupt does not pay, the Trustee has several options. They may: apply to the Official Receiver to issue a 139ZL Notice on: the bankrupt's employer garnishing the bankrupt's wages, or another third party, requiring the transfer of physical property or its value from the third party to the Trustee; lodge an objection to discharge; instruct a debt collection agency; register the arrears as a court order and using the usual court enforcement processes (including a further sequestration order if necessary); or require the bankrupt to set up a supervised account so that all of the bankrupt's income is paid into a particular designated account and the Trustee supervises any withdrawals from that account. Most of the above will not be pursued where the arrears are less than $1,000 with the exception of objection to discharge. Moreover, the Official Trustee will not proceed with a s139ZL Noice unless they have already attempted to recover the arrears via phone call or letter, they have not been contacted by the bankrupt to make arrangements and there is no information available to indicate that the bankrupt has a reasonable excuse regarding their failure to comply with the payment schedule. Clients should be encouraged to contact their Trustee and make arrangements to pay arrears whenever possible. Objection to discharge is a very common result of unpaid income contributions. Bankrupts need to understand that this will result in a fresh assessment for a new CAP for each additional year of bankruptcy (unless the entire debts and expenses of the bankrupt estate have been paid in full, including interest). Trustees and debt collectors acting on their behalf must comply with the ASIC/ACCC Guidelines in relation to debtor harassment. Subsequent hardship - the bankrupt could afford the contributions at the relevant time but did not pay and now can't afford the arrears In some cases, the original assessment may have been valid, but the bankrupt did not pay and is now in genuine hardship. This is a difficult situation not envisaged by the Act. As a first step the bankrupt should try writing to the Trustee setting out their financial position in detail. Try using the same hardship process and letter above. If there are significant arrears, there is also a good chance that the relationship with the Trustee in bankruptcy is not good and this may not work. Things can be further complicated if the Trustee has already commenced one or more of the enforcement options listed above. The bankrupt can also write to the Inspector-General requesting a review, as set out above. Again, it is not clear that the Act has this particular scenario in mind, so the response may not be helpful. If there is a court judgment in place, only the court or the Trustee can reverse it (by for example, getting the judgment set aside by consent). If all else fails, the bankrupt may have to file another Debtor's Petition in relation to the arrears (and the whole process starts again). This risks additional assessments of contributions during the subsequent bankruptcy should their financial position improve. Seeking permission to travel during bankruptcy As noted in earlier chapters, a bankrupt is not permitted to leave Australia (or even prepare to leave Australia) without the written permission of their Trustee (s 272(1)(c)). To do so is an offence potentially punishable by imprisonment. It is also a reason to extend the bankruptcy. Permission to travel will usually be given provided that: it is necessary to earning the bankrupt's income, or the bankrupt has compassionate reasons; and   it will not interfere with the administration of the estate; and   the bankrupt is not considered a 'flight risk' - that is, likely to never return. If the bankrupt is required to make income contributions, the Trustee will usually expect any contributions payable during the trip, plus any arrears (if any), to be paid up prior to departure. If the bankruptcy is being administered by the Official Trustee, there is an online Overseas Travel Request Form for completion on the AFSA website. AFSA charge a non-refundable fee of $150 (at 15 October 2025) for processing applications for permission to travel. Check the AFSA website for the latest fee details. In other cases, the Trustee should be supplied with: a statement outlining the bankrupt's reasons for departing Australia the dates of departure and return details of the itinerary and any overseas contact details particulars about who will fund the travel costs, including a letter from that person if it's not the bankrupt any documentary evidence supporting the request, for example, confirmation by an employer of the need to travel, or for compassionate travel, evidence of the illness or death (in the case of a funeral) of a relevant person how any contributions due in the bankrupt's absence will be paid (the Trustee may require these to be paid prior to departure). The Trustee may refuse consent where the bankrupt's presence is necessary for the proper and efficient administration of the bankruptcy. The AFSA request form states it must be lodged at least two weeks prior to the planned departure date. In practice you should lodge the request with AFSA or the Trustee as early as possible, and preferably prior to paying for any travel arrangements. If consent is granted, the Trustee must provide this in writing before departure. The bankrupt should carry this letter with them in case they have been placed on an alert list with the immigration officials and the Federal Police. The Trustee may impose conditions on travel (s 272(2)) - for example, for the bankrupt to deliver his or her passport to the Trustee within 7 days of returning to Australia. If for any reason the bankrupt will be unable to comply with a condition for reasons beyond his or her control (illness, disruption to transport services etc.), then the Trustee should be informed as soon as possible. If permission to travel is refused, the bankrupt should contact the Trustee to determine whether there is any room for negotiation. Perhaps permission would be approved for a different time or if certain prerequisites were met. If this is unsuccessful the bankrupt can contact Regulation & Enforcement at AFSA by contacting 1300 364 785 and asking to be referred. If the permission is still refused, then the bankrupt's only option for review is an application to the Federal Circuit Court of Australia or the Federal Court of Australia (ss 90-15 and 90-20 of Schedule 2 of the Bankruptcy Act). It is recommended that legal advice be obtained before an application is made to the court. My client is being chased for a provable debt If your client is being pursued for a provable debt, you or the client should inform the creditor that the client is bankrupt and give the creditor the date of the bankruptcy and the bankruptcy number. If the debt hasn't been included in the client's statement of affairs, the Trustee should be notified in writing. A creditor cannot enforce any remedy against the person or property of a bankrupt in relation to a provable debt and can only commence proceedings in relation to a provable debt, or take a fresh step in proceedings in relation to a provable debt, with the leave of the court (s 58 (3)). Some debt collectors contact clients during bankruptcy and offer discounted amounts to clear provable debts. Whilst an undischarged bankrupt is able to make voluntary contributions to their creditors, they should not be harassed or misled into doing so. Intentionally misrepresenting that a debt is legally enforceable against the debtor when this is not the case may amount to unconscionable conduct. Should this occur, the client should immediately contact their Trustee and should inform the debt collector that the debt was listed in the bankruptcy. Remember: An unsecured creditor with a provable debt should not be contacting an undischarged bankrupt directly - they should be contacting the Trustee. Sometimes this contact will happen because the debt has been assigned (sold) but the original creditor has not informed the purchaser of the debt (the debt collector) about the bankruptcy. This can also happen when the client is no longer paying and is preparing to go bankrupt. This is why it is important where possible to indicate on the statement of affairs all the parties who may be pursuing the unsecured liability in addition to the original creditor (for example, debt collectors, insurance companies in the case of car accidents, other drivers etc.). If inappropriate contact by a creditor or debt collector continues: contact the Trustee; consider lodging a complaint for harassment in an External Dispute Resolution scheme of which the creditor/debt collector is a member, such as AFCA; and/or Remember: The Telecommunications Industry Ombudsman and the Energy and Water Ombudsman schemes may also be relevant. consider complaining to the appropriate regulator about debtor harassment (ASIC for credit and financial services debts and the ACCC for debts arising from contracts for other goods and services). If your client receives a Statement of Claim or Summons or other document initiating court proceedings, the Trustee must be notified and sent a copy of the relevant documents. The plaintiff should also be notified of the client's bankruptcy, including the date and bankruptcy number. If the Trustee indicates he or she has no intention to defend the proceedings and the plaintiff has indicated they will continue the action, then the client can notify the court of the bankruptcy and, in accordance with the restrictions imposed under s 58, request that the Court exercise its power under s 60 and stay the proceedings. Noting, the Court may respond directing your client to file a Notice of Motion or other Court process. We do not recommend taking this step, without seeking legal advice first. Sample Letter: about legal proceedings in relation to a provable debt [Insert details of court] Dear Sir/Madam, RE: [insert details of court proceedings as per the Statement of Claim or other initiating document] I refer to the matter currently before the Court. On [insert date] I presented a Debtor's Petition and am currently bankrupt. My bankruptcy number is [insert number]. The debt currently being claimed by the plaintiff is listed as an unsecured debt in my bankruptcy. The details of my bankruptcy trustee are as follows: [insert details] By virtue of s 58(3)(b) of the Bankruptcy Act, leave of the Federal Circuit Court is required to proceed with this claim in the [insert name of court e.g. 'Local'] Court. I have defended the action and denied the claims made against me, but due to my bankruptcy I can no longer continue with this defence. I respectfully submit that this action should be permanently stayed in accordance with s 60(1)(b). Kind regards, Client's signature Client's name [Insert contact details] If the court proceedings are not in relation to a provable debt, or the client is unsure, refer the client for legal advice. Chapter 6 Part 1 contains information about what is and is not a provable debt. If the entity who has issued the court proceedings (the plaintiff) is in an EDR scheme, your client may be able to lodge a complaint in EDR (see section below in Chapter 8). Dealing with secured loans during bankruptcy In some cases, a bankrupt may continue to pay off secured loans during bankruptcy. There is extensive information on this issue contained in Chapter 6 Part 1, and also specifically in relation to Motor Vehicles in Chapter 6 Part 2 and Houses/Real Estate in Chapter 6 Part 3. If your client is paying off a secured loan, then the fact of bankruptcy alone cannot be used by the creditor to repossess the car, house or other security for the loan. A provision in a bill of sale, mortgage, lien, charge or PPSA security agreement which purports to allow the agreement to be modified, or for any power or remedy to be exercised, just because the debtor under the agreement becomes bankrupt, or enters a PIA, is void (s 302). Similar restrictions exist for hire purchase or property leases (s 301). If your client receives a notice threatening to repossess a car or home for this reason, you can write to the lender quoting the appropriate section. Of course, if the client is not meeting their repayments or is in default under the contract in some other way, enforcement action can happen as usual. Sample letter Dear Sir/Madam RE: [Insert client's name and a contract reference] I am assisting the individual named above. I enclose my client’s written authority. I note that in your letter/notice of [insert date] you have indicated your intention to repossess my client’s [insert description of security property]. While my client is a bankrupt, they are completely up to date with their repayments and are not otherwise in default to the best of my knowledge. Please be aware that the Bankruptcy Act renders void any provision of a contract, mortgage, lien, bill of sale, lease, hire purchase agreement, or PPSA security agreement, which purports to give the lender or lessor the power to enforce or otherwise vary a contract as a consequence of the borrower's bankruptcy. Please confirm in writing that you will not be taking enforcement action in relation to this contract, or clarify the nature of my client's default. Yours faithfully ... [Insert signature, name, position and contact details] If the car or property has already been repossessed, you should refer your client for immediate legal advice. If the lender is a member of the Australian Financial Complaint Authority, you may be able to lodge a complaint - see later section in this Chapter, Lodging a complaint with the Australian Financial Complaints Authority during bankruptcy. In some cases, the lender may have taken security over the client's personal belongings, especially for small fringe loans. If those possessions are necessary household goods that would be protected in bankruptcy, then they are also prohibited securities under the National Credit Code. You can lodge a complaint in the Australian Financial Complaint Authority (if the lender is a member) and/or seek legal advice. What if my client is having difficulty paying their secured loan during bankruptcy? Your client should first revisit the decision about whether to continue with the contract or surrender the security. Any shortfall on the contract should be provable in the bankruptcy, provided the contract was entered prior to the date of the bankruptcy. If the client wishes to try to continue paying the loan (and can reasonably afford to do so in the longer term), then the case can be dealt with like any other loan where the client is in financial difficulty. If the loan is consumer credit it is likely to be covered by the National Consumer Credit Protection Act and your client will be entitled to apply for a hardship variation (check the Fact Sheets about the National Credit Act and Financial Hardship on this website). You should try negotiating with the lender. If that fails, your client may be able to lodge a complaint with AFCA. Insurance claims Whether a client gets to keep the proceeds of an insurance claim depends on the nature of the insurance and the type of property or risk covered. Basically, claims fall into 4 categories: claims which are specifically protected by the Bankruptcy Act claims which are in relation to property which is security for a loan claims which are in relation to property that is/was itself protected under the Bankruptcy Act claims which are in relation to property which has vested in the Trustee. Claims which are specifically protected by the Bankruptcy Act The Bankruptcy Act specifically protects the proceeds of policies of life assurance or endowment assurance in respect of the life of the bankrupt or the spouse or de facto partner of the bankrupt provided they are received on or after the date of the bankruptcy. If received prior to the bankruptcy, then the proceeds, and any property purchased with those proceeds, will vest in the Trustee. The date the claim is received is crucial and a claim may be interpreted as received on the day it is approved, as opposed to when the funds clear in the insured person's account. If there is a dispute on this point legal advice will be required. What constitutes a policy of life assurance is not clear as it is not defined in the Bankruptcy Act. The Life Insurance Act 1945 defines policies of life insurance to include term life, continuous disability, investment and annuity policies. The types of policies offered by Australian life insurance companies include income protection, trauma, life, total and permanent disability (TPD), investment, endowment and whole of life policies. Many life insurance policies offer 'bundled' or multilevel benefits. Some are pure risk; some are investment only and others are risk policies with investment components. Some life insurance policies are sold by life insurance companies to individuals and others are sold as group insurance policies to employers or entities on behalf of their employees or members. Many life insurance policies are sold as group insurance policies to trustees of superannuation funds on behalf of the members of the fund (TPD claims associated with superannuation are covered specifically later in this section). If the proceeds of a life assurance or endowment policy are paid by way of annuity or pension, then they do not vest in the Trustee, but they are counted as income for the purpose of assessing income contributions payable. This is a complex area of law. When contemplating making a claim on a life insurance policy after the date of bankruptcy, the safest course of action is to contact the Trustee. Ask the Trustee if they are of the view that the proceeds of the claim will be protected. Ask for confirmation of this in writing. Seek legal advice if the Trustee is of the view that the proceeds of a claim on a particular policy will not be protected. Total and Permanent Disability Insurance As a starting point, it is important to determine if the TPD insurance benefit is held within or outside of superannuation. It is advisable when contemplating making (or continuing with) a TPD or lump sum income protection claim after the date of the bankruptcy is to contact the Trustee: Ask the Trustee if they are of the view that the proceeds of the claim will be quarantined from creditors. Ask for confirmation of this in writing. If the Trustee is of the view that the proceeds may not be protected, your client should get legal advice. TPD inside of Superannuation The Bankruptcy Act specifically exempts from property divisible by creditors the interest of a bankrupt in a regulated superannuation fund or Retirement Savings Account. A payment to the bankrupt from such a fund received after the date of the bankruptcy (except a superannuation pension) (s 116(2)(d)(iii) and (iv)). This means TPD benefits held in a superannuation fund and those paid out of a fund after the bankruptcy starts are exempt from creditors. AFSA has previously suggested that only TPD insurance benefits for personal injury (and not illness or non-trauma disability) are exempt. However, this appears to conflate superannuation payments and benefits with personal injury compensation payments (which are exempt under s 116(2)(g)). Whilst the better view may be that TPD benefits in super are exempt from creditors, it would be important to get legal advice before making (or finalising) a TPD claim. If the client can wait until after discharge to lodge a claim, this would put the issue beyond doubt, but clients may be in dire immediate need, or have a limited remaining lifespan. Another option may be to have the amount paid into the superannuation funds allocated pension fund (if it has one) and paid as income - this would then count towards the client’s assessed income contribution liability but would not vest in the Trustee (income contributions are covered in Chapter 6 Part 4). TPD outside of Superannuation The treatment of TPD payments outside of super is more complicated. The Bankruptcy Act exempts payments of life assurance and endowment policies from creditors when paid after the date of bankruptcy (s 116(2)(d)(i) & (ii)). However, there is legal doubt whether a standalone TPD insurance payment is a payment from such a policy. Traditionally trustees-in-bankruptcy accept that they are, but it would be important to get their written acknowledgment of this as suggested above. If not, it may be worthwhile considering delaying a TPD claim until the conclusion of the bankruptcy. It would be important to get legal advice before starting or concluding a claim. Claims in relation to property which is security for a loan If the property that has been lost or damaged is the subject of a mortgage or other form of security, then the proceeds must be paid to the lender up to the value of the amount payable under the contract. So, for instance, if your client's secured vehicle is written off in an accident, then the proceeds of the insurance claim must be paid towards the amount outstanding on the loan. If the car is only damaged, then the car will be repaired as per usual, in order to retain the value of the security. Similarly, if your client has retained a mortgaged home into bankruptcy, and there is damage to the building as a result of fire or storm for example, the proceeds of the claim will need to be used to repair the security property. Usually, the lender will insist on being noted on the policy and the proceeds will usually be paid directly to the lender. The bankrupt will then need to convince the lender to release the funds for the requisite repairs. Where the value of the insurance claim exceeds the amount owed to the lender, then what happens to the residual amount will depend on whether the property insured has vested in the Trustee or not (See Claims in relation to property which has vested in the Trustee below). Claims in relation to property that is/was itself protected under the Bankruptcy Act If an insurance claim is in relation to property which is protected under the Bankruptcy Act, and there is no secured creditor, then the claim proceeds can be retained by the bankrupt in order to replace or repair the lost or damaged property. Common examples of protected property include: necessary household contents a car worth up to the threshold amount ($9,600 as at October 2025) tools of trade worth up to the threshold amount ($4,450 as at October 2025) a home bought substantially wholly with compensation for personal injury, or other protected money (for example superannuation funds withdrawn on or after the date of the bankruptcy. For up to date indexed amounts check the AFSA website. Example A bankrupt has a car insured for $10,000. There is no loan secured over the vehicle. The car is written off in a car accident. It is the bankrupt's only vehicle. The bankrupt claims on her comprehensive insurance policy. The first $9,600 can be retained by the bankrupt to purchase another primary means of transport. The remaining $400 must be paid to the Trustee for the benefit of the bankrupt estate. Claims in relation to property which has vested in the trustee The proceeds of any claim for property which had already vested in the Trustee or would have done so had the property still existed at the date of the bankruptcy, also vest in the Trustee. This money cannot be retained by the bankrupt and the Trustee can take action to recover the money if the bankrupt has disposed of it. For example, if the client's car was stolen prior to or during bankruptcy, then the client can only retain the threshold amount from the proceeds of the claim. Similarly, if the client's home burns to the ground prior to, or during the period of the bankruptcy, and there is no mortgage, then the proceeds of the claim must be paid to the Trustee unless there is some argument that the home is protected (or partially protected - see Chapter 6 Part 2). It is the Trustee's decision what to do with the proceeds, but it is highly likely that if the home has been completely destroyed or substantially damaged that the land will be sold without rebuilding/repairing and the proceeds of both the sale and the insurance policy paid directly into the bankrupt estate. Remember: Vested bankruptcy property does not re-vest in the bankrupt upon discharge. A claim paid post discharge will still vest in the Trustee if the property covered by the policy had already vested in the Trustee during bankruptcy.   Example: Official Receiver v Prince [2006] FMCA 1917 (15 December 2006) Ms Prince became a bankrupt on 23 May 2003. At some point after that and prior to discharge she received a payout on her home building and contents policies with Allianz after her home in Tasmania burnt down. In total she received $63,900 for contents and $63,000 for the building. She did not pay any of this to the Trustee, being the Official Trustee in this case. She bought new contents to the value of $18,540 and she bought a car for her mother for $26,200. She repaid a vendor finance contract to the value of $43,500. On 15 December the Official Receiver obtained orders from the Federal Magistrate's Court for Ms Prince to pay the Trustee $45,700 plus interest at 6% and costs, this being made up of the $26,200 used to purchase the mother's car and $19,500, being the balance of the building claim less the amount used to repay the vendor finance contract. The court ruled that the newly purchased household contents were protected under Section 116 of the Act as necessary household property. The mother's car could not be characterised as 'the primary means of transport' of the bankrupt and that amount was therefore not protected. The house and land had vested in the Trustee and the Official Receiver was therefore entitled to the proceeds of the building policy claim after payment of the vendor finance contract. There was an unaccounted for balance of the proceeds of the contents claim of $19,160. The Official Receiver did not pursue that amount. Summary - Insurance claims while bankrupt Category: Claims which are specifically protected under the Act - for example, life assurance and endowment policies Proceeds Paid to: Bankrupt Reason: Section 116(2) Category: Claims for property that would itself have been protected under the Bankruptcy Act (for example, necessary household property under Contents Policy, or Building Insurance where the house was purchased substantially wholly with personal injury compensation funds) Proceeds Paid to: Bankrupt Reason: Section 116 and case law Category: Claims for property which is security for a loan (such as where there is a mortgage over a car or house and the secured property is destroyed by fire) Proceeds Paid to: The lender (up to the amount owing under the secured contract) Reason: Sections 58 & 117 Category: Claims for property which had vested in the Trustee (or would have but for its destruction or loss) Proceeds Paid to: The trustee in bankruptcy Reason: Section 58 Lodging a complaint in external dispute resolution during bankruptcy The Australian Financial Complaints Authority (AFCA) will consider complaints from bankrupts where they are an 'eligible person', as defined in rule.1.1 of the Schemes Rules and as set out in the Operational Guidelines. If this is a superannuation complaint where the benefit has not vested (see above under insurance) AFCA will not require the trustee's permission or involvement in the proceedings. The trustee may give permission in the proceedings where: The amount of compensation sought from the AFCA member (lender or insurer, for example) would exceed the total of debts owed in the bankruptcy. The trustee may insist on being a party to the complaint. The bankrupt is the complainant seeking non-financial loss, such as for debtor harassment, because the right to obtain damages for personal injury or wrong does not vest in the Trustee. Common examples of complaints which are unlikely to be objected to by the Trustee would include: a hardship complaint in relation to a loan that the borrower is paying out of their income during bankruptcy (this will often be a loan secured over a house or car that the bankrupt is trying to retain) a complaint about inappropriate or illegal threats of repossession, or actual illegal repossession of the loan security (prior to judgment being given in a court) a complaint about debtor harassment (including the client being pursued for provable debts) - in this case the Trustee's permission not required in any event an insurance dispute about a claim for protected property (or partially about protected property). In relation to financial hardship complaints, the Trustee may object or wish to be actively involved if there is equity in a secured property that could potentially be eroded to the detriment of the unsecured creditors. Note: As at May 2024 AFCA are currently pausing all complaints where the applicant is or was at the relevant time a bankrupt. If your client is or was a bankrupt at the relevant time you may want to seek legal advice   Case Note - Official Trustee in Bankruptcy v Kent [2023] FCA 1211 Chronology: April 2020: Mr Kent was discharged from bankruptcy. June 2020: Mr Kent made a complaint to AFCA about the conduct of the bank, as pre-bankruptcy lender, involving irresponsible lending January 2021: The Official Trustee and the bank entered into a deed of settlement that purported to resolve Mr Kent's complaint without his involvement. The settlement amount was for over $450,000, representing over $430,000 financial loss and $20,000 non-financial loss for stress and inconvenience. The Trustee wrote to Mr Kent that the Trustee had received the financial loss component from the bank as property of the bankrupt estate. It told him that amount would be sufficient to annul his bankruptcy by enabling payment of his creditors in full and that, after discharging the estate's liability to remunerate the trustee and pay statutory charges, Mr Kent would receive a small surplus from the financial loss component estimated at under $11,000. February 2021: AFCA informed Mr Kent by email that it had closed his complaint. February and December 2021: The Trustee received two conflicting opinions from counsel as to whether it was justified in treating the financial loss component as property of the bankrupt that had vested in it under s 58 of the Bankruptcy Act. April 2022: In light of the conflicting opinions of its counsel, the trustee sought judicial advice. The Trustee commenced this proceeding against Mr Kent accordingly. The primary issue was whether Mr Kent's right to make the complaint under the AFCA scheme was ‘property’ within the meaning of the Bankruptcy Act. Under the Act, 'property' means personal property of every description (s 5(1)) and 'the property of the bankrupt' means, relevantly, his or her rights and powers in relation to property divisible amongst his or her creditors that would have been exercisable by him or her had the bankruptcy not occurred (s 116(1)). By force of s 58(1), the property of the bankrupt vests in the Trustee on bankruptcy, and all after acquired property vests in the Trustee as soon as it is acquired by, or devolves upon, the bankrupt. Mr Kent's complaint alleged that the bank engaged in irresponsible lending. Sections 178 and 179 of the National Consumer Credit Protection Act gives a court the power to order a defendant who has contravened a civil penalty provision or committed an offence under the Act to compensate a plaintiff for loss or damage suffered as a result. The Court held that the right to apply for orders under ss 178 or 179 was not 'property' at all and was therefore incapable of vesting in the trustee. Alternatively, if it was wrong in this conclusion the Court held that the right created by ss 178 and 179 is conferred exclusively on the plaintiff to recover compensation. This right cannot vest in the trustee because its nature is inherently personal to the bankrupt and is incapable of assignment because no one but the plaintiff can satisfy the statutory criterion that only the plaintiff can apply for the compensation order. The Court concluded that the Official Trustee was not entitled to execute the deed of settlement or to any of the settlement amount. The Court also concluded that, by closing the complaint, AFCA had breached the Complaint Resolution Scheme Rules by failing to determine Mr Kent's complaint. This outcome challenges the usual approach taken by AFCA. Prior to this case, AFCA would: only consider a bankrupt's complaint with the consent of the trustee; usually require the trustee to participate in settlement discussions; usually accept the trustee's agreement in determining the matter; and only pay compensation for financial loss to the trustee. This case directly challenges steps 3 and 4, and casts doubt on steps 1 and 2, in the context of orders sought under ss 178 and 179. The Official Trustee made a public statement that they will not appeal the result. But, as things currently stand, it seems that a bankrupt's compensation for loss or damage suffered due to the lender's breach of a civil penalty provision will not vest in the trustee and will not depend on the trustee's co-operation in making the relevant complaint. Disputing an Insurance Refusal in Court (Life Insurance, TPD etc) Legal proceedings commenced by a person who is, or subsequently becomes, bankrupt against an insurer or a superannuation fund trustee would also be caught by the stay provisions of s 60 of the Bankruptcy Act and would therefore be subject to the election of the Trustee to prosecute. The only exception would be if the action was in respect of a personal injury or wrong done to the bankrupt. In practice, many Trustees will elect to continue with proceedings, particularly if they are being conducted on a no win/no charge basis or if the adverse costs risks are being funded. If the proceeds of any claim are protected in bankruptcy, there may be an argument that the bankrupt can commence or continue proceedings without the election of the Trustee, but this is not entirely clear and would require legal advice. The bankrupt should get advice in relation to whether the proceeds of any proceedings would be protected or vest in the Trustee in any event in order to clarify their own expectations. Applying for early release of superannuation while bankrupt Releasing superannuation whilst an undischarged bankrupt is a viable option but the release is still determined by the rules of the individual superannuation funds. Simply being bankrupt will not be regarded as sufficient grounds. Remember: Superannuation accessed prior to bankruptcy is NOT protected. The trustee is likely to seek clarification of what was done with any funds released and spent prior to bankruptcy. Where the money has been spent on a divisible asset belonging to the bankrupt, the asset will vest in the Trustee and the funds will be effectively lost to the bankrupt. Where the money has been given to a relative (or someone else) to improve their asset, or assist in purchasing an asset, it may be deemed an undervalue transaction or a transfer to defeat creditors and may be claimed by the Trustee. Where the money has been spent paying debts, the Trustee may consider these payments to be 'preferential' and consequently, take recovery action against the creditors. Where the money has been spent on medical expenses (or something similar) this should be explained to the Trustee and a paper trail produced to support this if at all possible. Where the money has been used to pay mortgage arrears it will not be protected (where withdrawn prior to bankruptcy), but whether the Trustee will take action to recover it will depend on the amount of equity in the home. The Trustee has many years in which to take action to sell the home. Once the bankrupt is discharged, they can negotiate with the Trustee to buy back any equity if the property has not already been sold. The types of superannuation release available are: Financial hardship Compassionate grounds Over 55 and meeting Centrelink requirements Financial hardship An undischarged bankrupt will need to fulfil the criteria of their superannuation fund. Please note that some funds do not allow applications for release on hardship grounds. To be eligible for early release the client needs to have received Commonwealth income-support payments continuously for 26 weeks and be unable to meet reasonable and immediate family living expenses. The bankrupt will need to prove a shortfall in their living expenses to get the release (without including the debts that have been accepted into the bankruptcy). Only one lump-sum payment can be made in any 12-month period per fund. The minimum amount that can be released is $1,000 (unless your superannuation interest is less than this amount) and the maximum amount available is $10,000. Tax will be deducted at 21% from your payment. Compassionate grounds Application for release of superannuation funds on compassionate grounds is handled by the Australian Tax Office. An undischarged bankrupt will need to meet the relevant criteria and to complete the appropriate paperwork. The grounds for compassionate release are narrow and the paperwork is quite complex and requires cooperation from third parties, such as doctors or a lender. The final decision for release will still rest with the individual superannuation fund. The grounds for compassionate grounds release are: For palliative care or funeral expenses where: the client or a dependent has a terminal illness and needs palliative care, or the client needs assistance to meet the cost of a dependent's funeral expenses, and the client lacks the financial capacity to pay for the expenses without accessing superannuation. If the client has a terminal illness, he or she may be eligible to access superannuation benefits without submitting this application. Contact should be made with the superannuation fund directly to discuss this option. For modification to your home or vehicle and/or the purchase of disability aids where: the client or his or her dependent suffers from a severe disability, or the client needs assistance to meet the cost of modifying their home or vehicle to accommodate a severe disability, and the client lacks the financial capacity to pay for the expenses without accessing superannuation. The final decision for release will still rest with the individual superannuation fund. For medical expenses where: the client or his or her dependent suffer from a life-threatening illness or injury, acute or chronic pain or an acute or chronic mental illness, and the client needs assistance to meet the costs of treatment for the condition which is not readily available through the public health system or covered by insurance, and/or the client needs assistance to meet the costs of transport in order to receive treatment, and the client lacks the financial capacity to pay for the expenses without accessing superannuation. The final decision for release will still rest with the individual superannuation fund. Mortgage assistance The amount that can be withdrawn is limited to 3 months repayments and 12 months interest. Tax of 21% will also be payable on the amount withdrawn. Mortgage assistance is available to prevent the client's mortgage lender or Council taking action to sell the client's home for mortgage arrears or unpaid rates respectively. This is a complex and potentially difficult area if the client is bankrupt, and the home has vested in the Trustee. If the client wishes to try this, they will need to understand that: There is no guarantee they will succeed. Paying off the arrears may increase the equity in the home or create equity in the home, prompting the Trustee to take action to sell it. While superannuation withdrawn on or after the date of the bankruptcy is protected money, a direct link will need to be established between the protected money and the percentage of the equity attributable to this source. Any additional equity will vest in the Trustee. Clients have succeeded in accessing superannuation on this ground while bankrupt, but this does not mean it is necessarily a good idea, or that another client will be successful. Clients should get independent advice on the implications before proceeding. Over 55 and meeting Centrelink requirements If you are over the preservation age and have received Centrelink payments for 39 cumulative weeks since turning 55 you can apply for the release of your super. Link to forms/information Applications can be made via your MyGov account Early access to super: details on the Australian Taxation Office website Forgotten debts On rare occasions a client will have lodged their Debtor's Petition and then find themselves being pursued by a creditor who they had failed to list in their statement of affairs, even though the debt was incurred before the date of lodgement, through oversight or a memory lapse. These debts can still be referred to the Trustee to request that they be retrospectively included. Other common issues See Chapter 6 for more information on the following: Joint debts - In the overwhelming majority of cases, especially for consumer debts, any non-bankrupt joint debtor remains liable for the whole debt including interest as a result of joint and several liability (see Chapter 6 Part 1) Secured loans - The bankrupt can continue paying these if they so choose but the Trustee can opt to sell the asset at any time should there be sufficient equity to make it worthwhile doing so (see Chapter 6 Part 1 and Part 3). Income tax debts and tax returns (see Chapter 6 Part 1) Debts you need or may want to keep paying (see Chapter 6 Part 1) Income contributions from wages, including salary sacrifice and other fringe benefits (see Chapter 6 Part 4) Compensation for personal injury - The bankrupt can take proceedings for personal injury and any compensation paid is protected (see Chapter 6 Part 2 & Part 5)) Conducting disputes/proceedings in Court - It is up to the Trustee to initiate or continue such proceedings although there are exceptions (see Chapter 6 Part 5) Loans taken out/debts incurred after bankruptcy - These are the responsibility of the undischarged bankrupt. They must be paid unless a subsequent bankruptcy occurs and non-payment can lead to enforcement of the debt in the courts. It is important for undischarged bankrupts to understand the disclosure rules in relation to getting credit once bankrupt (see Chapter 6 Part 5). Impact on being able to rent a property - An undischarged bankrupt may have had no rental arrears or rental debts but finds that when they try to rent property they get knocked back. They check their tenancy database listing and find there is no reference to the bankruptcy on it. Real estate agents may also check the credit report, which will include the bankruptcy. Many rental agreements/ applications include a list of agencies that you authorise the real estate/landlord to check. This can seem very unfair when the client has had no rent arrears issues, and it is very important to make sure that clients considering bankruptcy are made aware of this potential issue. This can be especially difficult if someone is moving from a country area where they are known and have good references to a major city in search of employment and a new life. Action by the Trustee over preferential payments or undervalued transactions - The bankrupt's affairs may be investigated, and money recovered from past transactions in some circumstances (see Chapter 6 Part 3) Employment - Some professional rules/association and licensing bodies may impose restrictions on bankrupts continuing in their current trade/occupation (see Chapter 6 Part 5) Lump sum termination/redundancy payments - These are treated as income and may affect the bankrupt's liability to pay income contributions (see Chapter 6 Part 4). Acquiring assets during bankruptcy which are not protected (after-acquired assets) - Where the undischarged bankrupt purchases or otherwise acquires assets while bankrupt (that are not otherwise protected under the Act) they will vest with the Trustee (for example, shares or real estate). This applies even if the items were bought from income after contributions have been paid. The income received after the date of the bankruptcy would be able to be retained while it remained in the bankrupt's transaction account but as soon as it is converted into an asset, it vests in the Trustee (see Chapter 6 Part 3). Wills - When an undischarged bankrupt inherits money from a deceased estate that money/property will vest in the Trustee. Where the inheritance is sufficient for the Trustee to pay out all debts and fees the bankruptcy will be annulled and the surplus inheritance will be returned to the bankrupt. There are no restrictions imposed by the Bankruptcy Act regarding a bankrupt being an executor of a Will. Annulment is covered later in this Chapter. Gifts - When an undischarged bankrupt wins money or is given money or property during the period of the bankruptcy, then that money/property will vest in the Trustee. Where the gift/winnings are sufficient for the Trustee to pay out all debts and fees the bankruptcy will be annulled and the surplus returned to the bankrupt. Annulment is covered later in this Chapter. Savings - Money can be saved from income while a person is bankrupt, but the bankrupt will need to prove that it came from income declared to the Trustee. This may require a clear paper trail to show the source of the income. Impact on getting insurance - Some insurance can be difficult to obtain while bankrupt (and even afterwards), or special conditions could be imposed (see Chapter 6 Part 5). Connection to utilities - This can be problematic, particularly where there is no other member of the household in whose name utilities can be put. A security bond may be required. Difficulties obtaining credit - The bankruptcy will be listed on the National Personal Insolvency Index forever and on the bankrupt's credit report for 5 years from the date of the bankruptcy or 2 years from discharge or annulment. This will make it more difficult to get credit, or to get credit on reasonable terms. Clients must also disclose their bankruptcy status if they apply for credit above a specified amount (see Chapter 6 Part 5). Complaints about other services - It is not uncommon for bankrupts to complain about information or advice they may have received (or not received) from other services prior going bankrupt. In some cases, these complaints may be justified. In others the client may have been told the correct information and simply misunderstood or refused to listen. They may have withheld important information from the adviser or given misleading instructions. The best course of action in such cases is to assist the client with their current questions and needs but refer him or her to the appropriate regulator or professional association to complain about other services. Your client may also need legal advice.

Updated: 29 October 2025 Content Part 1: Life in Bankruptcy Part 2: The light at the end of the tunnel - getting out of bankruptcy Part 3: Challenging Trustees' Fees Summary Life as a bankrupt comes with obligations and restrictions. Clients must now: co-operate with the Trustee; notify the Trustee of all material changes of circumstances (eg income increases or decreases, property acquired, money inherited or won etc); inform the Trustee in writing of any change of name; complete paperwork and possibly attend creditors' meetings (rare for financial counselling clients); provide the Trustee with access to records and information; possibly pay income contributions; and disclose their bankruptcy if they borrow money, enter lease or hire purchase agreements, offer to supply goods and services, or pass cheques worth more than the threshold amount. Part 2: The light at the end of the tunnel - getting out of bankruptcy Calculating the 3 years The period of a bankruptcy is 3 years and one day from the date the bankrupt's statement of affairs is accepted. In most cases, the presentation and acceptance date are the same. In some instances, the acceptance date can be later then then the presentation or filing date. AFSA must now accept a bankruptcy or reject it within a prescribed period of no longer than 90 days. Prior to 17 November 2023, AFSA had calculated the bankruptcy from acceptance, however, it ought to have been calculated from the filing date. A challenge to AFSA's approach resulted in the legislative change. There may be some bankruptcies which were otherwise longer than they ought to have been. Where a bankrupt has been disadvantaged by AFSA starting the 3 years and 1 day from acceptance rather than filing, AFSA will have a complaints process to determine what if any loss was suffered. Examples, of potential loss, may be that a person had a delay of time between presentation and acceptance, meaning their start date was later than it ought to be and so their discharge was later. If they received an inheritance after the 3 years and 1 day anniversary of filing but before their discharge which resulted in the trustee being entitled to the proceeds where it ordinarily would not have been, they may have a claim in damages. Can it go on longer than 3 years? Yes, this period may be extended by an objection lodged by the Trustee (ss 149A and 149D). Objections may potentially extend the bankruptcy to 5 or 8 years in duration. The bankruptcy may be extended to 5 years from the date of filing the statement of affairs if a bankrupt: made a void transfer against the Trustee because of ss 120/122 of the Bankruptcy Act (undervalued transactions and preference payments) montinued to manage a corporation engaged in misleading conduct and the amount exceeds the prescribed threshold ($7,173 as at October 2025). Check updated indexed amounts on the AFSA website. fails to disclose to the Trustee, a liability that existed at the date of bankruptcy fails to notify a change of address or daytime telephone number fails to advise the Trustee of any material change to the information disclosed on their statement of affairs fails to attend a creditors' meeting without written approval from the Trustee fails to attend an interview or examination fails to disclose any beneficial interest in any property. To 5 years from the date of returning to Australia if a bankrupt: leaves Australia without the written permission of the trustee and has not returned. To 8 years from the date of filing a statement of affairs if a bankrupt: made a void transfer against the trustee because of ss 121,128B and 128C of the Bankruptcy Act (transfers to defeat creditors) fails to provide details of property and income when requested after the date of bankruptcy, the bankrupt deliberately provided false or misleading information to the Trustee fails to disclose details of income or expected income fails to pay contributions as assessed fails to adequately explain how money was spent, or assets were disposed of fails to disclose to the Trustee, a liability that existed at the date of bankruptcy fails or refuses to sign a document when required intentionally fails to disclose a beneficial interest in a property to the Trustee. To 8 years from the date of returning to Australia: fails to return to Australia when requested to do so by the trustee The bankrupt will be notified of the objection. The bankrupt is encouraged to use the online review of objection form (but is not required to). The objection must be in writing and applied for no later than 60 days from when the bankrupt is notified of the trustee's objection. AFSA has a Practice Document on its website, outlining the Inspector-General in Bankruptcy expectations of trustees and approach to applications for review. The Inspector-General can also review a Trustee's decision to lodge a Notice of Objection on the Inspector-General's own motion. If the Inspector-General upholds the objection, the bankrupt can seek a review by the Administrative Appeals Tribunal within 28 days of receipt of the AFSA Practitioner Surveillance decision. Legal advice should be obtained before doing so. Can I get out earlier than 3 years? Once a person has been made bankrupt there are only four ways to get out: Pay out the debts, interest and costs of administering the estate and have the bankruptcy annulled Complete the bankruptcy term (complying with the rules, cooperating with the Trustee and paying any assessed income contributions) and get discharged Challenge the bankruptcy in Court (either by way of review or appeal in the case of a sequestration order - or by application for annulment by the court - see Chapter 10) Have your creditors pass a special resolution to accept your offer of Composition or Arrangement under s 73 of the Act, which will annul your bankruptcy. Annulment as a result of payment of debts and costs Section 153A of the Bankruptcy Act provides that if the Trustee is satisfied that all the bankrupt's debts have been paid in full, then the bankruptcy is annulled on the date on which the final payment was made. 'Paid in full' includes interest payable until the date of final payment. 'All the bankrupt's debts' means all debts that have been proved in the bankruptcy, including interest where applicable, plus the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the Trustee. The costs, charges and expenses of the estate can add up to tens of thousands of dollars. A detailed section on what the Trustee can charge by way of remuneration, and applying for a review of those charges is found at the end of this Chapter. Common scenarios where annulment is sought include: the bankrupt inherits property or money during the period of bankruptcy which is sufficient to pay the debts in full the bankrupt wins money or property during the period of the bankruptcy which is sufficient to pay the debts in full the bankrupt was made bankrupt by creditors in his or her absence and can afford to pay the debts and costs to date (note that if the sequestration order is relatively recent the bankrupt should get legal advice in relation to a potential set aside application also - see Chapter 10 and below). Annulment by the Court If the court is satisfied that a sequestration order ought not to have been made or, in the case of a Debtor's Petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the court may make an order annulling the bankruptcy (s 153B). Where the bankruptcy was initiated by a Debtor's Petition possible grounds might be that the debtor did not have the mental capacity to file a Debtor's Petition, or that the debtor did not in fact file the Debtor's Petition (fraud by another party). The reasons for establishing that a sequestration order should not have been made are the same as for seeking to have the order set aside as covered in Chapter 10 (solvency, for example). Usually, if the bankrupt has any hope at all in such proceedings the primary aim would be to have the sequestration order set aside, with annulment being sought in the alternative. In cases where a fair amount of time has passed since the sequestration order (months or even years) and the Trustee can demonstrate a considerable amount of work has already gone into administering the estate, then the Court will usually prefer to annul the bankruptcy rather than set aside the sequestration order - this will have the benefit to the Trustee of securing his or her fees and of validating anything properly done in the administration of the estate to date. Where your client is in a position to annul the bankruptcy by payment of the debts and costs, they should obtain legal advice prior to applying to the court, particularly if the time for appeal or review of the sequestration order has already passed (see Chapter 10). If the case is not strong it may be cheaper to simply negotiate with the Trustee for an annulment under section 153A above. Example: Nguyen v Lion Finance Pty Ltd & Anor [2012] FMCA 880 (31August 2012) Mr Nguyen sought to set aside a sequestration order some 4 months after it was made, or in the alternative, have the bankruptcy annulled under s 153B. His reasons for seeking these orders were in summary: he had not been served with the original Statement of Claim which led to the judgment debt on which the Bankruptcy Notice was based he had been served with the Creditor's Petition (including a copy of the judgment) but thought it was a mistake because he had never heard of Lion Finance (his original debt being to GE) he had a home and was solvent. The Federal Magistrate refused to make either order on the basis that: the applicant had not adequately explained the several months delay after being informed of the sequestration order the applicant did not dispute that he had been served with the Creditor's Petition the applicant had not taken any steps upon finding out about the Local Court judgment to have it set aside and did not appear to dispute his indebtedness as claimed the applicant had not fully disclosed his debts on his statement of affairs. His solicitor had found an additional overdue debt on his credit report and the Trustee had been contacted by yet another creditor who lodged a proof of debt but had not been included in the statement of affairs. As a result the Federal Magistrate did not think the court could make a finding of solvency with any confidence. Mr Nguyen would still have been able to approach the Trustee to seek annulment under s 153A, but only once the Trustee was confident that all debts had been disclosed and that the property was sufficient to pay out the debts, interest, legal fees and costs of administration of the estate. Unfortunately, those costs would now be higher as a result of the proceedings. Effect of annulment Where a bankruptcy is annulled (s 154): all acts done (sales made, distributions of dividends, payments made etc) by the Trustee prior to the annulment remain valid the Trustee can retain the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the Trustee (if not already paid) from the vested property any remainder must be repaid to the former bankrupt (unless there is an application by a person claiming a better interest in the property or a claim is pending under a proceeds of crime law and an application is made by an appropriate authority under that law) any surplus divisible property remaining re-vests with the former bankrupt. Where there is insufficient property in the estate to pay the Trustee's expenses etc (such as where the bankruptcy has been annulled by the court rather than by payment of debts, remuneration and costs), then the amount of the deficiency is a debt due by the former bankrupt to the Trustee and is only recoverable by the Trustee by court action against the former bankrupt. Note: Where there is clearly going to be sufficient funds to annul a bankruptcy (because of an inheritance perhaps) but the undischarged bankrupt urgently needs money (for example, for medical expenses or housing) they can apply to their Trustee to have a portion released. A financial counsellor can advocate to the Trustee in these circumstances to assist in establishing both the need for the money and that there is likely to be a surplus in the estate. Compositions or arrangements A bankrupt may not have sufficient funds to pay their debts in full, including interest and the costs of administering the estate, but still wish to propose an arrangement which will benefit creditors and bring the bankruptcy to an end. Section 73 provides for the bankrupt to make such a proposal in writing to the Trustee. The Trustee must then call a meeting of creditors and provide a report to the creditors indicating whether the proposal would benefit creditors generally. The Trustee does not have to call a meeting if the proposal does not make adequate provision for payment to the Trustee of accrued fees that are owing to the Trustee to date. The proposal can be amended by the bankrupt at the creditors' meeting provided the provision for the Trustee's fees is not amended. The Trustee of the bankrupt estate is usually also appointed the trustee of the composition or arrangement. However, another trustee may be appointed if creditors so desire. Creditors can indicate their agreement or otherwise to the proposal to the Trustee prior to the meeting in writing. In that case they are deemed to have been present and to have voted as indicated. The composition or arrangement must be accepted by special resolution (at least 75% in value of the creditors present or deemed present who voted on the proposal and those creditors must represent at least 51% in number of the creditors who voted). If the special resolution is passed, then the bankruptcy is annulled on the date the resolution is passed (s 74). The Trustee can later propose a variation to creditors with the consent of the bankrupt. In practical terms, it is usually the bankrupt who seeks the variation (for example, an extension of time in which to make the requisite payments) and the Trustee who conveys the variation proposal to the creditors for their consent. A composition or arrangement can be set aside by the court for a variety of reasons (for example, omission of material particulars), and terminated by the Trustee or creditors for non-payment. The same rules apply as for setting aside Personal Insolvency Agreements.

Updated: 29 October 2025 Content Part 1: Life in Bankruptcy Part 2: The light at the end of the tunnel - getting out of bankruptcy Part 3: Challenging Trustees' Fees Part 3: Trustee's fees Generally, the creditors have primary control over the Trustee's remuneration because they are the cost bearers. However, there are two circumstances where the level of fees and charges becomes critical to the debtor/bankrupt: where there is an attempt to set aside a sequestration order made pursuant to a Creditor's Petition (see Chapter 10); and where the bankruptcy is to be annulled because the debts and costs of the administration of the estate have been paid. The trustee's fees depend on whether they are a Registered Trustee (ie a privately appointed trustee), or the Official Trustee. Registered Trustees' remuneration (including other costs such as valuations, searches, legal fees etc) can amount to very large sums of money. Bankrupts are often shocked when they are told the cost to annul the bankruptcy. Where the Official Trustee is appointed, the estate is administered by officers within AFSA. The Official Trustee's fees and charges are published on the AFSA website. As at October 2025, the Official Trustee's fees for the administration of a bankruptcy are $4,000 + 20% of money received, with an additional fee of $62.50 per 15 minutes for time spent in managing the debtor's business. No money is charged to the bankrupt personally - it is only recovered from the estate. However, if the bankrupt wishes to annul the bankruptcy, the Official Trustee's full fee must be paid along with the debts (including interest) and costs of the administration. The rest of this chapter applies to estates administered by Registered Trustees. It briefly sets out the process for setting the Registered Trustee's remuneration, the notices the parties should receive, and the process for seeking a review of the Trustee's fees and charges. The Official Trustee rates cannot be used as a guide to determine what a Registered Trustee should charge because their rates are calculated by different methods. What can a Registered Trustee charge? The Registered Trustee's remuneration and other costs of administering the estate (plus the costs of the petitioning creditor) are priority debts. They are paid out of the estate before any other creditor is paid (s 109(1) Bankruptcy Act; reg 25(1) Bankruptcy Regulations). Division 60 of Schedule 2 (Insolvency Practice Schedule (Bankruptcy)) of the Bankruptcy Act concerns the Registered Trustee's remuneration. Sections 161B and 162 of the Bankruptcy Act, despite being repealed in 2016, still apply to a Registered Trustee appointed (or who consented to act) before 1 September 2017. The Registered Trustee is entitled to receive remuneration for 'necessary work properly performed' in administering the estate (s 60-5(1) Bankruptcy Act). If the Trustee was appointed (or consented to act) after 1 July 2017, the Trustee is permitted to claim reasonable remuneration (s 60-5(2) Bankruptcy Act) up to $5,000, indexed from the previous financial year (s 60-15 Bankruptcy Act) without prior approval. If the Trustee's claim is above this threshold, their remuneration will be in accordance with a remuneration determination made by resolution of the creditors, or by the committee of inspection (s 60-10 Bankruptcy Act). The determination may specify that the Registered Trustee is entitled to receive a fixed amount, or an amount calculated on a time-cost basis, or a percentage of money received by the Registered Trustee in respect of the debtor's estate (60-12 Bankruptcy Act). If remunerated on a time-cost basis (eg an hourly rate), the determination must include a cap on the amount (s 60-12(2) Bankruptcy Act). If remunerated on a percentage basis, the determination must specify the money to which the percentage applies and the percentage must not exceed the prescribed maximum (s 60-12(3) Bankruptcy Act; r 60-20 Insolvency Rules). The bankrupt has no say over the rate of remuneration. The remuneration determination may be the subject of an application to the Inspector-General, for example where the creditors or committee of inspection have rejected a remuneration determination proposal, or it is not cost effective or practicable to seek a determination by the creditors or committee of inspection (s 60-11 Bankruptcy Act; rr 60-5 and 60-10 Insolvency Rules). Registered Trustees are also entitled to claim remuneration for costs incurred that are 'necessary and reasonable' (r 42-60 Insolvency Rules). Registered Trustees should 'handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt' (Inspector-General Practice Direction (IGPD) No 6: Remuneration entitlements of a Registered Bankruptcy Trustee at 5.2, quoting Smithers J in Mannigel v Aitken [1983] FCA 183). The Trustee is entitled to a full indemnity of their properly incurred costs, charges and expenses from the estate and will not be penalised for 'mere errors in judgment which fall short of negligence or unreasonableness' (IGPD No. 6 at 5.4, citing Northrop, Wilcox and Cooper JJ in Adsett v Berlouis & Ors [1992] FCA 368 at [32], itself quoting Bowen LJ in Re Beddoe; Downes v Cottam (1893) 1 Ch 547 at 562). Additionally, the Registered Trustee is entitled to remuneration for certain tasks required by law, despite the fact that those tasks do not generate any additional funds for the estate (for example, reporting to creditors, lodging statutory records with AFSA and maintaining accounts). Where the bankrupt is solvent or has the resources to pay out all debts, the Inspector-General expects the Registered Trustee to identify this early and give the bankrupt an opportunity to pay and take advantage of s 153A (annulment of the bankruptcy on payment of debts) before incurring any unnecessary expense. AFSA has previously undertaken reviews of Registered Trustees to ensure that the s 153A annulments only incurred necessary expenses and that the outcomes were achieved expeditiously. What information must the bankrupt receive in relation to Trustee's remuneration and other costs? Warning: The following process only applies to bankruptcies on or after 1 December 2010. For older bankruptcies the old taxation system still applies. Contact AFSA for more details. The bankrupt is entitled to receive three documents: an initial remuneration notice, a remuneration approval report, and a remuneration claim notice. Initial remuneration notice (r 70-35 Insolvency Rules) The Registered Trustee must send the bankrupt an initial remuneration notice within 20 days of receipt of the bankrupt's statement of affairs. If no statement is provided within 60 days of the date of the bankruptcy, the Registered Trustee must send the initial remuneration notice within 7 days of the end of the 60-day period. The notice must contain: a brief explanation of the types of methods that could be used to calculate remuneration; the method or rate the Registered Trustee proposes to use to calculate remuneration and disbursements; an explanation of why this method is appropriate; an estimate of the Registered Trustee's total remuneration; and the Registered Trustee's preferred payment method. If the Trustee proposes to charge on a time-cost basis, the notice must include details about the respective rates at which the remuneration of the Trustee and the other persons who will be assisting (or are likely to assist) the Trustee to be calculated. Remuneration approval report (r 70-45 Insolvency Rules) The remuneration approval report is a prerequisite for the approval of a remuneration determination. Although the Trustee has some flexibility as to when to issue the report, if the determination will be made by the creditors then the report must be given to the creditors and regulated debtor at the relevant determination meeting or with the relevant determination proposal, as the case may be. The report must contain: a list of major tasks to be performed and associated costs, along with the method of calculation of the costs; an indication of when the Trustee proposes to withdraw the funds from the regulated debtor's estate to satisfy remuneration; an estimate of the total remuneration amount to be claimed; and if relevant, an explanation of the impact of the remuneration on dividends. Remuneration claim notice (r 70-47 Insolvency Rules) The Registered Trustee must give a remuneration claim notice if: a regulated debtor (a bankrupt or a debtor in a personal insolvency agreement: s 5-15 Bankruptcy Act) or creditor has elected to receive the notice; the election was made within 20 business days of the regulated debtor's or creditor's receipt of the remuneration approval report; and the amount of remuneration claimed exceeds the maximum default amount (in accordance with s 60-15(1) Bankruptcy Act). If required, the notice must be given before the Registered Trustee finalising the administration, meaning the trustee of the estate of a bankrupt has realized all the property of the bankrupt, or so much of it that can, in his or her opinion, be realized without needlessly protracting the trusteeship (s 145(1) of the Bankruptcy Act). A person is a regulated debtor if the person is: a bankrupt; or a person whose property is subject to control under Division 2 of Part X; or a debtor under a personal insolvency agreement; or a deceased person whose estate is being administered under Part XI. The remuneration claim notice must contain: the total remuneration claimed; details of the work performed, the value of disbursements claimed, the method of calculating the remuneration and disbursements, and an explanation of any variation from the amounts (or other details) set out in the initial remuneration notice; and a statement advising the regulated debtor that they may, within 20 business days after receiving the notice, request the Inspector-General to review the amount of remuneration claimed. The review process An application for review can be made by a regulated debtor or a creditor to the Inspector-General (s 90-21(2)(b) Bankruptcy Act). A person subject to a Section 188 authority or in a Personal Insolvency Agreements (PIA). See Chapters 5 and 12 in relation to PIAs. The application for review must be lodged within 20 business days of receiving a remuneration claim notice from the Registered Trustee (r 90-5(1)(b) Insolvency Rules), or otherwise within 20 business days after the end of the administration of the estate (r 90-5(1)(c) Insolvency Rules). The Inspector-General may extend this period if it is satisfied that the applicant and the Registered Trustee have been engaged in an alternative dispute resolution process to try to resolve the matter, or it is otherwise appropriate, in all the circumstances, to extend the period (r 90-5(2) Insolvency Rules). Application threshold The Inspector-General must refuse an application if (r 90-10(2)(b) Insolvency Rules): the applicant has no interest in the outcome of the review (eg the applicant is the debtor and the bankruptcy is not being annulled); the applicant has not adequately particularised the issue giving rise to the review; or the application is frivolous or vexatious. In this context, an 'interest in the outcome of the review' means a 'realistic expectation' of receiving a dividend (in the case of a creditor) or a surplus (in the case of a bankrupt) (IGPS No. 16: Reviewing remuneration of trustees and costs of third party service providers at [3.8]). Where there is no hope of a surplus even if the remuneration is reduced, the application will be rejected. Likewise, the Inspector-General must refuse an application unless satisfied that (r 90-10(2)(a) Insolvency Rules): the Registered Trustee's remuneration may have been fixed in a manner inconsistent with the Act and Regulations; or the Trustee may have acted improperly or without due care and diligence in the administration of the estate. Despite the above, the Inspector-General may accept an application for review if satisfied that there are exceptional circumstances which would justify the review (r 90-10(3) Insolvency Rules). Exceptional circumstances may include but are not limited to (IGPS No. 16 at [3.9]): evidence of errors by the Trustee or their staff requiring remedial action, including work done poorly; systemic and justified complaints made to AFSA about conduct which indicates the Trustee or their staff have been performing unnecessary work, or work has not been properly executed; and evidence of inefficiency or inappropriate billing practices, for example routine work given to expensive senior staff, charging for the Trustee's communication with the regulator, or inordinate delays without explanation. The Inspector-General may nevertheless refuse to accept an application if satisfied that it was appropriate for the applicant to attempt to resolve the matter without seeking a review, but the applicant did not do so without reasonable explanation (r 90-10(4) Insolvency Rules). The applicant or the Trustee can ask the Administrative Appeals Tribunal to review the Inspector-General's decision whether to approve the application for review (r 90-5(4)-(5) Insolvency Rules). Form of application The application must be in writing (r90-5(1)(a) Insolvency Rules). Form 28 Application for Review of Trustee Remuneration is available on the AFSA website. The claim must be particularised to a fair level of detail. Claims that include only general phrases like 'remuneration appears excessive' or 'every item of work is disputed' will not be considered adequate to justify a review. For guidance on the sort of content required, see Annexure A of IGPS No. 16 (which includes some principles and examples from the Australian Restructuring Insolvency and Turnaround Association's Code of Professional Practice (ARITA Code) and IGPD No. 6) and Division 42 of the Insolvency Rules (which includes the Standards for Registered Trustees). The application will only be accepted once all the relevant supporting information has been provided. The Inspector-General may, before making a decision to reject or accept an application, interview the applicant or Trustee, or inspect the Trustee's administration file. If the Inspector-General refuses to accept the application, the applicant and the Trustee must be given written notice of the refusal, with reasons, within 10 business days of the decision (r 90-10(5)-(6) Insolvency Rules). What will be taken into account in the review? The Inspector-General must conduct the review expeditiously and with as little formality and technicality as permissible (r 90-55(1) Insolvency Rules). The Inspector-General has broad powers of investigation (r 90-55(3) Insolvency Rules). Amongst other things, the Inspector-General can direct that an uncooperative Registered Trustee have their remuneration withheld (r 90-60(2) Insolvency Rules). The Inspector-General will have regard to the Bankruptcy Act (including Schedule 2: Insolvency Practice Schedule (Bankruptcy)), the Insolvency Rules (including the Standards for Registered Trustees in Division 42), the Bankruptcy Regulations, as well as IGPD No. 6, IGPS No. 15: Determination of a trustee's remuneration, IGPD No. 18: Trustee remuneration notifications, and the ARITA Code. The Inspector-General will generally consider whether: the work performed was within the scope of the Trustee's powers the work was performed prior to the appointment of the Trustee the Trustee undertook a proper assessment of whether a particular cost was reasonable, given the value and complexity of the administration there were instances of double billing for essentially the same tasks the Trustee behaved appropriately and properly managed any conflicts of interest the Trustee properly recorded the work done and costs incurred the Trustee delayed the administration unnecessarily (incurring additional costs) once the bankrupt indicated a willingness and ability to pay out all debts and expenses. Outcome of review and right of appeal The Inspector-General must complete the review and make a decision within 60 days of accepting the application for review (r 90-65(1)(a) Insolvency Rules). At the conclusion of the review the Inspector-General may (r 90-65(2) Insolvency Rules): affirm the amount claimed by the Trustee disallow some or all of the claim substitute another amount some or all of the amount claimed. If the Inspector-General finds that the Trustee has overcharged, the amount in excess of the appropriate amount is a debt due to the bankrupt estate (r 90-65(3) Insolvency Rules). When the Trustee receives the statement setting out the outcome of the review, any amount owing as a result will be required to be repaid to the bankrupt estate by a certain date. Inspector-General can, if necessary, recover this debt in a court of competent jurisdiction. Within 10 business days of making the decision the Inspector-General must provide the applicant and the Trustee a written statement setting out the decision, the reasons for the decision, the findings on any material question of fact, and evidence for these findings (rr 90-65(4)-(5) Insolvency Rules). The trustee, regulated debtor or a creditor may apply for judicial review of, and orders relating to, the Inspector-General's decision (ss 90-21(3)-(4) Bankruptcy Act). For a third party costs review, the third party may also appeal to the Court under s 30 of the Act. Whilst there is no specified time limit for making an application to the court, such an application should be made sooner rather than later. Important Note: Clients should be made fully aware that where a bankrupt does not co-operate with a Registered Trustee and the Trustee is required to spend additional time and resources to obtain the requisite information and/or realise assets, then the Trustee's legitimate remuneration will increase substantially. Likewise, if they engage in excessive communications with the Registered Trustee and/or make unsubstantiated/unwarranted complaints about the Trustee to the Inspector-General which the Trustee will have to defend, the Trustee's legitimate remuneration will increase accordingly.  

Updated: 29 October 2025 Content Part 1: What are the ongoing consequences after discharge from bankruptcy? Part 2: Debts allegedly incurred by fraud - dealing with Centrelink demands Summary Part 1 of this Chapter covers what happens after discharge. While bankruptcy officially ends at discharge there are some ongoing ramifications: The client may experience ongoing difficulties getting credit and goods and services because of the listing on their credit report/NPII There may continue to be employment ramifications Any property that vested in the trustee as a result of the bankruptcy will remain so for a certain period unless the client has made arrangements with the Trustee to buy the property back - vested property may still be sold or otherwise dealt with by the Trustee Investigations into past transactions may be continued or re-opened if new information comes to light, potentially resulting in claims for money or property from third parties Undisclosed property could still be identified and vest in the Trustee Undisclosed income could result in a reassessment of contributions owed The Trustee could take enforcement action against the former bankrupt to recover unpaid contributions The discharged bankrupt has an ongoing obligation to cooperate with the Trustee in relation to any of the above. The former bankrupt is released from most provable debts BUT: Debts incurred by fraud may still be enforced against the debtor (unless there is a judgment or repatriation order for the debt which predates the bankruptcy) The former bankrupt is not released from bail and recognisance debts, maintenance or child support, or debts incurred after the date of the bankruptcy. Part 2 of this Chapter contains information on responding to recovery action by Centrelink in relation to allegedly fraudulently incurred debts.   Part 1: What are the ongoing consequences after discharge from bankruptcy? The Official End Your client will be discharged from bankruptcy when the bankruptcy finishes (normally 3 years and 1 day from the date the statement of affairs was filed, unless the bankruptcy has been extended) so long as no objection has been lodged. However, there are some things that will continue to affect your client's life in the near and long-term future. When your client is discharged, he or she may not receive any notification from the Trustee. There is no requirement for a trustee to formally advise the bankrupt of the automatic discharge. If the client requires confirmation of the bankruptcy discharge date, he or she can obtain an extract of the NPII which will display the date of discharge. This extract of the NPII can be obtained via AFSA's Bankruptcy Register Search on AFSA's website. The applicable fee for this extract is $15 as at October 2025. In cases where the Official Trustee is the bankruptcy trustee and a less formal confirmation is required, a letter can be provided by AFSA. To request mere confirmation that a client's bankruptcy has ended, or if you wish to know the expected bankruptcy end date, you can submit an online form to AFSA. AFSA can then provide a letter confirming the client's bankruptcy end date or the expected bankruptcy end date. A request for an End of bankruptcy confirmation is free and available on the AFSA website. Ongoing ramifications After discharge from bankruptcy a record will remain on the client's credit report for the later of: five years from the date on which the individual becomes bankrupt, or 2 years that starts from the date the bankruptcy ends. However, the NPII record will remain for the rest of your client's life. This means that even though the client is a discharged bankrupt he or she may still encounter difficulty in obtaining credit, insurance and some other services in the near future (due to the credit listing) and possibly in the long-term (due to the NPII record). If your client is discharged with outstanding contributions payable, those unpaid income contributions will remain payable and may be pursued as a debt despite discharge. Non-payment of contributions is grounds for an objection to discharge. Where there has been a failure on the part of the client to disclose accurate information about income or assets during the bankruptcy, the Trustee may decide to take action to recover property or reassess income contributions, even after discharge. Where the client has property that vested in the Trustee, but which has not yet been sold or transferred, this will continue as per the timelines and guidelines detailed in Chapter 6. The property does not revert to the bankrupt unless transferred by the Trustee (or it eventually revests in the bankrupt in accordance with the time limits in the Act. See the final page of Chapter 6 Part 3). In fact, the discharged bankrupt has a statutory obligation under s 152 of the Bankruptcy Act to give such assistance to the Trustee as the Trustee reasonably requires, to sell and distribute any property so affected - failure to do so is an offence punishable by imprisonment for 6 months. A person can become a company director again once they are discharged from bankruptcy. However, they will need to be reappointed by the company in accordance with its constitution. Changes to company details must now be made online by registering to use ASIC's online services and changing the company details online. Even though the restrictions on being a director or partner are lifted by discharge, other restrictions due to the client's professional body's rules or licensing regulations may impact upon the client's future employment. The fact that the bankruptcy is permanently recorded on the NPII could impact on future promotion to high-level positions. Some people still feel a sense of guilt that they have gone bankrupt and have not repaid their debts. It is important to make it clear that even after discharge, the client can opt to repay all their debts plus the fees and charges imposed by the Trustee should they be in a position to do so. Where the Trustee is satisfied that all the debts and the Trustee's remuneration have been paid in full, the Trustee can annul the bankruptcy under s 153A of the Bankruptcy Act after discharge. The annulment of the bankruptcy will then be recorded on the NPII. The bankruptcy annulment will occur on the date on which the last such payment was made. However, confirmation of the bankruptcy annulment date will depend on whether any creditor will claim interest. The bankruptcy trustee will then notify the Official Receiver of such annulment within two days of the annulment being confirmed. Further information can be found on AFSA's website: Official Trustee Practice Statement 4, The end of a bankruptcy's period of bankruptcy 1 April 2021. The Bankruptcy Act does not allow a bankrupt who has already been discharged to obtain a retroactive annulment of their bankruptcy by way of an offer of Composition under ss 73 and 74. Troubleshooting On rare occasions a client will have been discharged from their bankruptcy and then find themselves being pursued by a creditor who they had failed to list in their bankruptcy through an oversight or memory lapse, even though the debt was incurred before the date of the bankruptcy. The client should: notify their Trustee of these debts provide evidence that the debts were incurred prior to the date of bankruptcy request that the Trustee record the debts in their bankruptcy request that the Trustee inform the creditor(s) accordingly. It is prudent to draft the statement of affairs as comprehensively as possible by listing all potential parties to the debt (ie creditors, debtors etc). This will minimise the risk that unforeseen claims of debt will arise in the future. Unfortunately, some debt collectors contact clients about debts after bankruptcy and claim that they are now able to pursue them because the bankruptcy is over. The client should immediately contact their Trustee in these circumstances and should inform the debt collector that the debt was listed in the bankruptcy. Any attempts to commence legal action should immediately be referred for legal advice. Where the debt collector (or lender) is a member of an external dispute resolution scheme, a complaint could be lodged with the relevant scheme if direct contact with the client continues after the creditor has been directed to the trustee (see Chapter 8).  

Updated: 6 May 2024 Content Part 1: What are the ongoing consequences after discharge from bankruptcy? Part 2: Debts allegedly incurred by fraud - dealing with Centrelink demands Summary Part 1 of this Chapter covers what happens after discharge. While bankruptcy officially ends at discharge there are some ongoing ramifications: The client may experience ongoing difficulties getting credit and goods and services because of the listing on their credit report/NPII There may continue to be employment ramifications Any property that vested in the trustee as a result of the bankruptcy will remain so for a certain period unless the client has made arrangements with the Trustee to buy the property back - vested property may still be sold or otherwise dealt with by the Trustee Investigations into past transactions may be continued or re-opened if new information comes to light, potentially resulting in claims for money or property from third parties Undisclosed property could still be identified and vest in the Trustee Undisclosed income could result in a reassessment of contributions owed The Trustee could take enforcement action against the former bankrupt to recover unpaid contributions The discharged bankrupt has an ongoing obligation to cooperate with the Trustee in relation to any of the above. The former bankrupt is released from most provable debts BUT: Debts incurred by fraud may still be enforced against the debtor (unless there is a judgment or repatriation order for the debt which predates the bankruptcy) The former bankrupt is not released from bail and recognisance debts, maintenance or child support, or debts incurred after the date of the bankruptcy. Part 2 of this Chapter contains information on responding to recovery action by Centrelink in relation to allegedly fraudulently incurred debts.   Part 2: Debts allegedly incurred by fraud - dealing with Centrelink demands Prior to November 2022, there was a legal case which established the principal that if a civil judgment had been made in relation to a debt prior to bankruptcy, the bankruptcy might extinguish that debt even if that initial debt was incurred by fraud (Power v Kenny [1977] WAR 87). For example, if a person was found to be lying to Centrelink about their income, they may have a civil judgment debt against them for the repayment of their benefits, but this would be extinguished upon discharge of the bankruptcy. In 2022, a Victorian Supreme Court decision changed this approach to the law (Barodawala v Perinparajah [2022] VSCA 198). Now, a judgment debt which was incurred by reason of fraudulent conduct will fall under the rule in s 153(2)(b). As a consequence, a client will be required to pay a judgment debt arising out of fraudulent conduct despite being discharged from bankruptcy. Please note this is a developing and complex area of the law and may be subject to change or re-interpretation. As covered in Chapter 6 Part 1, Centrelink will sometimes seek to recover debts that would otherwise be extinguished by bankruptcy on the basis that the debt was incurred by fraud. It is important not to accept this demand at face value. Centrelink should only be demanding payment, or garnisheeing the client's income where: the client has received a conviction specifically for a fraud offence; or the client has admitted fraud (the validity of which depends on the client's legal capacity and the circumstances in which the admission was obtained - when in doubt, refer the client for legal advice). If your client is a discharged bankrupt who is being pursued for a Centrelink debt that predates their bankruptcy and they have neither been found by a Court to have acted fraudulently nor admitted fraud, there is a Sample Letter on the following page that you can use to dispute Centrelink's decision to pursue the debt. A note on Power v Kenny [1977] WAR 87 In September 2022, the Supreme Court of Victoria refused to follow Power v Kenny in the matter of Barodawala v Perinparajah [2022] VSCA 198. By a 2:1 majority, the Court held that a judgment debt is capable of falling within the exception found in s 153(2)(b) of the Bankruptcy Act if the judgment debt is based on a finding of fraud. The effect of Barodawala is that a client who is discharged from bankruptcy will no longer be released of a debt incurred by fraud by operation of the judgment order. Power v Kenny was a decision of the Supreme Court of Western Australia. Barodawala is not, therefore, a subsequent decision by a superior court and is not necessarily binding on the Supreme Courts of other States. However, special leave to appeal Barodawala was refused by the High Court in March 2023 as the appeal had insufficient prospects of success. It is therefore uncertain whether Barodawala is binding in Victoria only, or in all States and Territories except Western Australia, or in all States and Territories including Western Australia. In short, the law on this point is not settled. If your client has had a judgment order made against them for fraud, refer the client for legal advice.   Sample letter: to Centrelink The following has been adapted from a letter prepared by Malcolm Buchanan, Financial Counsellor, Family Mediation Centre, Traralgon, Victoria Insert date Authorised Review Officer, Centrelink Insert address To whom it may concern, Re: [Insert Client's Name and CRN] I am assisting the above client and my client's authority is enclosed. [Insert client's name] contacted this agency in reference to a decision by Centrelink to reinstate a debt of [insert amount] after discharged from bankruptcy. This debt predated the bankruptcy and was provable in the bankruptcy. My client disputes your decision to reinstate this debt as my client argues it was extinguished by the bankruptcy. I refer to the following cases: Civitareale v Department of Family & Community Services (1999) 57 ALD 451; [1999] AAT Department of Social Security v Southcott (1998) 82 FCR 100; (1998) 50 ALD 162; (1998) 27 AAR 106; [1998] FCA 323 Department of Family & Community Services v Dobson [2000] AATA 41 Once a person has bankrupted, a debt due to the Commonwealth is replaced by the right to prove in bankruptcy under the Bankruptcy Act. The exception is, of course, if the debt is incurred by fraud. In paragraph 95 of Civitareale, the AAT defined fraud from the Osborne Law Dictionary: "Fraud is proved when it is shown that a false misrepresentation has been made (1) knowingly or (2) without belief in its truth, or (3) recklessly, careless whether it is true or false. To obtain damages for deceit it must be proved that the defendant intended that the plaintiff should act on the fraudulent misrepresentation..." In my client's case, there is no indication that you applied any of these definitions. Please outline the evidence on which you are relying to establish that my client has behaved fraudulently so that my client can properly make his or case to the review. Please confirm that this debt has been extinguished and no further action will be taken. Yours faithfully, Financial Counsellor The High Court case of Director of Public Prosecutions (Cth) v Keating [2013] HCA 20, found that the notices issued to the defendant by Centrelink asking for updated income details placed the defendant under a positive duty to disclose, which, if not complied with, could form the basis of the Criminal Code offence of obtaining a financial advantage from a Commonwealth entity. This case is likely to be quoted by Centrelink in response to this letter. If your client has not made any false statements but has completely failed to complete forms sent by Centrelink requiring income information, without reasonable excuse (such as perhaps mental illness, lack of intellectual capacity, or perhaps serious illness), then your client should get legal advice in relation to potential prosecution before pushing this issue any further. If you (or your) client receive further correspondence from Centrelink indicating that the debt will continue to be pursued, you should refer the client for legal advice and assistance. Your client can seek a review by an Authorised Review Officer and then the Administrative Appeals Tribunal. If your client has not been charged with a criminal offence you should also refer them for criminal law advice prior to lodging an appeal, as there is a risk that if their appeal is unsuccessful, they could be referred to criminal prosecution. Statements made by your client in the course of their appeal could potentially be used as evidence in a subsequent prosecution. Your client may dispute the debt and lodge an appeal even if they have already commenced paying back the debt. If the appeal succeeds and the debt is set aside or waived, amounts which have been 'over-recovered' will be refunded to your client. There is no time limit to start an appeal with an Authorised Review Officer or the first tier of the Administrative Appeals Tribunal. If your client concedes that they have engaged in fraud and yet is facing particular financial hardship as a result of the demand for repayment, you can make representations to this effect when seeking a write-off of the debt under s 1236 of the Social Security Act 1991.          

Updated: 2 May 2024 Content Part 1: Introduction Part 2: Bankruptcy Notices Part 3: Creditor's Petition Part 4: Sequestration Orders Summary This chapter describes the process for making a debtor bankrupt through the courts. It describes the process and your client's options at each stage. This is an area where proceedings move fast and legal costs accumulate quickly. If you have a client who has received a Bankruptcy Notice or a Creditor's Petition, they will need urgent legal advice. If your client has already been made bankrupt, the first they hear about it (or the first time they are driven to take action) may be when the Trustee freezes their bank account(s). Again, it is important to get advice urgently because there are short time limits for taking action and Trustees costs add up fast. If your client has been made bankrupt, they need to file a statement of affairs as soon as possible, whether they intend to try to get the bankruptcy set aside or not! Key terms Bankruptcy Notice This is a document issued by the Official Receiver when a creditor applies (and pays the filing fee) and can prove that there is an outstanding judgment (or judgments) against a debtor for $10,000 or more. The judgment(s) must not have been stayed by the court and must not be more than 6 years old. The notice itself does not start any court proceedings. Failure to pay within the time provided is an act of bankruptcy (see below) on which a creditor may then base a Creditor's Petition. Creditor's Petition This is a formal application to the court to make a debtor bankrupt. This commonly follows an unpaid Bankruptcy Notice (although theoretically there are other acts of bankruptcy on which it could be based - see Chapter 10 Part 3). The act of bankruptcy must have occurred in the previous 6 months. There will always be a hearing within a very short time and the debtor must attend or apply to the court for an adjournment if he or she is to have any hope of avoiding bankruptcy. Sequestration Order This is an order of the court making a person bankrupt. Most commonly this will be the result of a Creditor's Petition. Your client's options are very few once they have been made bankrupt. Those options they do have are canvassed later in Chapter 10 Part 4. Part 1: Introduction While voluntary bankruptcy is the most common way that debtors become bankrupt, a number of debtors are threatened with forced bankruptcy each year for non-payment of debts. Bankruptcy has serious consequences for debtors, many of whom have assets to lose, most commonly the family home, a vehicle or perhaps a mobile home/caravan which serves as their home. The threat of Trustee's fees, which can amount to tens of thousands of dollars in a relatively short period of time, and legal fees, also means there is much more at stake than the amount of the debts. A debtor who is not really insolvent but ignores the bankruptcy process (often because they don't know what to do), can end up with nothing left by the time the bankruptcy is annulled, or insufficient funds to annul the bankruptcy. This means that they may not only lose their home and other assets, but they are also subject to the same restrictions as all bankrupts in terms of their opportunities to travel, to enter loans, to be a company director etc. While it is important that the law has a mechanism for dealing with insolvency, the results for debtors can sometimes be punitive and disproportionate. While bankruptcy is not supposed to be a substitute for debt collection, many financial counsellors and consumer advocates are aware of creditors and debt collectors who routinely resort to bankruptcy without exhausting other debt enforcement mechanisms first. Using the bankruptcy process to collect unpaid strata management fees has become particularly common and many clients who present as experiencing mortgage hardship are often also at serious risk of facing bankruptcy proceedings in relation to unpaid strata management fees. It is very important to act fast when your client may be at risk of being made bankrupt. For a client facing bankruptcy, a day or two can make a world of difference. If your client says anything or gives you any documents that indicate they are facing bankruptcy proceedings, or have been made bankrupt, you should refer the client for urgent legal advice. Case study A financial counsellor had a client who had been hospitalised for many months due to her mental health. Upon being released the client found she had a demand to pay $12,000 in strata management fees. She paid immediately, but it was all the money she had. Later she received a demand from a lawyer for costs. The letter claimed over $3,000 in legal costs, including amounts for the issue of both a Bankruptcy Notice and a Creditor's Petition. The financial counsellor was very concerned the client may have already been made bankrupt. She contacted Financial Rights Legal Centre (Financial Rights). A Financial Rights' solicitor searched for the client's case on the Commonwealth Courts Portal and discovered that the sequestration order had not been made (because the client had paid the original debt) but that the Court had ordered the financial counsellor's client pay legal costs and specified the amount. If the sequestration order had been made, the client would have had only 21 days from the date of the decision (which may have been weeks ago) to have the decision reviewed! The financial counsellor did the right thing by seeking assistance immediately. Bankruptcy proceedings will usually take place in the Federal Circuit and Family Court of Australia (FCFCOA) or the Federal Court of Australia (FCA) for debts of very large amounts (or for the convenience of the creditor's solicitor), as both courts have exactly the same original jurisdiction under the Bankruptcy Act. The Registrar assigned to bankruptcy hearings on the day will hear matters for both courts. Bankruptcy proceedings are very technical and are very expensive. To make matters worse, it is not a particularly 'debtor-friendly' jurisdiction - there is less scope for courts to be sympathetic to debtors once bankruptcy proceedings have begun. There is also a risk of additional costs being ordered against your client at every turn. If your client agrees they owe the debt, or most of it, then they should pay as much as they can, as soon as possible, and keep negotiating for time to pay off the rest, if necessary, at the same time as getting legal advice. The rest of this Chapter will refer to the Federal Circuit and Family Court of Australia (FCFCOA) (formerly the Federal Magistrate's Court and the Family Court of Australia). However, in some cases the relevant court will be the Federal Court of Australia. Hint for lawyers This jurisdiction is very technical - do not put your toe in without being aware of the relevant provisions and clauses in: Bankruptcy Act 1966 Bankruptcy Regulations 2021 Federal Circuit and Family Court of Australia Act 2021 Federal Court and Federal Circuit and Family Court Regulations 2022 Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy) Rules 2021 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (which apply where there is no specific coverage of the issue in the bankruptcy specific rules above The Federal Circuit Court Practice Directions AFSA Practice Statements. If the matter is in the Federal Court of Australia, then the Federal Court (Bankruptcy) Rules 2016 and Federal Court Rules 2011 will apply. The Bankruptcy rules in both FCFCOA and FCA are harmonised and are generally of the same effect but check the rules of the specific jurisdiction. The Bankruptcy Act & Regulations and the Court Rules are amended from time to time in significant ways. Lawyers should use the Federal Register of Legislation website or the Federal Circuit and Family Court of Australia website to make sure they are referring to the correct instruments for the relevant point in time. Acts of bankruptcy A key concept in the Bankruptcy Act 1966 is that a person who commits an act of bankruptcy is then vulnerable to bankruptcy proceedings - that is an application by a creditor, or group of creditors, to make the person bankrupt. There are many acts of bankruptcy. A comprehensive list of acts of bankruptcy is found in s 40 of the Act. Some of these are alarmingly broad. The most commonly relied on act of bankruptcy, however, is in s 40(1)(g) and is based on an unsatisfied judgment debt, followed by an unsatisfied Bankruptcy Notice. Bankruptcy Notices are covered in detail in Chapter 10 Part 2. Examples of acts of bankruptcy (see s 40(1)): filing a Debtor's Petition filing a Declaration of Intention to present a Debtor's Petition filing a Debt Agreement Proposal breaching a Debt Agreement disappearing, leaving the country, failing to respond to attempts at contact - all with the intent to defeat or delay creditors giving notice to any of his or her creditors that he or she has suspended, or that he or she is about to suspend, payment of his or her debts* (see Note below) making a conveyance or assignment for the benefit of creditors generally making a conveyance, transfer, settlement, or other disposition of property, creating a charge on property, or making a payment or incurring an obligation - any of which would be void against the Trustee if the person went bankrupt a court has issued an order or writ for execution against property which has since been sold or held by the sheriff for 21 days, or the execution remains unsatisfied if a s 188 authority is signed appointing a controlling trustee (this is the first step in entering a Personal Insolvency Agreement - see Chapter 5) a Personal Insolvency Agreement, composition or scheme of arrangement is terminated or set aside by the court. *Note: It is sometimes observed that financial counsellors may be assisting clients to commit an act of bankruptcy when writing to creditors about their financial difficulties and requesting alternative repayment arrangements. While it would not hurt for financial counsellors to be careful in their choice of language - do not directly state than clients will or have ceased paying their debts, for example - there is no real cause for alarm on this count. Creditors prefer to rely on clear cut acts of bankruptcy that are easy to prove. As noted above, failure to pay in accordance with a Bankruptcy Notice issued in relation to a judgment debt is overwhelmingly the most common basis for a Creditor's Petition. Terminated PIAs and Debt Agreements also lead to sequestration orders (bankruptcy) in some cases. There is no known case of a financial counsellor's hardship letters being used to establish an act of bankruptcy. The process for making a debtor bankrupt Following final judgment, if the debt is not paid a Bankruptcy Notice is served (see Chapter 10 part 2). These steps detail the process from Bankruptcy Notice to a client being bankrupt. Step 1: Bankruptcy Notice served What can you do? Apply to set aside Bankruptcy Notice Apply to extend time to comply IMPORTANT: DO NOT do this without legal advice. This is a very technical procedure - it is not about general fairness but technical compliance. Your client will have to pay costs if they are not successful. If you client wants more time to pay, negotiate directly with the creditor or get the client to apply to pay by instalments at the original court and start paying! What might happen to your applications? Application Granted = The client must now deal with the outstanding debts as required by the Court, for example, challenge them in the appropriate jurisdiction, negotiate the amount or the timeline or create a payment plan. This will depend on what sort of application was made. Application Dismissed = Go to Step 3 Step 2: Bankruptcy Notice not paid If not paid within the time given (usually 21 days), this is an Act of Bankruptcy and your client moves to Step 3. Step 3: Creditor's Petition served leading to a Creditor's Petition Hearing. What must your client do now? Your client MUST turn up to the court for the Hearing (known as a Sequestration Hearing). Now is the opportunity to try to get more time to pay the debts. The court will usually allow one or more adjournments to allow the parties to 'work things out'. If your client has applied to pay by instalments, set aside the original judgment or appealed the decision, they still need to turn up and inform the court (with evidence). What might happen at the Hearing? Petition Dismissed = while a petition dismissal means the client is NOT declared bankrupt, it is important they deal with the pre-existing debt, as previously required, to avoid further consequences Petition Granted = Sequestration Order made = your client is now BANKRUPT Is there anything else you can do? Apply for Review of a Registrar's decision (21 days) or Appeal from a single Judge of FCA or FCFCOA Steps to avoid being made bankrupt It gets more and more difficult to avoid bankruptcy as the process progresses. The best thing your client can do to prevent bankruptcy is avoid a judgment debt in the first place. It is essential to respond to a statement of claim (or other initiating process) in the Local/ District/Supreme Court or other court to avoid a 'default judgment'. If the credit provider is in the Australian Financial Complaints Authority (AFCA) or another External Dispute Resolution service (for telecommunication or energy)), you can lodge in the scheme to stop legal proceedings progressing, but this will only provide you with a limited reprieve. If the debt is owed, you need to keep negotiating and making payments to reduce the debt. Make sure any negotiated resolution is realistic for your client and emphasise the importance of the client sticking to the arrangement. As far as possible, avoid agreeing to judgment being entered as part of the resolution as this will leave your client vulnerable to bankruptcy proceedings in the event they breach the arrangement. AFCA may not require the financial firm to discontinue proceedings if they were appropriately instituted. If you believe they were not, seek advice. If judgment has already been entered, then the client needs to pay the amount claimed in full or to get enforcement of the judgment or order stayed in the court where the original judgment was made prior to the issue of a Bankruptcy Notice. Your client can lodge in AFCA after a judgment but before a bankruptcy notice to assist in negotiating a payment arrangement, but AFCA's jurisdiction is very limited to a payment arrangement. It does not technically stay any judgment. Only a stay issued by the court, however, will prevent a Bankruptcy Notice being issued or render it invalid. In most jurisdictions an application to pay by instalments will result in a stay of enforcement, although you may have to specifically apply for a stay (especially with second and subsequent applications). Check the rules in your jurisdiction or get legal advice. Your client should pay what they can immediately (regardless of any application to pay by instalments) and confirm any arrangement agreed with the creditor in writing. If a debtor makes an application to pay by instalments it is important that they start paying in accordance with the proposed instalment plan immediately, regardless of whether they have been notified of the court's decision in relation to the application. Similarly, if a creditor lodges an objection to an instalment order, the debtor should keep paying until the objection has been dealt with by the court. If your client believes the debt is not owed (that is that the client has a defence) or the client has a possible cross claim, the client should seek urgent legal advice, whether or not judgment has been entered. It may be possible to get the judgment set aside. Applications to pay by instalments The process for applying to pay a judgment debt by instalments varies between all the States and Territories of Australia. Financial Counsellors will generally be familiar with their local process and may even have knowledge of the idiosyncrasies of their nearest court(s). Generally speaking, there are two ways in which clients go wrong when preparing an application to pay by instalments: They complete the income and expenditure form in such a way that it does not reveal sufficient income to meet the instalments offered (in other words they show a big shortfall between income and expenditure). They believe that they need to convince the court that they are very poor so that the court will agree to the order. Unfortunately, the court will not agree to the order if it appears that the debtor cannot afford to meet the instalments. AND/OR They ask for such low instalments that the debt will not be paid off within a reasonable time. Again, the courts will vary as to what they consider to be a reasonable time, and sometimes even change their approach according to whether the creditor is an institution such as a bank, or an individual or small business. Asking for instalments which will pay off the debt in less than three years is generally a good guide. If the client really cannot afford the instalments they are offering, or they cannot afford to pay off the debt within a reasonable time, they may need to sell property in order to pay the debt and avoid bankruptcy. If they do not have any property, you can try to convince the creditor that they are wasting their time and money enforcing against the debtor. As noted above, an application to pay by instalments will only stop bankruptcy proceedings if it is accepted, and a stay of enforcement granted, prior to the issue of a Bankruptcy Notice. Any breach of the instalment order will also mean that the stay ceases to have effect and a Bankruptcy Notice can be validly issued. You can still apply to pay by instalments after the issue of a Bankruptcy Notice, but it will not prevent the creditor filing a Creditor's Petition.

Updated: 29 October 2025 Content Part 1: Introduction Part 2: Bankruptcy Notices Part 3: Creditor's Petition Part 4: Sequestration Orders Summary This chapter describes the process for making a debtor bankrupt through the courts. It describes the process and your client’s options at each stage. This is an area where proceedings move fast and legal costs accumulate quickly. If you have a client who has received a Bankruptcy Notice or a Creditor’s Petition, they will need urgent legal advice. If your client has already been made bankrupt, the first they hear about it (or the first time they are driven to take action) may be when the Trustee freezes their bank account(s). Again, it is important to get advice urgently because there are short time limits for taking action and Trustees costs add up fast. If your client has been made bankrupt, they need to file a statement of affairs as soon as possible, whether they intend to try to get the bankruptcy set aside or not! Key terms Bankruptcy Notice This is a document issued by the Official Receiver when a creditor applies (and pays the filing fee) and can prove that there is an outstanding judgment (or judgments) against a debtor for $10,000 or more. The judgment(s) must not have been stayed by the court and must not be more than 6 years old. The notice itself does not start any court proceedings. Failure to pay within the time provided is an act of bankruptcy (see below) on which a creditor may then base a Creditor’s Petition. Creditor’s Petition This is a formal application to the court to make a debtor bankrupt. This commonly follows an unpaid Bankruptcy Notice (although theoretically there are other acts of bankruptcy on which it could be based – see Chapter 10 Part 3). The act of bankruptcy must have occurred in the previous 6 months. There will always be a hearing within a very short time and the debtor must attend or apply to the court for an adjournment if he or she is to have any hope of avoiding bankruptcy. Sequestration Order This is an order of the court making a person bankrupt. Most commonly this will be the result of a Creditor’s Petition. Your client’s options are very few once they have been made bankrupt. Those options they do have are canvassed later in Chapter 10 Part 4. Part 2: Bankruptcy Notices A creditor can apply to the Official Receiver for a Bankruptcy Notice if: The creditor has: a final judgment or order issued by a court, or enforceable as a court order, against the debtor for at least $10,000; or more than one final judgment or order adding up to at least $10,000 (s 41(1)); and The judgment or order was issued no more than 6 years ago (s 41(3)); and The enforcement of the order must not have been stayed (s 41(3)); and The creditor pays the AFSA application fee ($470 as at October 2025) While creditors can claim post judgment interest on a Bankruptcy Notice in certain circumstances, post judgment interest cannot be used to make up the $10,000 minimum required (see Official Receiver’s Practice Statement 6 (ORPS6), Applying for a bankruptcy notice). Post judgment interest can be claimed on a Bankruptcy Notice only where it is allowed by the terms of the judgment or the rules of the court in which the judgment was given, the amount is specified and the schedule to the Bankruptcy Notice is completed showing how the interest was calculated. Creditors can choose not to claim the post judgment interest in order to avoid errors in its calculation which may render the Bankruptcy Notice invalid. Legal fees can only be used to make up the $10,000 threshold where either: The amount claimed was included in the original judgment or order as a specific dollar amount; or The original judgment or order was for costs generally and those costs have since been taxed (fixed) by the court or assessed by an assessor and a sealed bill of costs or certificate issued. In NSW the certificate of assessment of costs needs to be registered as a judgment in a court of competent jurisdiction before it can be enforced and form the basis of a Bankruptcy Notice. Get advice about your jurisdiction if necessary. The Bankruptcy Notice must be served on the debtor within 6 months of the date of issue of the Bankruptcy Notice by the Official Receiver (Bankruptcy Regulations reg. 10). The creditor can apply for additional time to serve a Bankruptcy Notice, but the application must be accompanied by reasons and a description of the attempts made to serve the notice. Another fee must also be paid ($160 as at October 2025). Personal service is not required (Bankruptcy Regulation reg. 102). This means the Bankruptcy Notice can be posted, e-mailed or faxed to the debtor in accordance with the Electronic Transactions Act 1999. The belief a Bankruptcy Notice must be personally served is a common misconception. If this is the client’s only defence/objection he or she will just incur additional costs if they try to fight the Bankruptcy Notice in court. My client has been served with a Bankruptcy Notice – What now? The Bankruptcy Notice will usually give your client 21 days to comply (if the Bankruptcy Notice is served outside Australia, it may give the debtor a longer period to comply, but this will be specified in the notice). You should note the date the client received the Bankruptcy Notice on your file and make sure the client is aware of when their time runs out! If there is some confusion as to when the bankruptcy notice was received, for example how long it was in the letterbox, it may be wise to contact the creditor and confirm the start date of the 21 days. Your client has a number of options apart from doing nothing. Doing nothing is not recommended unless the client is happy to be made bankrupt and understands the consequences (see Chapter 6). If the client can pay the amount claimed, he or she should do so within the 21 days provided by the Bankruptcy Notice to avoid an act of bankruptcy. If your client disputes the debt, he or she should get legal advice immediately (as time limits apply). If something can be done to dispute liability (such as applying to set aside the judgment) then it will need to be done urgently. It may be that the client has simply run out of options to dispute the debt and will need to pay whether they believe they owe the money or not to avoid bankruptcy. Clients find this idea very difficult ('it’s just not fair') and it is your role to help them understand how much more unfair it will be if they are forced into bankruptcy. Reducing the debt below $10,000 Once judgment(s) have been obtained for $10,000 a Bankruptcy Notice can be issued. Importantly, post judgment interest cannot be used to make up the amount, for example a creditor cannot obtain a $9,500 judgment and wait for $500 of interest to accrue to support the issue of a Bankruptcy Notice. Even if your client can’t pay the whole debt, it is worth your client trying to pay the debt down to an amount below $10,000 and keeping all debt owed to the creditor below $10,000. Note that, a bankruptcy notice may be issued, even if the debt is at the time below $10,000 due to a payment, if the judgment debt(s) are above $10,000. In rare cases, the Bankruptcy Notice may even state an amount below $10,000. Autron Pty Ltd v Benk, [2011] FCAFC 93. If all the debts owed to the creditor is less than $10,000 after the expiry of the Bankruptcy Notice period, then the creditor will not be able to establish the grounds required for the issue of a Creditor’s Petition. Because of this the creditor may not accept the payments once a bankruptcy notice is issued. Note that they may accept payment and are more likely to do so now than after the issue of a Creditor’s Petition. This will not work where the client owes other amounts to the same creditor because once the act of bankruptcy has been committed (failure to pay in accordance with the Bankruptcy Notice) other amounts which were owed by the client prior the act of bankruptcy can be added to make up the $10,000. This can be particularly apparent in strata disputes, where unpaid levies may continue to accrue simultaneously. Amounts owed to other creditors can also be relied on to make up the $10,000 if those creditors join the proceedings or are substituted as petitioning creditors – this is less common.   Case study Jane lives in a strata building. She fell behind in her strata levies as she lost her job and was struggling with her mental health during the COVID pandemic. Jane continued to pay as much as she could when she could.  Her strata issued her a statement of claim to recover the levies, and shortly after obtaining judgment commenced fresh proceedings for the legal fees incurred. The total of the two judgments exceeded $10,000, and a Bankruptcy notice was issued for $9,900 reflecting the payments she had made since judgment was entered. Jane did not pay the whole balance, and an act of bankruptcy was triggered. As Jane had fallen behind in her levies that were ongoing again, and the strata company claimed she owed the legal fees for pursuing the judgment debt the amount she owed strata again increase over $10,000 and the creditor issued a Creditors Petition. Setting aside the Bankruptcy Notice on the grounds that it is technically invalid There are several grounds for setting aside a Bankruptcy Notice. Some examples include: the judgment or order on which the Bankruptcy Notice is based was stayed prior to the issue of the Bankruptcy Notice (and remained stayed at the time the Bankruptcy Notice was issued) (s 41(3)) more than 6 years had expired from date of the judgment or order to the issue of Bankruptcy Notice (s 41 (3)); the wrong creditor(s) has(have) issued the Bankruptcy Notice; the Bankruptcy Notice has been issued against the wrong debtor; the debtor does not owe the creditor(s) at least $10,000; the Bankruptcy Notice is not in the required form and could mislead the debtor as to what was required to comply or is an abuse of process. Setting aside the Bankruptcy Notice will usually need to be done by application to the FCFCOA or FCA (as applicable) using the appropriate form with a copy of the Bankruptcy Notice and an affidavit in support (See the court’s website). The application will need also to seek an extension of time to comply with the Bankruptcy Notice until the court has heard the case (to avoid committing an act of bankruptcy). Your client must get legal advice before disputing a Bankruptcy Notice. The grounds are very technical and there is no room for general arguments about unfairness, or pointlessness (where the client has nothing). You cannot argue that your client is actually solvent (although you can once the case gets to the Creditor’s Petition stage – see Chapter 10 Part 3). Your client will be ordered to pay the creditor’s costs if he or she is unsuccessful. It is also necessary to complete the correct forms, attach the necessary evidence and file with the Court (within the 21 days on the Bankruptcy Notice) and also serve the application on the creditor within the necessary time limit (in this case 3 days!) (see Rule 3.02 of the Federal Circuit and Family Court (Division 2) (Bankruptcy) Rules 2021). If your client obtained an instalment order from the original court prior to the date on which the Bankruptcy Notice was issued, then they may be able to argue that the debt was stayed, but only if the instalment order was being strictly complied with.   Case example A debtor applied to the Local Court to pay a judgment debt by instalments, commencing with a lump sum on a particular date (immediately after the application was lodged) and then a set amount per month on a particular day of the month until the debt was paid. The date for the first payment came and went without the debtor knowing whether the application to pay by instalments had been accepted by the court so she did not make a payment. Even when the debtor was notified in writing that the instalment order had been made, she took three more days to make the first payment. Shortly afterwards, the creditor applied for a Bankruptcy Notice. The debtor argued that the judgment had been stayed by the application to pay by instalments and the subsequent instalment order and could not therefore form the basis for a valid Bankruptcy Notice. The Court found that the stay of enforcement ceased to operate when the debtor missed the first payment date (even though the debtor had not yet been notified that the instalment order had been made) and that the Bankruptcy Notice was therefore valid. The Court ordered the debtor to pay the creditor’s costs of approximately nearly $10,000 for the hearing & other appearances in relation to the validity of the Bankruptcy Notice in addition to the original debt. Setting Aside the Bankruptcy Notice on the grounds of a set off or cross claim Section 40(1)(g) of the Bankruptcy Act says that to avoid an act of bankruptcy a debtor either has to comply with a Bankruptcy Notice (in other words pay the debt) or: satisfy the court that they have a counter-claim, set-off or cross demand; that is at least equal to the amount claimed in the Bankruptcy Notice AND importantly, could not have been set up in the original action. Section 41(7) also provides that if the debtor applies to the court within the time to comply with the Bankruptcy Notice for an order setting aside a Bankruptcy Notice on the grounds that they have a set off or cross claim as described above, then the time to comply with notice will automatically be extended until the court has made a decision in relation to the application. It is important that the client understands that it is not enough to allege that a larger amount is owed to them as a cross claim; they must be able to show why they could not legally have raised the cross claim in the earlier case (where the creditor obtained judgment against them). If relying on this approach under s 41(7) the initial affidavit in support of the application MUST satisfactorily address (i), (ii) and (iii) above or the matter may be dismissed. Clients should not attempt to use these provisions without legal advice! Seeking an extension of time to comply with the Bankruptcy Notice because the client has lodged an application to set aside the judgment or appealed the judgment. If the client has a potential defence to the debt, or cross claim, that was not raised in the original proceedings then it may be possible to apply to set aside the judgment debt. This must be done in the original court where the judgment was made, not in the Federal Circuit and Family Court of Australia (or Federal Court of Australia). Usually, the client will also need to be able to explain why they did not take action when they received the original writ, summons, or statement of claim (or other document initiating legal proceedings), and why they then delayed lodging an application to set aside the judgment. Examples of good reasons include not receiving the court documents or being incapacitated through illness or disability. The client should get legal advice. Remember:: Many clients will claim to have not received court documents but more often than not it turns out that there is an affidavit of service on the court file. The client will need evidence to counter this affidavit if they really believe it is not true. Further, even if the client was not served with the documents, the court will find that they could have taken action as soon as they became aware of the proceedings by any other means (the other side might have correspondence, for example, from the client or their legal representative which shows they knew about the proceedings). This means the bankruptcy proceedings may continue despite the lack of service of the documents. If applying to set aside the judgment is a realistic possibility, then the client should: Apply to set aside the judgment in the original court AND Apply to the Federal Circuit and Family Court of Australia (or Federal Court of Australia) for an extension of time to comply with the Bankruptcy Notice (s 41(6A)). Again, this will require the right forms, evidence, and service on the creditor, so legal assistance is essential (Rule 3.03 of the Federal Circuit and Family Court (Division 2) (Bankruptcy) Rules 2021). The client risks additional costs if the application to set aside the judgment is unsuccessful. The client should also be aware that the Court has the power under s 41(6C) to refuse to extend time to comply with the Bankruptcy Notice if it is of the opinion that the application to set aside the judgment is not bona fide (that is, has no real merit and is being used as a stalling tactic) or is not being prosecuted with due diligence (is being intentionally 'dragged out' to buy time). An extension of time can also be sought if the original judgment or order is the subject of an appeal or other form of review (for example, statutory review of a costs assessment where the Bankruptcy Notice is based on legal fees owing). However, the Court will be reluctant to grant an extension on these grounds unless enforcement of the judgment has also been stayed in the original court. If the judgment was already stayed at the time of the issue of the Bankruptcy Notice, then the Bankruptcy Notice is invalid and can be opposed. If the appeal has been lodged after the date of the Bankruptcy Notice (for example, where leave has been sought to lodge the appeal after the expiry of the time limit), then the client must also apply to have the enforcement of the judgment stayed at the same time. Legal advice is essential. What if the amount claimed on the Bankruptcy Notice is wrong? A Bankruptcy Notice will not be invalid simply because the amount claimed is wrong. In order to dispute a Bankruptcy Notice on the basis that the amount claimed exceeds the amount owed (overstates the amount), the debtor needs to give notice to the creditor within the time for compliance with the notice that he or she intends to dispute the validity of the notice on the basis of the misstatement (s 41(5)). The Act does not specify how the notice is to be given, but the client would be wise to notify the creditor in writing and confirm that the creditor has received the notice. The notice should be precise as to the nature of the overstatement of the debt. The debtor should also pay the amount they agree is owed within the time required by the notice or make an immediate arrangement to pay off the amount they agree is owed. Section 41(6) states that if it is later proven that the Bankruptcy Notice does include an overstatement the debtor will be taken to have complied with the notice if they paid the correct amount within the required time. The debtor should seek legal advice about how to deal with the Bankruptcy Notice in these circumstances. What if the client cannot afford to pay the amount claimed in the Bankruptcy Notice and has no grounds to either dispute the notice or set aside the judgment? This is in fact the most common scenario of all. Many clients have not paid the judgment debt because they simply cannot afford it. In some cases, they may have a home, but no cash flow, which is why the creditor is resorting to bankruptcy – to get access to the asset. In this case your client cannot avoid committing an act of bankruptcy. However, they can try to reduce the risk that the creditor will proceed to the next stage of the process by paying as much as they can and trying to come to an arrangement with the creditor to pay the amount outstanding. Always get any arrangement confirmed in writing and impress upon your client the importance of paying in strict accordance with the arrangement. Lodging an application to pay by instalments after the issue of a Bankruptcy Notice A debtor can still lodge an application to pay by instalments in the original court after the Bankruptcy Notice has been served. This will NOT affect the creditor’s rights to proceed to a Creditor’s Petition, but it may make them disinclined to do so. It is important to pay strictly in accordance with the instalment order if it is granted. An instalment order that is being complied with might also be useful in arguing for an adjournment of a Creditor’s Petition to give the debtor time to pay, but usually only if the debt will be paid quite quickly (usually within months, not years). If the creditor objects to the instalment order, however, the client should get very specific legal advice. The instalment order will not prevent the issue of a Creditor’s Petition and the debtor could face an adverse costs order as a result of the hearing of the objection. The risk of costs in these circumstances may vary from jurisdiction to jurisdiction. If a debtor has been served with a Bankruptcy Notice and it has not been paid, set aside, or an extension of time to comply granted by the court then the debtor will have committed an act of bankruptcy (even if they have applied to pay by instalments). This means that the creditor can proceed to a Creditor’s Petition. A search of the Commonwealth Courts Portal can show whether a Creditor’s Petition has been presented and any relevant court dates.  

Updated: 2 May 2024 Content Part 1: Introduction Part 2: Bankruptcy Notices Part 3: Creditor's Petition Part 4: Sequestration Orders Summary This chapter describes the process for making a debtor bankrupt through the courts. It describes the process and your client’s options at each stage. This is an area where proceedings move fast and legal costs accumulate quickly. If you have a client who has received a Bankruptcy Notice or a Creditor’s Petition, they will need urgent legal advice. If your client has already been made bankrupt, the first they hear about it (or the first time they are driven to take action) may be when the Trustee freezes their bank account(s). Again, it is important to get advice urgently because there are short time limits for taking action and Trustees costs add up fast. If your client has been made bankrupt, they need to file a statement of affairs as soon as possible, whether they intend to try to get the bankruptcy set aside or not! Key terms Bankruptcy Notice This is a document issued by the Official Receiver when a creditor applies (and pays the filing fee) and can prove that there is an outstanding judgment (or judgments) against a debtor for $10,000 or more. The judgment(s) must not have been stayed by the court and must not be more than 6 years old. The notice itself does not start any court proceedings. Failure to pay within the time provided is an act of bankruptcy (see below) on which a creditor may then base a Creditor’s Petition. Creditor’s Petition This is a formal application to the court to make a debtor bankrupt. This commonly follows an unpaid Bankruptcy Notice (although theoretically there are other acts of bankruptcy on which it could be based – see Chapter 10 Part 3). The act of bankruptcy must have occurred in the previous 6 months. There will always be a hearing within a very short time and the debtor must attend or apply to the court for an adjournment if he or she is to have any hope of avoiding bankruptcy. Sequestration Order This is an order of the court making a person bankrupt. Most commonly this will be the result of a Creditor’s Petition. Your client’s options are very few once they have been made bankrupt. Those options they do have are canvassed later in Chapter 10 Part 4.   Part 3: Creditor’s Petitions A creditor can present a Creditor’s Petition against a debtor if: the debtor has committed an act of bankruptcy within the preceding 6 months (s 44(1)(c)) the debtor owes the creditor at least $10,000 or in the case of a joint petition by 2 or more creditors, the debtor owes a total of $10,000 when the debts to each creditor are added together (s 44(1)(a)) the debts are liquidated sums due at law or in equity (or partly in each) and are owed immediately or at a certain future time. A secured creditor can only be counted to the extent that the debt owed to them exceeds their security (the amount of the estimated shortfall) unless they are willing to agree to surrender the security for the benefit of all the debtor’s creditors. The Creditor’s Petition must be filed in the Federal Circuit and Family Court of Australia or the Federal Court of Australia. The creditor must pay the cost of filing the application, but the costs may ultimately be paid out of the estate as a priority if the debtor is made bankrupt (ss 51 and 109). A Creditor’s Petition cannot be withdrawn after presentation except with the leave of the court (s 47(2)). The Creditor’s Petition will be listed for hearing by the court. The Creditor’s Petition must be served on the debtor along with a copy of the affidavit(s) verifying the petition (proving the required facts), and any other relevant documents, at least 5 days prior to the date fixed for the hearing of the Creditor’s Petition. Creditor’s Petitions need to be 'personally served' unless a Court has made an order permitting substituted service. These orders are often made when a debtor appears to be deliberately avoiding service, and can permit service by post, email and even text message to the debtor’s mobile phone or social media post. At the hearing the creditor will need to prove to the court’s satisfaction that (s 52(1)): the matters stated in the Creditor’s Petition are true (that is that debtor has committed act of bankruptcy in last 6 months and that at least $10,000 is owed now or at some future definite time) that the Creditor’s Petition has been served on the debtor as required that the debt or debts on which the petitioning creditor(s) rely are still owed. A Creditor’s Petition will lapse after 12 months unless, prior to the expiry of the 12 months, the creditor applies for an extension of time (s 52(4)). The Court can only give a maximum of another 12 months (2 years in total) to prosecute the petition (s 52(5)). My client has been served with a Creditor’s Petition – What now? Your client still has options at this stage and the most important thing is not to ignore the Creditor’s Petition. At the first return date (the first time the matter is in court) the matter will be listed before a Registrar. The client may get as few as five days' notice of the hearing but MUST attend the hearing at the Court on the appointed day unless they are happy to be made bankrupt. If the client really cannot attend, they should contact the court giving reasons and attaching evidence, and/or seek to appear by phone or instruct a solicitor to attend. Your client has three options: seek an adjournment (either to get advice or to pay or both); or file a Debtor’s Petition; or oppose the Creditor’s Petition. The court can make a sequestration order (an order making the debtor bankrupt) if the court is convinced of the 3 matters required to be proved by the creditor (see above – s 52(1)). However, if the court it is not satisfied of those matters, or it is satisfied by the debtor that either: the debtor can pay their debts (solvency); or there is other sufficient cause that the order should not be made. Then the court may dismiss the petition (s 52(2)). Seeking an adjournment In many cases your client’s best hope at this stage will be to attend the court and seek an adjournment under s 33 of the Bankruptcy Act. If your client has paid off a substantial portion of the debt and has a plan to pay the remainder within a few months, then evidence of this should be provided. If your client has property that they are willing to sell, they will need to provide evidence of this, such as a contract for sale and a real estate agent agreement. If your client has tried to pay and the creditor won’t accept the money, then the client should also seek an adjournment for the purpose of negotiations and advice. If your client needs legal advice, they should indicate this and describe what they have done towards getting an appointment. If your client really cannot attend on the nominated hearing date, they can apply for an adjournment in writing. Ideally the application for an adjournment should be supported by an affidavit, with supporting materials attached and filed as soon as possible (although it is better to get something to the court than nothing). The client will need to have a very good reason and provide evidence (such as a medical certificate indicating they are in hospital or recovering from a very recent operation). The court will generally only give short adjournments (1 – 4 weeks).  If possible, the client should arrange to be available by telephone. An application to attend by telephone can be made by completing and filing the appropriate form within the required timeframe (refer to the Court’s website). Any adjournment will be for a limited time and your client will need to keep showing up to argue on future court dates if they need further time. It will be fairly easy to get an adjournment on the first date set for hearing the Creditor’s Petition if your client has an arguable case, or just needs time to get advice or pay the debt. But it will be increasingly difficult to obtain a further adjournment on each subsequent occasion. Many Registrars operate on a rule of thumb that a bankruptcy case should receive no more than two adjournments without a very good reason. The creditor’s legal costs will also increase with each court appearance, which the client may eventually be ordered to pay. If your client may have grounds to oppose the Creditor’s Petition (see below) or has a case for setting aside or appealing the original judgment, they will need to get legal advice. Usually, the court will give an adjournment for this purpose. If your client does lodge an appeal or set aside application (in the original court) and successfully stays the judgment, this will NOT undo the act of bankruptcy already committed (failure to pay in accordance with the Bankruptcy Notice) – the only way to prevent this is to apply for an extension of time to comply with the Bankruptcy Notice before the time to pay expires. However, it may provide grounds for the court to adjourn or dismiss the Creditor’s Petition. (Another creditor [or creditors] could nevertheless rely on the original act of bankruptcy if they are separately owed more than the required $10,000 and seek to be substituted as the petitioning creditor (s 49)). In seeking adjournments, it is important for the debtor explain to the court: why the adjournment is necessary to be fair to the debtor in the circumstances; AND why the adjournment will not prejudice the rights of the other party. It is important to remember that the Creditor’s Petition will expire after 12 months. The court can, on the application by the creditor, extend it for another 12 months but no longer. The court is unlikely to allow adjournments to continue for long periods without very good reasons.   Case study A woman in her late eighties contacted the Credit and Debt Legal Advice line at Financial Rights Legal Centre because she had been served with a Creditor’s Petition. She rang on a Friday morning and the Creditor’s Petition was listed for hearing on the following Monday. She owned a small flat in an expensive part of Sydney. The paperwork alleged that she had obtained a loan. She had no recollection of the loan and did not receive any money. She said that it was something to do with her son. He had assured her that he was 'fixing' everything, but she thought she would just get a little advice of her own. The original loan was for $60,000 and the amount now claimed exceeded $100,000. Had a sequestration order been made by the Court, she would have been made bankrupt, her home and only asset, the flat, would have been sold, the loan would have been paid and she would have forfeited thousands of dollars (possibly tens of thousands of dollars) in Trustee’s fees. A Financial Rights solicitor attended the (then) Federal Magistrate’s Court on the Monday and sought an extension of time on the basis that the client was seeking legal advice about a possible application to set aside the original judgment. An application was subsequently lodged in the Local Court and the judgment was eventually set aside. Several appearances were also required in the Federal Magistrate’s Court to seek further adjournments of the Creditor’s Petition while this process was taking place. Filing a Debtor’s Petition In some cases, your client may decide that bankruptcy is their best option, or is inevitable, and wish to file a Debtor’s Petition rather than wait for a Creditor’s Petition to be heard. Advantages of filing a Debtor’s Petition The Official Trustee will be initially appointed as the trustee in bankruptcy. There is no guarantee that the Official Trustee will remain as the Trustee – AFSA may allocate the estate to a Registered Trustee, or the creditors may seek to appoint a Registered Trustee of their choice. The client can nominate their own Registered Trustee if they have a preference. However, if the Petitioning Creditor has obtained the consent of another Registered Trustee to administer the estate, generally the estate is then transferred to that Trustee.  The creditors have the ultimate say as to the appointment of the Trustee. The usual 3 years until discharge will commence (if the client waits for the sequestration order to be made and then files a statement of affairs as required, it could be weeks or even months before the bankruptcy commences). Disadvantages The client will need to act quickly to get the paperwork done. AFSA may reject the Debtor’s Petition if it is too late to lodge (see below). It may be to the client’s advantage to delay the date of the bankruptcy as long as possible because of previous transactions which may otherwise fall within the relation back period or be caught as undervalue transactions. When is it too late to lodge a Debtor’s Petition? A Debtor’s Petition will usually be accepted as long as it is lodged at least a full working day before the Creditor’s Petition hearing. To be safe, your client should aim to lodge the Debtor’s Petition at least two working days prior to the listed hearing date. A Debtor’s Petition must be referred to the Court in the following circumstances: where the debtor is one of a group of debtors against which a Creditor’s Petition is pending (whether they are joint debtors or members of a partnership) (s 55(3B)) where one or more members of a partnership have lodged a Debtor’s Petition but not all the members of a partnership (s 56C(1)(a)) where all the members of a partnership have lodged a Debtor’s Petition and there is a Creditor’s Petition pending against one or more but not all the members of a partnership (if the Creditor’s Petition is against all of them there is no need to refer the matter to the court) (s 56C(1)(b)). where two or more debtors have lodged a joint Debtor’s Petition and at least one (but not all) of them is subject to a pending Creditor’s Petition (s 57(3B)). Usually, AFSA will contact the debtors to discuss whether they wish to withdraw the petition before referring it to the court. Petitioning creditor’s costs When the court is made aware that the debtor has become bankrupt on a Debtor’s Petition, the court will generally dismiss the Creditor’s Petition and order that the petitioning creditor’s costs be paid out of the estate as if a sequestration order had been made. Accordingly, the bankrupt does not incur a fresh personal liability for such costs. It is advisable to notify the solicitors acting for the petitioning creditor when the debtor has presented their Debtor’s Petition. Opposing the Creditor’s Petition A debtor wanting to oppose a Creditor’s Petition must file a notice of appearance and a notice of opposition, with supporting evidence, at least 3 days before the hearing and serve it on the creditor (Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy) Rules 2021, Rule 2.06). The client can oppose the Creditor’s Petition on a number of grounds including, but not limited to, the following: the debt is no longer owed the debt was never owed the debt is below the threshold solvency (the client can pay their debts as they fall due) no act of bankruptcy or act of bankruptcy more than 6 months ago The debt is no longer owed If the debt has been paid in full by your client, and that payment has been accepted by the creditor, then the sequestration order cannot be made (s 52(2)). This is why it is very important for people to pay if they possibly can, even if they find the prospect completely objectionable. Getting out of bankruptcy once a sequestration order has been made is much more difficult and expensive! It is essential that the technical difference between tendering a payment towards the debt and the acceptance of a payment towards the debt by the creditor is understood. For example, if the client has direct deposit account details, simply depositing the money won’t be enough – the creditor still has the option of returning the money within a reasonable time and indicating that they will not accept payment. The importance of this difference is that, after an act of bankruptcy, tendering a payment towards the debt will not have a binding effect on the creditor, and will not reduce the amount of the debt. If the payment is accepted, however, the debt will be reduced. In general, creditors will be hesitant to accept payments from a debtor after an act of bankruptcy, on the basis that if there are other creditors pursuing a debt from your client, those payments might need to be paid back (as preferential payments) to the eventual Trustee to help satisfy the debts of other creditors. The distinction between the tendering and accepting a payment won’t always be black and white – acceptance by a creditor might be able to be demonstrated by conduct alone. For example, if your client deposits the amount in the creditors account and several weeks have passed without it being returned, or better a receipt or statement is received noting the payment made and not indicating any intention to reject it. In practice there will often be a negotiation between the debtor and the creditor with the aim of having the Creditor’s Petition dismissed (or adjourned) by consent. As part of this negotiation, the creditor will usually ask the debtor to pay the creditor’s legal costs to date as a condition of both accepting the payment and agreeing to the dismissal of the Creditor’s Petition. If the creditor is hesitant to accept payment it could be useful to indicate that there are no other significant creditors (if this is true) or to offer payment tendered by a family member or friend. This would minimise the chances that the money could be taken back from the creditor by the trustee as a preferential payment. To avoid the risk of a payment being recovered by the Trustee as a preferential payment, there must be no contractual relationship between the debtor and the third party paying the money which requires the third party to pay the money (or the potential bankrupt to repay the third party), and the payment offered must be from funds/property that is in the sole ownership of the third party. The debt was never owed As a Creditor’s Petition is most often based upon the failure to pay in accordance with a Bankruptcy Notice, which itself is based on a judgment debt, it is difficult to argue that there is no debt at this late stage. Nevertheless, the court does have a limited to power to look behind the original judgment debt in some circumstances. This is more likely to be the case where there is a default judgment. The bankruptcy courts have the power to look behind a judgment obtained after a hearing, but this power will usually only be exercised in exceptional circumstances – generally to look behind a judgment, default or otherwise, there would need to be “circumstances tending to show that there has been fraud, or collusion, or miscarriage of justice”. The debtor should get urgent legal advice before pursuing this option. In most cases this situation would be more appropriately dealt with by applying to set aside the original judgment in the original court and seeking an adjournment of the bankruptcy proceedings. The debt is less than the $10,000 threshold If the court is not satisfied that the debt (or debts) on which the Creditor’s Petition is based are at least $10,000 in total, it has no power to make a sequestration order and should dismiss the petition. If the amount owed exceeded the $10,000 threshold when the Creditor’s Petition was filed but the debtor has since paid off enough money to reduce the amount below $10,000, then provided the creditor has accepted that payment, the Creditor’s Petition should be dismissed. However, even if the judgment debt has reduced below threshold, the $10,000 can be made up of other amounts owing to the creditor, as long as they accrued prior to the act of bankruptcy relied on (usually the failure to pay in accordance with a Bankruptcy Notice). A typical example is a judgment by default for strata levies which is later combined with unpaid strata levies that were incurred post judgment but prior to the act of bankruptcy. If a payment has been made but not been accepted, the debtor may be able to seek an adjournment, to try to raise the rest of the money and settle the matter with the creditor (see Seeking an adjournment above). Even if the court agrees not to make the sequestration order, it is likely to order that the debtor pay the petitioning creditor’s costs of the proceedings. As noted above, if your client is trying to settle the matter by consent, then they will usually need to pay the creditor’s costs to date in addition to the original debt. The filing fees and legal costs are set out on the Court's website. Proving that the debtor is solvent If the court is satisfied that the debtor can pay their debts as they fall due, then it may dismiss the Creditor’s Petition (s 52(2)). Bankruptcy proceedings are inappropriate for debtors who are able to pay but simply reticent to do so. This is largely because it is recognised that bankruptcy affects all creditors rights and other enforcement mechanisms that are potentially available to a creditor where the debtor has capacity to pay. In practice, however, the solvency argument is rarely made with success, as it is not enough for the debtor to have assets which exceed their debts – they must be able to liquidate those assets (by sale or borrowing money against them) and pay their debts within a reasonable time in order to be found solvent. Again, from a practical point of view more cases are resolved through obtaining adjournments while the money is raised or a settlement reached, than through the debtor successfully arguing that they are solvent.   For example – in the case of Quitlong (Quitlong v ACM group [2011] FMCA 688 (12 August 2011)), In finding that Mr Quitlong was not solvent the Federal Magistrate noted that: “It has not been established that Mr Quitlong’s interest in his home is presently available or realisable........Mr Quitlong is only a part owner of that property. There is no indication that his wife is willing for the property to be sold. On the contrary, he told the court that it was not the case that his wife was willing to sell the property; that she had made the major financial contribution to the property....” It should be noted that Mr Quitlong was trying to set aside a sequestration order that had already been made. Had he raised his solvency prior to the making of the order, he may have had better success in at least getting an adjournment to try to raise the money. Generally, if there is a joint owner in such circumstances, the debtor should ask the joint owner to attend court or prepare an affidavit indicating their willingness to sell the property or their intention and capacity to buy out the debtor’s share of the equity. Evidence of having placed the property for sale, or conditional approval for a loan, would also be useful.   For example – in the case of Maher [Maher v Maher [2022] FedCFamC2G 147]. Mr Maher was held to be unable to pay his debts even though his debts, at approximately $750 000, were less than his interest in the Maher partnership, which for him included interest in cattle in the amount of $711 000 and in land of at least $350 000. In finding that Mr Maher was not solvent, the Federal Magistrate noted that Mr Maher needed the consent of the other members of the partnership to liquidate his interest: "The question of whether the respondent is able to pay his debts is not answered simply by reference to a balance sheet analysis. Instead, as this case perfectly illustrates, the inquiry must take account of the nature of the identified assets and the ability of the respondent to convert those assets into cash within a relatively short time…while there may be mechanisms available to the respondent to force a sale, including through the dissolution of the Maher partnership, there is presently no evidence before the Court as to how, and, critically, across what timeframes, such a process might occur.” It should be noted that Mr Maher was attempting to have a sequestration order set aside. Again, perhaps if the issue of solvency was raised earlier, the court would have ordered an adjournment to allow him to attempt to realise his assets. Having sufficient income to pay a debt off over several years is also not sufficient to establish that the client is solvent, even where there is evidence that this is the creditor’s only hope of recovery (because the client has little or no equity in any asset). In general, the assessment of a debtor’s solvency reflects one of the harshest aspects of bankruptcy law in Australia. More often than not a court will only consider a person solvent if they can pay their debts within a very short period of time. The reason for this is that the system has been developed to enable creditors to quickly recover their debts in circumstances where normal payment terms have not been complied with and there is a question mark over whether creditors will be able to be paid in full at all. For this reason, if your client is arguing that they are solvent based on their ability to sell an asset, such as their home, you should try to gather evidence to prove how quickly that property might be sold. For example, in the case of James v Deputy Commissioner of Taxation ([2010] FMCA 106) the debtor’s request for 6 – 8 months, to enable him to sell his house was not considered by the court to be fast enough for the debtor to be said to be solvent. No act of bankruptcy, or act of bankruptcy more than 6 months ago If the failure to pay in accordance with a Bankruptcy Notice (or other alleged act of bankruptcy) occurred more than 6 months prior to the filing of the Creditor’s Petition, your client may have grounds for opposing the petition. If your client believes the Bankruptcy Notice was not valid but they did not take any action to oppose it at the relevant time (within the period for payment – usually 21 days), then they should get legal advice. Stay of the sequestration order for up to 21 days The Court has the power to make a sequestration order but stay its operation for up to 21 days (s 52(3)). This will not stop the debtor becoming bankrupt, but it will mean that the Trustee should not incur costs during the stay period. This will make it cheaper for the debtor to annul the bankruptcy if he or she is able to raise the money to pay the debts and legal costs within this time. It will also prevent any of the debtor’s property from being sold or otherwise dealt with for the benefit of the creditors. This power has been used in cases where the debtor has argued unsuccessfully that he or she is solvent. The Judge or Registrar has taken the view that the debtor has not established that he or she is solvent but gives the stay to give the debtor one last chance to come up with the money. What if my client wants to enter a Debt Agreement or Personal Insolvency Agreement (PIA)? If your client is a good candidate for a Debt Agreement or a PIA (see Chapter 5) then they need to take urgent action to get assistance from a Debt Agreement Administrator or a Controlling Trustee. If the client is considering a PIA, appointing a controlling trustee will place the Creditor’s Petition process on hold (s 189AAA). The client will still need to attend court to inform the court of the fact that a controlling trustee has been appointed and provide evidence of such an appointment. Clients should get legal advice before appointing a controlling trustee. If the client is considering a Debt Agreement, then they will need to turn up to the Creditor’s Petition hearing with: evidence of the Debt Agreement Proposal having been lodged or at least being prepared evidence as to why it would be in the creditors’ interests to accept the Debt Agreement Proposal information about the date on which the proposal will be lodged, or if lodged, the date by which creditors will need to indicate their acceptance or otherwise. You should ensure you explain the consequences of a Debt Agreement in considerable detail and particularly turn the client’s mind to whether he or she would not be better off allowing the Creditor’s Petition to proceed (for example, because eventual bankruptcy is likely in any event). Power to take control of property or examine debtor prior to bankruptcy It should be noted that the court has the power to order the Official Trustee, or a specific Registered Trustee, to take control of a debtor’s property; order that the debtor be examined (including producing any books in their possession pertaining to the debtor or related entities); or make orders in relation to the debtor’s property BEFORE making a sequestration order if: a Bankruptcy Notice has been issued and not complied with or a Creditor’s Petition presented AND a creditor (or creditors) seeks the relevant orders AND the court is of the view that it is in the interests of the creditors to do so (s 50). In the event that the Creditor’s Petition is ultimately dismissed, the debtor may within 15 days apply for compensation for any loss that has resulted from the control order (Bankruptcy Regulations 2021 16). Creditors are only likely to use this process if there is a good reason to suspect that assets/funds and/or financial records will otherwise be destroyed or disposed of.    

Updated: 7 May 2024 Content Part 1: Introduction Part 2: Bankruptcy Notices Part 3: Creditor's Petition Part 4: Sequestration Orders Summary This chapter describes the process for making a debtor bankrupt through the courts. It describes the process and your client’s options at each stage. This is an area where proceedings move fast and legal costs accumulate quickly. If you have a client who has received a Bankruptcy Notice or a Creditor’s Petition, they will need urgent legal advice. If your client has already been made bankrupt, the first they hear about it (or the first time they are driven to take action) may be when the Trustee freezes their bank account(s). Again, it is important to get advice urgently because there are short time limits for taking action and Trustees costs add up fast. If your client has been made bankrupt, they need to file a statement of affairs as soon as possible, whether they intend to try to get the bankruptcy set aside or not! Key terms Bankruptcy Notice This is a document issued by the Official Receiver when a creditor applies (and pays the filing fee) and can prove that there is an outstanding judgment (or judgments) against a debtor for $10,000 or more. The judgment(s) must not have been stayed by the court and must not be more than 6 years old. The notice itself does not start any court proceedings. Failure to pay within the time provided is an act of bankruptcy (see below) on which a creditor may then base a Creditor’s Petition. Creditor’s Petition This is a formal application to the court to make a debtor bankrupt. This commonly follows an unpaid Bankruptcy Notice (although theoretically there are other acts of bankruptcy on which it could be based – see Chapter 10 Part 3). The act of bankruptcy must have occurred in the previous 6 months. There will always be a hearing within a very short time and the debtor must attend or apply to the court for an adjournment if he or she is to have any hope of avoiding bankruptcy. Sequestration Order This is an order of the court making a person bankrupt. Most commonly this will be the result of a Creditor’s Petition. Your client’s options are very few once they have been made bankrupt. Those options they do have are canvassed later in Chapter 10 Part 4. Part 4: Sequestration orders A sequestration order is the legal term for a court order making a person bankrupt. The court has the jurisdiction to make a sequestration order if (s 43(1)): The person has committed an act of bankruptcy AND The person had the required connection with Australia at the relevant time AND A creditor has petitioned the court in accordance with the procedures outlined in the previous sections (and established the requisite facts). Upon the making of a sequestration order, a debtor becomes a bankrupt and remains a bankrupt until they are either discharged or the bankruptcy is annulled (s 43(2)). However, the time until automatic discharge does NOT start until the debtor files their statement of affairs (s 149), so it is important that they do so as soon as possible. The requirement to file a statement of affairs applies even if the debtor has applied to have the decision reviewed or appealed. A sequestration order has been made against my client – Is there anything they can do? A sequestration order will usually be made by a Registrar of the Federal Circuit and Family Court of Australia. It may be made upon the first date of the hearing of the Creditor’s Petition if the Registrar is satisfied that all the relevant requirements have been met and the debtor has been duly served. However, if a sequestration order is made by the Registrar, then the debtor has 21 days to seek a review of that decision (Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy Rules) 2021 2.02(3)). On a review of a sequestration order the debtor will need to show that the order should not have been made. Bankrupts are automatically entitled to a review of a Registrar’s decision (s 256(2) of the Federal Circuit and Family Court of Australia Act 2021) the review hearing will be like the Creditor’s Petition hearing conducted all over again, taking into account any information that was before the Registrar at the time of the Registrar’s decision, and any information that has since come to light. For a successful application to have the sequestration order reviewed your client must show that: one or more of the matters required to be proven at the Creditor’s Petition hearing was in fact not true (see above); or he or she is solvent (see above); or there is another good reason why the sequestration order should not have been made. It is not sufficient to show that the creditors are unlikely to benefit from the bankruptcy (because, for example, the debtor has no assets or no equity in their assets). There is no general rule that the sequestration order must be in the interests of the creditors. The debtor should get legal advice. Usually, the debtor would ask for the sequestration order to be set aside and the Creditor’s Petition dismissed. It may also be necessary to ask in the alternative for the bankruptcy to be annulled under s 153B, although this may incur additional costs because the Trustee may be required by the Court to prepare a report. Before the hearing the debtor should: pay the debt (if possible) or seek legal advice as to whether they have a realistic possibility of setting aside the sequestration order on other grounds (if a set aside or appeal in relation to the original judgment is to be made it should preferably have been filed by the time the bankruptcy matter comes before the court) complete their statement of affairs request/warn the Trustee not to incur further costs. Note: It is very important to warn the Trustee of the debtor’s intention to challenge the order as soon as possible because this will be taken into account when the Judge decides whether to set the sequestration order aside or annul the bankruptcy. If the bankruptcy is annulled, then the Trustee is able to recover their costs and expenses directly from the estate and only give the debtor what is left. If the sequestration order is set aside, then the Trustee is likely to be left to whatever remedies he or she may have at common law (and this would usually be only to recover expenses rather than hourly fees). The Trustee’s costs start accumulating immediately after the sequestration order is made and the Trustee is appointed. These costs can quickly amount to a substantial sum depending on the circumstances. A review application might first be considered by a Registrar, who would determine whether the parties are ready to argue their cases on the review application (The Registrar cannot actually hear the application, only deal with preliminary appearances). Alternatively, it might be up to a Judge. If the parties are not ready an adjournment may be granted. Typically, on the first return date of the review application the court will be prepared to grant an adjournment as long as an adjournment does not prejudice the creditor(s). On review, the Judge is reviewing the order 'de novo'/ over again as if it is the first time (without being bound by previously submitted arguments or facts) and has broad powers to make a range of orders depending on the circumstances as presented at that time, including for example: setting aside the sequestration order annulling the bankruptcy under s 153(B) of the Bankruptcy Act confirming the sequestration order. If the debtor’s only reason for setting aside the sequestration order is that they have sufficient assets to ultimately pay the debt, and there is no good reason why they have not done so before, then it is likely the court will decide to annul the bankruptcy rather than set aside the sequestration order to ensure the Trustee is able to recover his or her costs. A successful application to set aside the bankruptcy will be closer in effect to undoing the bankruptcy altogether. Annulment, on the other hand, will end the bankruptcy, but will not make it as if it never happened. For example, the person will still have been 'bankrupt' in any context where this is relevant and any offence against the Act committed while bankrupt could still be prosecuted. In Pattison v Hadjimouratis (see later in this Chapter) the court agreed to set aside a sequestration order in circumstances where the debtor had given the relevant documents to his solicitor and the solicitor had failed to take any action or provide advice. The Trustee appealed because he would be deprived of his substantial remuneration and argued that the bankruptcy should be annulled instead. The Federal Court refused to overturn the decision to set aside the sequestration order but confirmed that the debtor had to pay both the Trustee and the creditor’s legal costs of the original set aside application hearing (but not the Trustee’s remuneration for work on the bankrupt estate). The trustee had to pay the costs of the appeal. Case study The A family migrated to Australia in the early 80s from Macedonia. Mr and Mrs A Senior and their son and daughter-in-law (Mr and Mrs A Junior) jointly owned two units in Sydney. Mr and Mrs A Senior worked as cleaners and their English skills were poor. Whilst they understood they owned both properties with their son, they had little understanding that they had joint obligations under the mortgage and in relation to strata fees. Mr A Junior was out of work due to a back injury and Mrs A Junior received Centrelink benefits as she cared for their two young children. Mr A Junior, who had primary responsibility in paying the mortgage, fell behind on the mortgage and the strata fees. A Statement of Claim was issued and served for the outstanding strata fees. After, 28 days judgment was entered against them for $3,200 including legal fees. At that time a creditor only needed a debt of $2,000 to file a Creditor’s Petition. Two days after the judgment was entered, a Bankruptcy Notice was issued and subsequently served on Mr and Mrs A Senior and Junior. But the A’s did not respond to the Bankruptcy Notice so they committed an act of bankruptcy. Subsequently Creditor’s Petitions were served on all the A’s, and a date was set for a hearing at the (then) Federal Magistrate’s Court. But the A’s did not show up to the Petition Hearing. Ultimately the A’s were made bankrupt by sequestration order in their absence by the Registrar of the (then) Federal Magistrates Court. They received statements of affairs in the post and were contacted by the Trustee. 16 days after the orders were made, they sought advice from Consumer Credit Legal Centre ('CCLC'). CCLC applied for a review of the Registrar’s decision. In the meantime, on CCLC’s advice, the A’s paid the original judgment. CCLC commenced negotiations to have the sequestration order set aside by consent. Eventually it was agreed that the A’s would pay the Trustee’s costs of $3,000 and the legal costs of the petitioning creditor. In total, the A’s paid $11,000 to avoid bankruptcy. The original strata levy debt was about $3,000. What if the 21 days is already up? Section 33(c) of the Bankruptcy Act and s 256(1)(b) of the Federal Circuit and Family Court of Australia Act 2021 give the court a general power to hear applications to extend the time to do certain things under the Act. Your client can apply to the Federal Circuit and Family Court of Australia for leave to apply for a review of the registrar’s decision out of time, particularly if there is a good reason for their failure to do so earlier. However, the court will also consider the likely success of the review application as a relevant consideration to whether time will be extended. Example 1: Pattison v Hadjimouratis [2006] FCAFC  153 A judgment debt was entered against Mr Hadjimouratis on 20 May 2004. On 13 October 2004 he was served with a Bankruptcy Notice and then on 23 March 2005, a Creditor’s Petition. He left these documents with his then solicitors who did not take any action or advise him what he should do. He was made bankrupt by a sequestration order made by a Registrar in his absence on 3 May 2005. Unsurprisingly, he then instructed new solicitors. These solicitors first of all wrote to the Trustee indicating that their client was solvent and wanted to pay his debts and bring the bankruptcy to an end. However, the solicitors reviewed their client’s options after being told by the Trustee that the costs of annulling the bankruptcy would be $47,500, (some $33,000 over Mr Hadjimouratis’ initial debts of about $14,000). On 20 July 2005, Mr Hadjimouratis’ solicitors lodged a notice of motion in the (then) Federal Magistrate’s Court seeking (among other things) an extension of time to apply for a review of the Registrar’s decision (over 75 days after it was made), and an order setting aside the sequestration order, or alternatively an order annulling the bankruptcy. On 7 October 2005, after hearing submissions from Mr Hadjimouratis’ solicitors and the Trustee, a Federal Magistrate ordered that the sequestration order be set aside, but that Mr Hadjimouratis pay the costs of the proceedings of both the Trustee and the petitioning creditor. The Trustee appealed, arguing that the bankruptcy should have been annulled so that he would have been able to recover his remuneration and expenses from the estate in accordance with the Bankruptcy Act Section 154. The Federal Court found that the Federal Magistrate had the discretion to set aside the sequestration order or annul the bankruptcy according to the circumstances. They also found that the Federal Magistrate was correct in taking into account that the Trustee had early notice that the debtor was allegedly solvent (two weeks after the sequestration order), despite the fact that the formal application to review the decision was not made for some time after that date. This meant that he had warning to proceed cautiously in incurring costs in administering the estate. The Judges said that it may have been different if he had not had such notice and an annulment may have been more appropriate. The fact that the bankrupt had not ignored the notices but had sought legal assistance (and was let down by his solicitors) was also doubtless relevant to the decision to set aside rather than annul the bankruptcy.   Example 2: trustees fees reasonable: Mutton (liquidator) v De Matteis, in the matter of De Matteis Pty Ltd (in liq) [2023] FCA 1649 A sequestration order was made by a Registrar on 23 February 2023 against the estate of the respondent Lucas Emilio De Matteis on a petition presented by Car Stackers International Pty Ltd. This order related to the unpaid amount of a default judgement debt being $35,351.72. In the preceding period, Lucas Emilio De Matteis Pty Ltd was substituted as the petitioning creditor. Significantly, a few weeks prior to the hearing, the parties reached an agreement that the petition should be dismissed, and the sequestration order set aside. However, the Trustee, Mr Stephen Michell, did not consent to these orders and contested that the payment of his remuneration, costs and expenses should be ordered. At the hearing on this matter, Mr De Matteis submitted that if he was burdened with the costs, it would diminish the necessary protection of the de novo hearing. In particular, he highlighted that the Trustee had been put on notice of the application for review and was required to act with caution when incurring expenses, and he hence questioned whether the expenses incurred were proportional and in good faith. This argument was contextualized by the fact that the Trustee claimed to have incurred almost 80% of the estimated remuneration that was anticipated for completion of administration of the estate (an expense bill of approximately $41,165). While the Court dismissed the Trustee’s argument that they had legal authority to make the setting aside of the sequestration order conditional on payment of the Trustee’s costs and that it was appropriate to do so, they did accept that they have the power to make consequential orders as to trustee costs. The Court concluded that while in many cases burdening the debtor with reimbursement costs is acceptable if the debtor contributed to the making of a sequestration order by failing to deny the act of bankruptcy or failing to bring forward evidence of solvency. Additionally, they found the expenses incurred in this case to be reasonable because the Trustee has statutory obligations to continue with the administration of the order unless the petition is dismissed. Therefore, the court ordered the payment of the Trustees reasonable remuneration by Mr De Matteis, although capped at $35,000. Therefore, Mr De Matteis is required to pay almost the entire amount of the initial debt to the Trustee by failing to comply with the bankruptcy notice or engaging in negotiations about the debt at an earlier stage. What if the order was made by a Judge and not a registrar? The decision of a Judge of the Federal Circuit and Family Court of Australia can only be overturned on appeal to the Federal Court of Australia. An appeal is a very formal and technical legal procedure generally based on a legal ground (not a rehearing ‘de novo’ as is the review of a Registrar’s decision) and the possibility of a costs order against the bankrupt is a very real risk. If your client wants to pursue this course of action, they need urgent legal advice. Generally, an appeal must be lodged within 28 days after the date the judgment was pronounced or order was made (rule 36.01, 36.03 Federal Court Rules 2011; FCA Form 121), although an extension of time to appeal may be given in appropriate cases (rule 36.05 Federal Court Rules 2011; Form 67). If your client does not have a good reason for failing to take action earlier, or the court rejects the client’s application for an extension of time to appeal, or refuses to overturn the sequestration order, then the client will remain bankrupt until they are discharged, or the bankruptcy is annulled. If there are grounds, an annulment application can be made at any time in the Federal Circuit and Family Court of Australia. Discharge and annulment of a bankruptcy are covered in Chapter 8. My client has been made bankrupt – what now? Lodge a statement of affairs! If your client has been made bankrupt, they have 14 days from the date they are notified of the bankruptcy to lodge a statement of affairs with the Official Receiver and the Trustee (s 54 Bankruptcy Act). Failure to do so may result in a civil penalty. The Official Receiver can also require the bankrupt to lodge his or her statement of affairs by issue of a written notice to this effect (s 77CA). Failure to comply with this notice attracts a criminal penalty including potential imprisonment, although the bankrupt may argue a defence of reasonable excuse (s 267B). The bankrupt should lodge a statement of affairs even if considering a review or appeal application, or are of the view that they are, or may soon be, in a position to get the bankruptcy annulled. Lodging a statement of affairs is extremely important: under the Bankruptcy Act, a bankrupt will be automatically discharged from bankruptcy 3 years from the date they lodge their statement of affairs. This means that even if the 14 days has passed (even long passed), the debtor needs to lodge their statement of affairs with the Official Receiver as soon as possible to start the clock running on their bankruptcy. If they do not lodge a statement of affairs the bankruptcy will never end. Note (Lawyers – If your client needs help completing their statement of affairs you can refer them to a Financial Counsellor for assistance). The process will then continue exactly as if your client filed a Debtor’s petition – see Chapters 6 and 8. Importance of a bankrupt complying with orders of the court Once your client is given a Bankruptcy Notice or a Creditor’s Petition it is important that you advise your client not to: abscond (run away or hide); or conceal or remove any property that might be taken upon bankruptcy with the aim of avoiding the payment of debts, or to prevent or delay the bankruptcy proceedings. It is also important that your client does not: destroy, conceal, or remove any documents relating to their financial affairs; or conceal or remove any property without permission of the trustee (once bankrupt); or fail to comply with any order of the court or obligation under the Bankruptcy Act (for example, the obligation to provide a statement of affairs). If your client breaches any of the above, they face the risk of being arrested and prosecuted under s 78 of the Bankruptcy Act. See checklist for this chapter in Chapter 11: Tools and Resources  

Updated: 27 October 2025 Content Part 1: The Debt Agreement proposal and acceptance process Part 2: Complaints about Debt Agreements and Debt Agreement Administrators Part 3: Varying, terminating or otherwise ending a Debt Agreement Summary This section covers the process for entering a Part IX Debt Agreement including: what must be included in the proposal the procedure for acceptance by AFSA the procedure for voting by creditors what happens next depending on whether it is accepted or not. Information about who can enter a Debt Agreement, the consequences of entering Debt Agreement and comparative information about Debt Agreements and bankruptcy are included in Chapter 5. This chapter provides information on assisting clients with common complaints about Debt Agreements, including what to do if a client has started the proposal process and does not want to proceed, or has pulled out and is now being chased for fees. Varying or terminating a Debt Agreement is also covered. Note: This chapter is not intended to inform financial counsellors how to set up Debt Agreements for clients. It is intended to explain the process so that financial counsellors understand what is involved. It also provides information on what clients can (or can’t) do if they decide they want to change their mind or experience problems along the way such as feeling misled or being unable to pay.   Part 1: The Debt Agreement proposal and acceptance process Where the client meets all the requirements to qualify to enter a Debt Agreement listed in Chapter 5 (including not being bankrupt or entering into a debt agreement within the last 10 years, that total debts are below the prescribed threshold, that proposed payments are below the prescribed payment to income ratio etc), four documents need to be lodged with the Official Receiver at AFSA to constitute a valid Debt Agreement Proposal (Bankruptcy Act s 185C & D): the prescribed information form with the acknowledgement section at the bottom signed and dated by the debtor; a Debt Agreement Proposal and Explanatory Statement, signed and dated by the debtor; a Debt Agreement Statement of Affairs with the declaration signed and dated by the debtor; a certificate signed by the proposed Debt Agreement Administrator (DAA). Debt agreement forms must be submitted electronically via debt agreements online or AFSA’s Business to Government channel. The Official Receiver will ensure the paperwork is complete and in order to be put to creditors for their vote. A Debt Agreement Proposal Lodgment Fee ($200 as at October 2025) must be paid. The DAA makes payment on behalf of the debtor, at point of lodgment with the Official Receiver. Note: Information that must be provided to the debtor prior to signing the Debt Agreement Proposal, as noted in Chapter 5. The Debt Agreement Proposal must include: all provable debts (ie debts captured by s 82(1)) must rank equally; where the provable debts are not being paid in full, then they must be paid proportionately (for example, a creditor that is owed 50% of the client’s unsecured debts by value, must receive 50% of the proceeds available for distribution to creditors under the Debt Agreement); it must not include the transfer of property other than money to a creditor (although the agreement can propose that certain property will be sold by the debtor and a specified sum paid out of the proceeds to the administrator for distribution to the creditors); for secured debts, it should only include any amount owed by the debtor over and above the value of the security. Additionally, the Debt Agreement regime does not affect the rights of a secured creditor to realise or otherwise deal with their security (s 185XA). If a Debt Agreement Proposal is expressed to be subject to the occurrence of a specified event within a specified period, the specified period must not be longer than 7 days. For example, two debtors with joint debts may each propose a Debt Agreement that is conditional on the acceptance of the other. This way they ensure that they both receive a release from the debt by completing the agreement and/or have the opportunity to try other measures if one of the Debt Agreements is accepted and not the other. The Debt Agreement Proposal also may, and often does, provide for the payment of the fees of the DAA. The fees are payable for administering the agreement until it ends and must be expressed as a percentage of the total amount to be paid by the debtor under the agreement, which is defined in s 185C(3A) as the 'overall remuneration percentage'. When a debtor pays an amount under the agreement in respect of a provable debt (defined as the 'individual repayment amount'), the debtor must also pay a proportionate amount to the DAA (defined as the 'individual remuneration amount'). The DAA cannot take their money first, in preference to the creditors, but must take their nominated share from each payment or when they make a distribution to creditors. There is no limit on the size of the overall fee’s percentage, but this is one aspect that can be taken into account by the debtor on deciding whether to proceed with the proposal (at least in theory) and the creditors in deciding whether to accept it. The percentage charged can vary. (This is in addition to any upfront fee charged for the preparation of the proposal – see Chapter 5). The Certificate by the DAA includes a statement to the effect that the DAA has reasonable grounds to believe that the debtor will be able to meet the repayments required under the Debt Agreement and that all the required information in the debtor’s Statement of Affairs and Explanatory Statement have been disclosed by the debtor. AFSA monitors all registered DAAs. Acceptance of the proposal There are two parts to the acceptance of a Debt Agreement Proposal: The Official Receiver must decide whether to accept the proposal for processing The creditors must then vote on the proposal. Acceptance for processing by the Official Receiver Before accepting a Debt Agreement Proposal for processing the Official Receiver must be satisfied that (s 185E): all the prerequisites have been met, such as insolvency, limitations on previous activities under the Bankruptcy Act, fitting within the relevant monetary thresholds (see Chapter 5); all the required forms have been validly completed and appear to be in order (for example, there is no clearly inconsistent information, the Debt Agreement Proposal meets the requirements set out above, and the DAA's fees meet the requirements set out above); that: there is a validly executed Certificate by the DAA that the DAA is either the Official Trustee, a registered Debt Agreement Administrator or a registered Trustee; that the proposal has been presented to the Official Receiver within 14 days of having been signed by the debtor; and if the Official Receiver is of the view that the creditors’ interests would be best served by rejecting the proposal then they MUST do so. There are some examples given in the Official Receiver Practice Statement 11,  Debt Agreement, which include: where there is only one debt and creditor; where there is concern the proposal will not be understood by creditors; where the debtor’s affairs are so complex they result in a lack of clarity for creditors; and where information is available to suggest the debtor has income, property or liabilities that have not been disclosed. Note: The Official Receiver can refuse to accept a Debt Agreement proposal for processing if the Official Receiver reasonably believes that complying with the debt agreement would cause undue hardship to the debtor (s 185E(2AB)). AFSA states that due to the requirement for Certification, this applies only in exceptional circumstances. Refer to Official Receiver Practice Statement 11, Debt Agreement on the AFSA website for more information. The debtor or an affected creditor may apply to the Administrative Appeals Tribunal if they are dissatisfied with the Official Receiver’s decision. Once a Debt Agreement Proposal has been accepted for processing it is recorded on the NPII and accordingly, the debtor’s unsecured debts are 'frozen'. This means that (per s 185F): A creditor with a 'frozen debt' cannot apply for enforcement of, or enforce, a remedy against the debtor or their property. The sheriff must not take action, or further action, to execute, or sell property under, any process issued by a court to enforce payment of a frozen debt. A person who is entitled under a law of the Commonwealth, or of a State or Territory of the Commonwealth, to retain or deduct money from money that is or will be owing or payable to the debtor must not retain or deduct money A creditor may, however, start legal proceedings in respect of a frozen debt or take a fresh step in existing proceedings, provided that step is not to enforce a judgment (s 185F(2)). A creditor may also apply for or enforce a remedy against the debtor’s person or property in respect of a liability under a proceeds of crime law. This is to ensure that the creditors interests are not prejudiced pending the vote. The debts remain frozen until the Debt Agreement is either accepted (and the details entered on the NPII), rejected, cancelled or lapses (s 185F). If the agreement is accepted, then the debtor and creditors are bound by the agreement. Otherwise, enforcement action can recommence. If the proposal is rejected or no replies are received by the deadline, enforcement action can commence once the deadline for replies has passed. If a Debt Agreement is contingent on a particular event occurring within a certain period and that event does not occur, the debts cease to be frozen after the deadline for the event passes. The presentation of the proposal to the Official Receiver, as well as its acceptance, also means that the debtor has committed an act of bankruptcy (see Chapter 10 Part 1). It is also an act of bankruptcy if a Debt Agreement is terminated by the Court and, significantly, a creditor who applies for such an order may also include an application for a sequestration order whether or not the debt exceeds the threshold required for a Creditor's Petition. Creditors voting process Once the Official Receiver has decided to accept a proposal for processing it must be forwarded to every affected creditor known to the Official Receiver requesting each creditor to indicate whether the proposal should be accepted (Section 185EA). The Official Receiver must provide each affected creditor with: the Debt Agreement Proposal; the Explanatory Statement; and the DAA's certificate under s 185C(2D) and any certificate under s 185C(4C)(b), which would have accompanied the Debt Agreement Proposal. The Official Receiver will also give creditors details about lodging a claim and vote form (CAV) online and will ask the creditor to state whether or not the debt agreement proposal should be accepted. Both the debtor and other affected creditors have the right to inspect and make copies or take extracts of a CAV provided by an affected creditor (s 185EB), which will include its claim to be a creditor, the amount claimed as unsecured, whether it votes yes, no or abstains and in some cases the reasons behind a “no” vote. By lodging a completed CAV, the creditor can provide details of their claim for dividend purposes. In order to submit a valid vote however, the CAV must be completed and returned by the voting deadline date to establish: Whether the party is in fact a creditor The amount of unsecured debt In relation to a secured debt, the value of the security and the net amount owed Whether the creditor is a related entity and, if so, the amount of the purchase price of the debt Whether the creditor voted yes or no or abstained Creditors have 35 days to vote (from acceptance and recording on the NPII) unless the proposal was lodged in December in which case the voting period is 42 days. Any CAV submitted after the deadline cannot be accepted. Only creditors with a provable debt at the time the acceptance of the Debt Agreement Proposal was recorded on the NPII are eligible to vote. A provable debt can be an unsecured or an estimated shortfall on a secured debt (see s 81). A Debt Agreement Proposal is officially ‘accepted’ if the majority of creditors by value respond before the applicable deadline indicating that the proposal should be accepted (s 185EC). The proposal is taken to be accepted on the date of the applicable deadline. The value of a creditor’s debt is the amount outstanding at the time the acceptance by the Official Receiver of the Debt Agreement Proposal for processing was recorded on the NPII. The value of a debt that has been assigned (sold) to a creditor, who is a related entity of the debtor, is the equivalent of the amount the assignee paid for the debt (not its contractual value). The value of any secured creditor’s debt is only that which exceeds the value of the relevant security. Example Mary owes the following: $14,200 for a credit card debt (Creditor A) $21,500 for a second credit card debt (Creditor B) $5,000 for a personal loan (Creditor C) $11,000 to a secured car loan (for a car now worth approximately $8,000) (Creditor D) As Creditor D, the secured car lender, can claim no more than $3,000 (debt less value of security) then it would take a positive vote from all the creditors except Creditor B to bind Creditor B to the Debt Agreement. On the other hand, Creditor B would only need the agreement of one other Creditor if they were of the mind to accept the proposal to bind all the others. For Creditor D, as a secured Creditor, then its value for voting purposes is the amount of its debt in excess of the value of its security - being $3,000. The Official Receiver can cancel the acceptance of a proposal for processing at any time prior to the deadline for acceptance if the Official Receiver becomes aware of a matter that would alter its decision to accept the agreement – for example, a material change in the debtor’s position, or a material error, omission or falsehood in the forms which formed the basis for acceptance, or the non-disclosure of an affected creditor (s 185ED). This decision can also be appealed by the debtor to the AAT. Once the agreement has been accepted by creditors, the details of the Debt Agreement must be entered on the NPII by the Official Receiver, at which time it will formally commence (s 185H). Note that this is in addition to the acceptance of the proposal for processing which will already have been entered on the NPII. The parties to the agreement are the debtor and the creditors to whom the debtor owes provable debts (s 185I). Secured creditors can choose: to accept a dividend, proportionate to the unsecured part of the debt (as assessed by the DAA); or to receive a dividend only if they repossess the security during the life of the debt agreement and are entitled to recover a shortfall; or not to receive a dividend at all. In all of these circumstances, the secured creditor is still considered a party to the Debt Agreement. There is no stamp duty payable on Debt Agreements (Section 185X). What happens once the Debt Agreement is made? Once the Debt Agreement has been made (s 185K): A creditor cannot present a Creditor’s Petition against the debtor; or proceed with a Creditor’s Petition that was presented prior to the Debt Agreement being entered on the NPII; or enforce a remedy against the debtor’s person or property (such as a writ or garnishee) or take a fresh step in legal proceedings in relation to a provable debt. The sheriff must not take action, or further action, to execute a writ or process, or sell property pursuant to a court order, in respect of a provable debt. A person who is entitled under a law of the Commonwealth, or of a State or Territory, to retain or deduct money from money that is or will be owing or payable to the debtor must not retain or deduct money. A creditor may, however, enforce a remedy in relation to a maintenance order or agreement (including child support), or a proceeds of crime law action. As noted above, the rights of secured creditors to realise or otherwise deal with their security is unaffected (s 185XA). This means that an order for repossession could be sought for a car or goods under the National Credit Code (or the goods simply repossessed from a public place), or a writ for possession in the Supreme Court for a home or land if the debtor does not keep up with repayments. Debtors will need to keep paying their secured debts in order to avoid repossession. If a security is repossessed with a shortfall during the period of the Debt Agreement, the relative dividends paid to each creditor may need to change to take into account the secured creditor’s share (if not being claimed from the start). Further, there is a remote possibility that a creditor may apply to the Official Receiver to vary the agreement because the debtor is no longer making payments towards the secured debt and has more income available for other debts. Note: In relation to secured debts: While interest may continue to accrue and be paid by a debtor under a secured loan despite the existence of a Debt Agreement, interest accrued after the date of the Debt Agreement cannot be collected under the Debt Agreement in the event of a default and a shortfall on repossession of the property or goods. The amount that can be claimed in the Debt Agreement is the creditor’s fair share of the dividend based on the amount outstanding at the time the Debt Agreement was entered on the NPII, less any payments made, and the net amount recovered from the sale of the security. When and how does the Debt Agreement end? A Debt Agreement can end in a number of ways: discharging all the obligations (making all the payments required) under the agreement (completion of the agreement) (s 185N) an application to the Official Receiver to terminate the agreement made by the debtor or a creditor bound by the agreement (s 185P) by application to the Court to terminate the agreement by the debtor, a creditor (whether or not they are a party to the agreement), or the Official Receiver (s 185Q) as a result of a six month arrears default (that is debtor has continuously been missing payments for a period of six consecutive months) (s 185QA) if the debtor becomes bankrupt (s 185R). Note: despite the prevention of proceedings of a creditor’s petition and likewise by s 185K, a debtor may nonetheless become bankrupt, for example if the Cout gave them permission to present a debtor’s petition or as a result of a petition against a partnership. Completion of the agreement When all the obligations under the Debt Agreement have been discharged (usually because all payments made) the DAA must notify the Official Receiver in writing of this fact within 5 working days (s 185N(5)). The Official Receiver will require the DAA to provide a statement of receipts and payments showing the total amount paid by the debtor, any sale of assets, total payments for fees and expenses, and total dividends to creditors. This will be then checked against the Debt Agreement) to make sure that all obligations have been met. If there is some doubt about whether creditors have been paid as stated, the Official Receiver will make compliance calls to creditors to confirm payment. Once the Official Receiver is satisfied with the evidence that the agreement has been completed this will be recorded on the NPII. The Official Receiver must then give the debtor a Certificate as evidence of the completion of the Debt Agreement (s 185N(3)). The debtor is then released from all provable debts that the debtor would have been released from had they gone bankrupt on the date the acceptance of the Debt Agreement Proposal for processing was recorded on the NPII (s 185NA). Accordingly, the debtor is not released from debts such as maintenance or debts incurred by fraud. The debtor is NOT released from any subsequently incurred debts, nor any secured debts that are still on foot. However, should the debtor default on a secured debt after the Debt Agreement has been completed and the repossessed security is insufficient to cover the amount owing, the debtor is released from the unsecured portion of the debt (provided the debt existed and was included in the Debt Agreement Proposal). It makes no difference whether the secured creditor chose to receive a dividend under the Debt Agreement or not. The release ceases to operate if the Debt Agreement is declared void by the court (s 185NA(2)). Co-borrower and guarantors continue to be liable for the debts, despite the acceptance of the Debt Agreement or its completion (s 185NA(3)), unless they have independently become bankrupt or entered a Debt Agreement or other arrangement.

Updated: 7 May 2024 Content Part 1: The Debt Agreement proposal and acceptance process Part 2: Complaints about Debt Agreements and Debt Agreement Administrators Part 3: Varying, terminating or otherwise ending a Debt Agreement Summary This section covers the process for entering a Part IX Debt Agreement including: what must be included in the proposal the procedure for acceptance by AFSA the procedure for voting by creditors what happens next depending on whether it is accepted or not. Information about who can enter a Debt Agreement, the consequences of entering Debt Agreement and comparative information about Debt Agreements and bankruptcy are included in Chapter 5. This chapter provides information on assisting clients with common complaints about Debt Agreements, including what to do if a client has started the proposal process and does not want to proceed, or has pulled out and is now being chased for fees. Varying or terminating a Debt Agreement is also covered. Note: This chapter is not intended to inform financial counsellors how to set up Debt Agreements for clients. It is intended to explain the process so that financial counsellors understand what is involved. It also provides information on what clients can (or can’t) do if they decide they want to change their mind or experience problems along the way such as feeling misled or being unable to pay. Part 2: Complaints about Debt Agreements and Debt Agreement Administrators Summary This section covers how to deal with complaints about Debt Agreements including: I signed up to an Informal Debt Agreement and now I am in a worse position I signed up to a Part IX Debt Agreement and now I want to get out Liability for fees I have been rejected and I am in worse trouble I was misled! I can’t afford to keep up the payments on my Debt Agreement! Making a complaint: to AFCA, AFSA or ASIC Commencing January 2021, all registered Debt Agreement Administrators (or their employment firm) are required to be members of the Australian Financial Complaints Authority (AFCA) (Bankruptcy (Registered Debt Agreement Administrator Conditions) Determination 2020). AFCA can consider a broad range of debt administration complaints including misleading and deceptive conduct, inappropriate advice, and financial difficulty.  AFCA may also award compensation because of a firm’s error or inappropriate conduct, although this is discretionary. This is a significant update since the last version of the toolkit. I signed up to an Informal Debt Agreement and now I am in a worse position   As an informal debt agreement is not a formal process under legislation, if your client wants to stop paying they can. As it is an informal agreement what will be happen with the interest, credit report listings and payment amounts will depend on the agreement entered with each creditor. It may be worthwhile to: request a copy of the agreement and any interactions with the entity who arranged the informal agreement check if the entity is a member of AFCA. If the agreement was not appropriate for your client, your client may want to consider complaining about the services they received. In these circumstances options for the client include: ensure the underlying creditors are being dealt with and other options such as bankruptcy being considered (where applicable) raise a complaint with the internal dispute resolution contact of the entity or service provider and seek compensation, often this will be the claimed fee make a regulatory complaint to ASIC noting ASIC does not provide financial remedy if negotiations with the entity fail in seeking financial compensation considering lodging a complaint with AFCA (if they are a member). I signed up to a Part IX Debt Agreement and now I want to get out If your client has signed up for a Debt Agreement Proposal and wants to get out, you need to act fast because they will have very limited options once the agreement has been accepted by creditors! Do not allow clients to be pressured into proceeding with a Debt Agreement just because they may be liable to pay upfront fees if they pull out – the consequences of a Debt Agreement are so serious that the fees may be the least of their problems. Further, in some circumstances your client may have a case for either reducing the fees or denying liability for them altogether. Once the Debt Agreement has been voted on and entered in the NPII, it is very difficult to undo. Where the Debt Agreement forms have not been signed or prepared for signing? Your client does not have to and can decide not to submit the forms. If they have been working with an intermediary broker or a DAA they may be asked to pay for 'set up fees'. Ordinarily, this would be set out in any agreement with the entity and the terms of any refund available. See below under liability for fees Where the Debt Agreement forms have been signed and not lodged? If the Debt Agreement paperwork has been signed, and the DAA has not yet lodged it with the Official Receiver for processing, then you may be able to stop its lodgment by contacting the DAA or their broker/agent and asking them not to proceed or instructing the client to do so. Initial requests made of the administrator by phone should be followed up with written confirmation, with a copy being sent to the Official Receiver. Where the Debt Agreement forms have been signed and lodged with the Official Receiver? Voting period has not begun A debtor can write to AFSA to withdraw the proposal before the voting period occurs and does not need to specify a reason. Voting period has begun The withdrawal process becomes more difficult once the voting period begins, as the Official Receiver needs to be satisfied of the matters in s185ED(2) which includes becoming aware a creditor was not disclosed in the statement of affairs; omission of particular matters or facts or there is material change in circumstances. Equally, if it is cancelled, and the debtor disagrees the debtor may apply to the Administrative Appeals Tribunal for review of the Official Receivers’ decision to withdraw during the voting period. It should be noted that if the Debt Agreement Proposal is withdrawn in the voting period (ie after it has been accepted for processing by the Official Receiver but before acceptance by creditors), an act of bankruptcy has already occurred (the lodging of the proposal in the first place) and the NPII record  will  contain a notation that the debt agreement proposal was withdrawn for one year from the date of withdrawal. If your client entered into a debt agreement that cannot be stopped, they can still bring about the end of a debt agreement and dispute the agreement (fees incurred). Liability for fees Usually, the debtor is required to pay the upfront fee to the DAA before the Debt Agreement Proposal is submitted to the Official Receiver. If the client tries to withdraw, the DAA will usually claim that the client has already incurred the liability for the upfront fee and insist that the fee is paid regardless of whether the client proceeds with the Debt Agreement Proposal (similarly there is usually no automatic refund of upfront fees when a Debt Agreement Proposal is rejected by creditors). Whether your client can get out of these fees will depend on the circumstances of the case and the wording of the contract. If you, or the client, are unable to settle the dispute with the other party by complaint and negotiation, then the client should get legal advice. Usually the following options are available: if the entity who charged the fee belongs to AFCA, then lodge a complaint through that scheme (Debt Agreement Administrators are required to members of AFCA and their brokers may also be credit licensees or credit representatives under the credit law and therefore be required to be in AFCA) if you are unsuccessful in AFCA Apply to an appropriate consumer jurisdiction for a declaration that the fees are not payable or ought to be refunded (for example, NCAT in NSW or VCAT in Victoria) wait and lodge a defence and cross claim in the event that the other party commences legal action (of course the client cannot be guaranteed they will win, and they could face some legal costs). Your client should get legal advice as this approach is generally not advised. Theoretically, any deferred fee over $150 could be listed on a person's credit report assuming that the lister was a member of external dispute resolution and complied with the required notices under the Privacy Act. If there is a default listed on the client's credit report as a result of the unpaid fees, then the complaint should be lodged with the party who has made the listing and the credit reporting agency, attaching a copy of the letter disputing the fees and if it is unresolved, escalate to AFCA. In some cases, a client may wish to raise a dispute over fees even though the Debt Agreement went ahead. I have been rejected and I am in worse trouble Debtors often contact financial counselling agencies and advice lines seeking assistance after their Debt Agreement Proposal has been rejected by their creditors. It is not uncommon for these clients to report that they were either advised to pay the DAA’s (or broker’s) upfront fees in preference to their creditors during the period in which the Debt Agreement Proposal was being prepared, submitted and voted on or just stopped paying. As a result, these clients are further behind (or even behind for the first time) on their credit accounts and may be facing enforcement action. Ideally a DAA should run a proposal past the creditors prior to formal submission rather than waste the client’s time and money. They should also be open to discussing a refund or partial refund where a proposal has been rejected, particularly if they have not done sufficient preparation or have misled the client in anyway. You should try to negotiate a refund but, in the meantime, you need to attend to the other creditors as a priority. In these circumstances options for the client include: ensure the underlying creditors are being dealt with and other options such as bankruptcy being considered (where applicable) raise a complaint with the internal dispute resolution contact of the Debt Agreement Administrator or service provider and seek compensation, often this will be the claimed fee; make a regulatory complaint to AFSA if there was anything misleading or inappropriate about the actions of the DAA (or to ASIC) about the advice or service provided. Neither AFSA nor ASIC provide financial remedy; if negotiations with the DAA and/or broker fail in seeking financial compensation considering lodging a complaint with AFCA (see below for their jurisdiction). I was misled! There are many ways in which clients claim to have been misled by DAAs and other related entities. Promotional activities for debt agreements can amount to conduct which is false, misleading or deceptive (and hence in contravention of Australian Consumer Law). Establishing that a client was misled or deceived can be difficult, particularly with many entities relying on the required disclosure obligation. It is always a good idea to ask for recordings of any meetings the client may have had or with any correspondence exchanged. Once you have proven you were misled, the next step is to establish what loss you suffered as a result and then seeking to be compensated for that loss. The following represent just a few of the ways in which clients have felt they have been misled: Case study 1 A debtor complained that he had been told by his Debt Agreement Administrator that his employment would not be affected by the Debt Agreement when this was not true. Case study 2 A debtor paid a broker to set up a Debt Agreement. The proposal was rejected because the debtor had been bankrupt previously less than 10 years ago. She maintains that she told the broker this in the first place and they should not have taken her money and wasted her time. Case study 3 A debtor entered a Debt Agreement to pay 85% of his debts including a joint debt with his wife. He says he was not warned that she would still be pursued for the remainder of the debt, plus any interest accrued or accruing on the whole debt. In response to being misled about a debt agreement, the issue becomes about what the client is hoping to achieve. For some, they may be seeking a refund or reduction in fees (see above) and/or seeking to vary or get out of as explained in the sections below. Getting out of the Debt Agreement without negative consequences is usually not possible. If the entity is in AFCA then you can lodge a complaint with AFCA and seek financial remedies but the Debt Agreement itself cannot be changed or undone except by using the processes set out in the following sections. I can’t afford to keep up the payments on my Debt Agreement! As with loans, there are two main scenarios in which clients cannot afford to pay in accordance with a Debt Agreement: when they have experienced a change of circumstances (with Debt Agreements getting longer a change of circumstances within the period of the agreement is also more likely); or when the Debt Agreement was unsustainable in the first place. If the Debt Agreement was never sustainable, you should complain to AFSA and consider a complaint to AFCA if you have suffered loss. The Act requires the Debt Agreement Administrator to certify that s/he has reasonable grounds to believe that the debtor will be able to 'discharge the obligations created by the agreement as and when they fall due' (that is, meet the repayments required under the Debt Agreement). If you can convince AFSA that the Debt Agreement Administrator could not possibly have had reasonable grounds to believe this then AFSA may take disciplinary action. This will not assist the client, although it may go towards preventing similar problems in the future. The client has the option of either attempting to vary the Debt Agreement or pursuing one of the options in Getting out of a Debt Agreement later in Chapter 11 Part 3. If the circumstances of the debtor have changed and they can no longer afford the Debt Agreement payments, it may be appropriate to Vary the debt agreement (more information below) take steps to terminate the debt agreement and file for voluntary bankruptcy (6 months) Request permission from the Court to file a debtor’s petition for bankruptcy if it is urgent (see below). Making a complaint Summary Complaints may be made to AFCA where you are seeking recovery for loss and damage in relation to one of their members. AFCA does not have the power to undo a Debt Agreement – they can ask members to take certain actions or to compensate someone financially in accordance with their Rules. Complaints can also be made to AFSA or ASIC about the conduct of the DAA or any associated entity. The complaints will not result in any specific outcome for your client, they also will not undo a Debt Agreement. It is important that the regulators receive complaints so that they are aware of problems in the industry and can take action to possibly protect other consumers in future. Complaining to AFCA Since 1 January 2021, all registered Debt Agreement Administrators (DAAs) must be members of AFCA. AFCA’s Role: AFCA assists in resolving complaints about financial products and services, acting impartially and independently. AFCA can consider complaints against DAAs related to issues like misleading conduct, financial difficulty, and credit reporting. There are certain conditions under which AFCA may not consider a complaint, such as those lodged outside of the required time frame (generally 6 years of becoming aware of the problem) AFCA cannot undo a debt agreement or terminate a debt agreement.  AFCA cannot remove a debt agreement listing from your credit report or the NPII.  AFCA will instead, generally be limited in providing financial remedies. Before lodging in the AFCA, you should raise your concerns with the internal dispute resolution contact of the entity you are complaining about. If you do not get the outcome you are seeking, you can lodge with AFCA if they are a member. If they are not a member you should get legal advice. When putting together a complaint, it may be useful to look at the examples set out in Inspector-General Practice Direction 4, Advertising and promotional activities of personal insolvency practitioners which include, the following at paragraph 5.5: misleading information describing the essence of personal insolvency conveying that a debt agreement or personal insolvency agreement is less serious and has less significant consequences than a bankruptcy implying that the administrator is able to readily facilitate a debt agreement being made that will not be overly onerous on the debtor to satisfy representing that the entire debt agreement process is regulated or approved by AFSA (or some other authority/instrument of the Commonwealth government) concealing or understating negative consequences of a personal insolvency option by, for example, adversely comparing a debt agreement with bankruptcy or vice versa. It may also be useful to look at previous determinations made by AFCA where consumers have disputes Part IX debt agreements. You can review determinations in AFCA on their website and search for 'Part IX' to find cases. It should be noted, not all cases go to determination and AFCA looks at matters on a case-by-case basis as to the facts and circumstances. Once you have raised a complaint with internal dispute resolution, if you remain unsatisfied you can lodge a complaint to AFCA using their online form. To complete the form, you can refer to and add your letter and the response to the AFCA complaint's section of their website. Sample Letter: Complaint to AFCA Dear Sir/Madam Re: Complaint about [insert name of Debt Agreement Administrator or broker entity], in relation to Debt Agreement set up for [client’s name] your reference [insert reference]. I am assisting [client’s name] in relation to their Debt Agreement entered on on being arranged [insert date and provide a copy if possible]. My client wishes to complain about the conduct of [debt agreement administrator’s name]. Delete the sections which do not apply. These are examples only. You must include the details of your client’s particular experience. Add additional information wherever available (including exact quotes of conversations where possible and attach any additional evidence such as e-mails and correspondence). Delete paragraphs which do not apply. On [insert date] my client responded to an advertisement which stated that [insert details of relevant advertising]. My client claims that this ad/marketing was misleading because [insert details of the ways in which the client was misled, for example: The advertisement mentioned debt consolidation and did not mention the Bankruptcy Act. As a result, my client believed that s/he was inquiring about refinancing into a consolidation loan The advertisement referred to being debt free/stress free when in fact my client is struggling to make the repayments under the Debt Agreement at the same time as facing many of the limitations associated with bankruptcy. The Debt Agreement does not extinguish debts as implied by the term 'debt free']. My client was led to believe that the [insert name of Debt Agreement Administrator] representative [insert name of person who dealt with your client] was acting in their best interests when in fact he was pursuing a “sale” to generate a commission. [Insert further details] My client was told all the advantages of a Debt Agreement verbally, but only referred to the written material in relation to the disadvantages. My client has limited literacy skills/speaks English as second language/cannot read written English. [Insert further details]. My client was required to sign a contract obligating s/he to pay significant fees prior to being given any information about the true nature of a debt agreement. [Insert further details]. My client told the Debt Agreement Administrator that s/he did not want to proceed with the Debt Agreement but was told that she would have to pay the upfront fees of $ [insert amount] regardless and was otherwise pressured to continue with the process. [Insert further details]. My client was never told about alternatives to a Debt Agreement/my client was told misleading information about the likely effectiveness of the alternatives to a Debt Agreement in their case. [Insert further details]. My client was not insolvent at the time s/he entered the Debt Agreement [insert evidence including statements etc showing that the client was able to pay their debts as they fell due or was only in very temporary difficulty/arrears. For example, there was no default notice, statement of claim, enforcement action threatened/my client had a good case for a hardship variation under the credit law without any long-term adverse effects on their credit record etc.] My client could not afford the repayments under the Debt Agreement without substantial hardship [insert evidence including income and expenditure at the relevant time]. I note that the Debt Agreement Administrator was required to certify that the debtor was able to afford the repayments. My client was told not to pay their creditors so that s/he could pay the Debt Agreement Administrator’s fees instead. The proposal was rejected and now my client has serious arrears when this was not the case previously. [Provide amounts and evidence such as statements.] [In all cases explain why your client is in a worse position as a result of the above conduct.] My client is seeking a refund of the fees paid/asks the debt agreement be varied/ [Yours faithfully, etc] Financial Counsellor Complaining to AFSA It is important that clients make complaints to AFSA when they are dissatisfied with any aspect of the Debt Agreement process so that AFSA is made aware of the debtor’s perspective. It is important, however, to manage your client’s expectations about what AFSA is likely to do, if anything. Information about lodging complaints is contained in Inspector-General Practice Statement 10, Complaint handling process for complaints against practitioners and debtors, Issued December 2010, updated June 2019, and AFSA's website: Resolving Complaints about Trustees and Administrators. There must be a breach of the law, an improper use of a power or the non-performance of a duty before AFSA can take any action. In many cases clients are unhappy with the situation but no actual breach of law or duty or abuse of power can be identified. Further, even if the relevant breach or impropriety can be established, AFSA may have the power to discipline the administrator but no power to undo the harm to the client or otherwise deliver the result the client is looking for. In some cases, the complaint may be about the conduct of AFSA itself. AFSA has no power to undo a Debt Agreement – only the court has this power (see later section of this Chapter). If your client’s complaint is about (or includes a reference to) an advertisement or marketing about Debt Agreements, then you should also refer to s 18 (l) of the Australian Consumer Law and Inspector-General Practice Direction 4, Advertising and promotional activities of personal insolvency practitioners. Complaints about misleading and deceptive conduct can also be made to the Australian Consumer and Competition Commission. If your client was arguably solvent at the time they entered the Debt Agreement, you should complain about both the Debt Agreement Administrator’s conduct and the conduct of AFSA in accepting the Debt Agreement for processing. See earlier section in relation to insolvency in Chapter 5 and refer to the Official Receiver Practice Statement 11 – Debt Agreements. Information about AFSA’s complaint handling procedures and the online forms are found on AFSA's website. The website also identifies a phone number and postal address for complaints, in addition to the online form. The sample letter provided below can be adapted to fit your client's circumstances and uploaded to the Online Form. Sample letter: complaint to AFSA [Insert date] AFSA Regulation and Enforcement Dear Sir/Madam Re: Complaint about [insert name of Debt Agreement Administrator], in relation to Debt Agreement set up for [client’s name] and [reference number] I am assisting [client’s name] in relation to their Debt Agreement entered on [insert date and provide a copy if possible]. My client wishes to complain about the conduct of [debt agreement administrator’s name]. Delete the sections which do not apply. These are examples only. You must include the details of your client’s particular experience. Add additional information wherever available (including exact quotes of conversations where possible and attach any additional evidence such as e-mails and correspondence). Delete paragraphs which do not apply. On [insert date] my client responded to an advertisement which stated that [insert details of relevant advertising]. My client claims that this ad/marketing was misleading because [insert details of the ways in which the client was misled, for example: The advertisement mentioned debt consolidation and did not mention the Bankruptcy Act. As a result my client believed that s/he was inquiring about refinancing into a consolidation loan The advertisement referred to being debt free/stress free when in fact my client is struggling to make the repayments under the Debt Agreement at the same time as facing many of the limitations associated with bankruptcy. The Debt Agreement does not extinguish debts as implied by the term “debt free”]. My client was led to believe that the [insert name of Debt Agreement Administrator] representative [insert name of person who dealt with your client] was acting in their best interests when in fact he was pursuing a “sale” to generate a commission. [Insert further details] My client was told all the advantages of a Debt Agreement verbally, but only referred to the written material in relation to the disadvantages. My client has limited literacy skills/speaks English as second language/cannot read written English. [Insert further details]. My client was required to sign a contract obligating s/he to pay significant fees prior to being given any information about the true nature of a debt agreement. [Insert further details]. My client told the Debt Agreement Administrator that s/he did not want to proceed with the Debt Agreement but was told that she would have to pay the upfront fees of $ [insert amount] regardless and was otherwise pressured to continue with the process. [Insert further details]. My client was never told about alternatives to a Debt Agreement/my client was told misleading information about the likely effectiveness of the alternatives to a Debt Agreement in their case. [Insert further details]. My client was not insolvent at the time s/he entered the Debt Agreement [insert evidence including statements etc showing that the client was able to pay their debts as they fell due, or was only in very temporary difficulty/arrears. For example, there was no default notice, statement of claim, enforcement action threatened/my client had a good case for a hardship variation under the credit law without any long term adverse effects on their credit record etc.] My client could not afford the repayments under the Debt Agreement without substantial hardship [insert evidence including income and expenditure at the relevant time]. I note that the Debt Agreement Administrator was required to certify that the debtor was able to afford the repayments. My client was told not to pay their creditors so that s/he could pay the Debt Agreement Administrator’s fees instead. The proposal was rejected and now my client has serious arrears when this was not the case previously. [Provide amounts and evidence such as statements.] [In all cases explain why your client is in a worse position as a result of the above conduct.] [Yours faithfully, etc] Financial Counsellor Complaining to ASIC In some cases, your client may have been misled by a person or organization that is not a DAA. Sometimes the advertising and initial contact with the client is done by another entity who acts as a broker, referrer or intermediary for a registered DAA who then administers the agreement. In that case the conduct is not necessarily regulated by AFSA. If you, or your client, want to complain about an entity that is not a registered DAA, then you should address your complaint to ASIC (better still – complain to both!). You can check whether the entity has a credit licence or is a credit representative of a credit licencee by visiting the ASIC website and choosing to search the registers for both credit licencees and credit representatives. You can also search the membership list the Australian Financial Complaints Authority (AFCA). Some entities recommending Debt Agreements also offer debt consolidations and other services which may fall within credit legislation or the ASIC Act.

Updated: 17 December 2024 Content Part 1: The Debt Agreement proposal and acceptance process Part 2: Complaints about Debt Agreements and Debt Agreement Administrators Part 3: Varying, terminating or otherwise ending a Debt Agreement Summary This section covers the process for entering a Part IX Debt Agreement including: what must be included in the proposal the procedure for acceptance by AFSA the procedure for voting by creditors what happens next depending on whether it is accepted or not. Information about who can enter a Debt Agreement, the consequences of entering Debt Agreement and comparative information about Debt Agreements and bankruptcy are included in Chapter 5. This chapter provides information on assisting clients with common complaints about Debt Agreements, including what to do if a client has started the proposal process and does not want to proceed, or has pulled out and is now being chased for fees. Varying or terminating a Debt Agreement is also covered. Note: This chapter is not intended to inform financial counsellors how to set up Debt Agreements for clients. It is intended to explain the process so that financial counsellors understand what is involved. It also provides information on what clients can (or can’t) do if they decide they want to change their mind or experience problems along the way such as feeling misled or being unable to pay.   Part 3: Varying, terminating or otherwise ending a Debt Agreement When the debtor has experienced a change in circumstances A debtor may no longer be able to pay in accordance with a Debt Agreement for a number of reasons, for example: unemployment or reduction in income/employment increase in dependents (birth of a child, new dependent adult) unavoidable increase in essential expenditure (such as, medical bills, loss of free or supported housing). Faced with an inability to meet the payments under a Debt Agreement a debtor has 3 options: apply to vary the Debt Agreement apply to terminate the Debt Agreement (and possibly present a Debtor’s Petition) wait and let the DAA trigger the termination of the Debt Agreement as a result of '6-month default'. Varying a Debt Agreement The debtor (or creditor who is a party to a Debt Agreement, in limited circumstances) can apply to vary the Debt Agreement by completing a proposal in the approved form accompanied by an Explanatory Statement, also in approved form (Section 185M). The form is very similar to the original proposal form in many respects but also requires particulars of the change of circumstances which has led to the need for the variation and the current status of the agreement (when was the last payment made/Is the agreement in arrears and by how much?). A proposal to vary a Debt Agreement must also include a certificate from the DAA stating that the debtor is likely to be able to discharge the obligations created by the Debt Agreement as varied. The approved forms are available on the AFSA website: Debt Agreements Online. It is important that it is clear what the difference is between the original agreement and the varied proposal so that creditors can make an informed decision on whether to vote in favor of the proposal. The Explanatory Statement should also include both negative and positive changes to the debtor’s financial position (for example, a reduction in income as a result of a birth of a child should also include information about any consequential increase in government support for the debtor and their family). Whilst there is no requirement to lodge a fresh statement of affairs, it may assist in demonstrating the change in the debtor’s circumstances. The variation should be submitted by the DAA on the client's behalf. If they refuse, a complaint can be made (see Chapter 11, Part 2). If it is submitted by the DAA and there may be an additional fee payable. Clients sometimes report difficulties in getting DAAs to put forward variation proposals. This may be because asking the creditor to accept less, or to accept the money over a longer period, will also involve a decrease in the amount that can be kept by the DAA for administration. If the debtor is dissatisfied with the DAA, they can approach another DAA to submit a variation proposal to the Official Receiver proposing the replacement of the current DAA with a new DAA or lodge a variation themself. There are no grounds for variation set out in the Act. Commonly the debtor may want to reduce the monthly repayments, reduce the payments and extend the period, or seek a temporary suspension in repayments. Also, if a debtor’s financial position has improved, they may wish to vary the agreement by increasing the regular payments or offering a lump sum so that the agreement can be ended earlier. Understandably, in the majority of cases creditors would readily accept such variation proposals. Creditors may also ask the debtor to increase the total amount payable under the agreement if there has been a significant improvement in the debtor’s financial position. If the Official Receiver receives a variation proposal that complies with the requirements of s 185M, then it must be processed in accordance with s 185MA, and the same voting process applies as for the original Debt Agreement. Whilst the Official Receiver has no discretion to reject the variation proposal on the basis that it is not in the interests of the creditors, the Official Receiver can withdraw the variation proposal if a material error or deficiency is detected in the proposal. This decision can be appealed to the AAT. Creditors can also apply to vary a Debt Agreement A creditor who is a party to a Debt Agreement can also apply to vary a Debt Agreement under s 185M(1). However, Official Receiver Practice Statement 11, Debt agreements, provides that 'there are a limited number of instances where a creditor may propose a variation that does not affect the payments and obligations of the debtor' and gives the example of a change to the DAA. The Practice Statement also clarifies that 'a variation proposal that is lodged by a creditor relating to payment or action by the debtor without documented agreement by the debtor will not be accepted to send to creditors for voting'. The Official Receiver may call the debtor and DAA to establish whether such agreement has been obtained. If a creditor seeks to change the payments or action under the Debt Agreement, it may be more practical to attempting to persuade the debtor to lodge their own variation proposal. Alternatively, or if the debtor declines to do so, the creditor can submit a proposal to the Official Receiver that the Debt Agreement be terminated. Getting out of a Debt Agreement Summary Getting out of a Debt Agreement is almost impossible unless your client is happy to simply default and eventually go bankrupt. A Debt Agreement can be terminated by: agreement of the creditors (after a proposal is put forward by the debtor or one of the creditors) default (it will be terminated automatically once the debtor has been in continuous default for six months or if the agreement has gone more than 6 months past its due date for completion without a variation having been agreed to) termination by the court (usually at the application of a creditor who was either not included in the agreement or who has evidence the debtor has substantially misled the creditors in the initial proposal) being declared void by the court (this section appears to have potential at least in theory to assist debtors but has not been used in this way to date). Applying to terminate a Debt Agreement A debtor may also apply to terminate a Debt Agreement. The process is the same as for setting up and varying the agreement – the proposal must be in the approved form and include an Explanatory Statement setting out the reasons for the termination (Section 185P). If the proposal appears to be in the approved form, it must be accepted for processing (s 185P) and the creditors will be asked to vote whether or not to accept the termination proposal in the same manner as the original proposal (s 185PA). The Act does not specify any required grounds for termination. However, the Official Receiver Practice Statement 11, Debt agreements provides that 'a proposal to terminate would generally only be appropriate where the debtor has failed to perform the terms of the debt agreement or failed to disclose material information that affected creditors’ original vote' and gives the following examples of the types of situations that may prompt a proposal to terminate: the failure of the debtor to start or maintain payments with little likelihood of completing the debt agreement a change to the debtor’s circumstances where they can no longer afford payments and a variation to reduce payments is not feasible material non-disclosure of employment or income that would have affected the creditors’ original decision to support a debt agreement a material reduction in the estimated dividend to creditors because of significant undisclosed debt a material omission of divisible property that would have affected the creditors’ original decision to accept the debt agreement. The forms required by AFSA list a number of possibilities for termination at the instigation of the debtor or creditor: debtor has ceased payments and is unlikely to recommence significant undisclosed unsecured debts significant understatement of unsecured debts significant undisclosed income or assets unemployment or redundancy incurred significant post Debt Agreement debts loss of income unexpected medical expenses loss of supporting payments e.g. free board increase in number of dependents relationship breakdown and separation. The termination proposal must also contain a detailed status report from the DAA, updated information about the debtor’s outstanding debts and a statement by the debtor indicating that they understand that the debts are reinstated to their pre-Debt Agreement amounts plus interest, less any amounts paid to creditors under the Debt Agreement (not amounts paid to the DAA for set up administration), and that enforcement action may recommence. Again, the Official Receiver may declare a termination proposal withdrawn if, before the deadline for acceptance and before acceptance, the Official Receiver becomes aware that the information contained in the proposal document is wrong or deficient in a material way, or that the circumstances of the debtor have changed in a significant and relevant way not envisaged by the proposal (s 185PD). This decision can be reviewed by the AAT. Creditors have only 14 days to vote (from acceptance and recording on the NPII) on a termination proposal unless proposal was lodged in December in which case the voting period is 21 days (s 185). Proposal to terminate by the debtor If a Debtor wishes to propose to terminate a Debt Agreement, they must be warned that they will not be able to propose another Debt Agreement for 10 years (s 185C(4)). The Official Receiver’s Practice Statement only mentions one circumstance in which the debtor may wish to terminate the agreement – that is, that the debtor wishes to lodge a Debtor’s Petition rather than continue with the Debt Agreement. However, the debtor may submit a termination proposal on the grounds that there has been a significant decrease in their financial circumstances, and they can no longer make the payments required under the Debt Agreement. It would then be up to the creditors if they wished to pursue enforcement action (or effectively force the debtor into bankruptcy). Proposal to terminate by a creditor A proposal to terminate by a creditor must include a current status report by the DAA to ensure that up-to-date agreements are not generally terminated. The Official Receiver will not process a proposal to terminate if payments are up to date and no other reasons are provided. A failure to distribute a dividend by the DAA is not a reason to terminate if payments by the debtor are up to date. In order to terminate an up-to-date agreement, the creditor must be able to demonstrate a valid reason such as the 'non-disclosure of income, debts or assets which materially affect the dividend rate to creditors'. Termination as a result of a 6-month arrears default A DAA must notify all the creditors who are party to a Debt Agreement within 10 working days if the debtor is in arrears for a period of 3 consecutive months (s 185LB). If the debtor is in default for a period of 6 consecutive months, then the DAA must notify the Official Receiver within 10 working days (s 185LC). This may include a debtor making no payments at all for 6 calendar months past the due date for a payment, or 6 calendar months have passed since the date for completion of the agreement and the agreement has not been completed. It is not 6 months since the last payment, but 6 months after the next payment was due and unpaid. In the case of passing the date for completion of the Debt Agreement, this will usually occur because the debtor has continued to make some payments (and has not therefore incurred a previous 6-month arrears default) but pays less than the required amount and/or misses some payments. In practice this means that a debtor must either get completely up to date within 6 months of the due date for completion, or get a variation approved within this time, in order to avoid a termination of the agreement at this late stage. If the agreement is terminated, the debtor will lose any benefit the agreement offered in terms of savings on capital and interest (including interest accrued since the agreement was entered), while having all the disadvantages of a listing on the NPII and their credit report continue. They will also face potential enforcement action, including potentially a Creditor’s Petition. Once the Official Receiver has been notified of a 6-month arrears default, and the Official Receiver is satisfied that the alleged default has in fact occurred, then the Official Receiver must declare in writing that the Debt Agreement is terminated and record that fact on the NPII (s 185QA). The Debt Agreement is officially terminated on the date the termination is recorded on the NPII (s 185QA). The Official Receiver may make compliance calls to the debtor and/or administrator to confirm the facts and seek evidence in the event of a dispute about the facts. However, there is no discretion for the Official Receiver to decide not to terminate a Debt Agreement provided the 6-month arrears default has occurred. Termination as a result of the debtor’s bankruptcy A Debt Agreement is automatically terminated upon the bankruptcy of the debtor (s 185R). Although a debtor generally cannot present a Debtor’s Petition while in a Debt Agreement (s 55(5A)) and can’t be personally subjected to a Creditor’s Petition (s 185K), he or she may become bankrupt as a result of, for example: 0btaining permission of the Court to present a Debtor’s Petition while subject to a Debt Agreement a Creditor’s Petition being presented against a partnership of which the debtor is a member. Termination of a Debt Agreement by Court Order The debtor or the executor/executrix of their estate, Official Receiver or a creditor of the debtor (but not necessarily a party to the Debt Agreement) can apply to the court for an order terminating a Debt Agreement (s 185Q(1). A court can make the order if it is satisfied that (s 185Q(4)): the debtor has failed to carry out a term of the agreement AND it is in the creditors’ interests to terminate the agreement; or that carrying out the agreement would cause injustice or undue delay to the creditors or the debtor; or the DAA has contravened ss 185EC(6), 185MC(6) or 185PC(6); or that for any other reason the agreement should be terminated and that it is in the creditor’s interest to do so. As mentioned above, if the application is made by a creditor, then a simultaneous application for a sequestration order against the debtor may also be made (s 185Q(2)). Applying to void a Debt Agreement The debtor (or the executor/executrix of their estate), Official Receiver or a creditor of the debtor (but not necessarily a party to the Debt Agreement) can apply to the court for an order that all, or a specified part, of a Debt Agreement is void (s 185T(1)). The court can make the order if it is satisfied that (s 185T(2)): there is doubt on a specific ground that the Debt Agreement was not made in accordance with the relevant sections of the Act; or the statement of affairs lodged with the Debt Agreement was deficient because it omitted a material particular or because it was incorrect in a material particular; or the DAA has committed a breach of duty in relation to the Debt Agreement; or the DAA has breached a condition of registration (if they are a registered DAA) or a condition imposed under the Insolvency Practice Rules (if they are a registered trustee). The court must not make a Debt Agreement void, or part of it void, on grounds of noncompliance with the Act if there is substantial compliance – that is minor technical noncompliance will be insufficient to have the agreement declared void (Section 185U(2)). Similarly, the court must not declare an agreement void on the grounds of a deficiency in the statement of affairs unless the court it is satisfied that it is in the interests of the creditors to do so (s 185U(3)). The court can make whatever other orders it sees fit in relation to the Debt Agreement, including ordering a person to pay another person compensation of a specified amount (s 185U(5)-(6)). In the case where the debtor considered that they had been misled by the DAA when proposing their Debt Agreement, an application by the debtor to have it declared void would appear preferable to applying to have it terminated because of the possibility of being awarded compensation if the application was successful. However, given the comprehensive nature of the prescribed information given to the debtor as part of the Debt Agreement proposal process (and signed by the debtor), the debtor would have to have fairly good evidence of the misleading statements/conduct, and/or have personal attributes that made it difficult for them to comprehend the prescribed information, in order to have a good case. A debtor who was not insolvent at the time of making a Debt Agreement proposal could, in theory at least, apply to the court to have the Debt Agreement declared void. On the other hand, as AFSA usually relies on a statement signed by the client to the effect that they cannot meet their debts as they fall due, and DAA’s are quite adept at dictating a form of words sufficient to satisfy AFSA, then the debtor may risk exposing him or herself to criticism by the court for signing a false statement or even prosecution under s 267 of the Bankruptcy Act. An order cannot be made declaring the Debt Agreement void, or partly void, after all the obligations created by the agreement have been discharged (s 185T(3)). If a creditor is applying to make a Debt Agreement void, then the creditor may also apply for a sequestration order. Similar rules apply as in relation to terminating a Debt Agreement and applying for a sequestration order (see above).

Updated: 27 October 2025 Content Part 1: What is the process for entering into a PIA? Part 2: Variation of a PIA Part 3: Termination of a PIA Part 4: Complaints Summary This Chapter does not cover the advantages and disadvantages of a Personal Insolvency Agreement (PIA). For information about what a PIA is, the implications of a PIA and who may be suitable for a PIA see Chapter 5 Part 3. This section covers: The process of entering a PIA Varying a PIA, terminating a PIA Making a complaint about a Controlling Trustee or a trustee administering a PIA This section is very brief because financial counselling clients are rarely suitable for a PIA. Contact AFSA for more information or an appropriate referral. Part 1: What is the process for entering into a PIA? Step 1 – Appointing a Controlling Trustee After getting advice, the debtor appoints a Controlling Trustee by signing a Section 188 Authority. The Authority becomes effective when the proposed Controlling Trustee consents to the appointment and signs it. Only a registered trustee, a suitably qualified solicitor or the Official Trustee (AFSA) can be appointed as a Controlling Trustee. The debtor must be given a copy of the prescribed information and provide a signed acknowledgement that they have received and read that information before a Controlling Trustee can consent to accept the appointment. Note: Unlike the prescribed information in a Debtor’s petition, the prescribed information that the Controlling Trustee is obliged to give the debtor is set out in section 29 of the Bankruptcy Regulations. The debtor must lodge with the proposed Controlling Trustee, a statement of affairs and a draft PIA proposal. The Controlling Trustee must give the Official Receiver (AFSA) a copy of the Section 188 Authority and statement of affairs within 2 business days of consenting to the Authority. Normally, the Official Receiver is also given a copy of the draft PIA. Once appointed, the proposed Controlling Trustee will consult with the debtor in the first instance and assist in the formulation of the terms of the proposal to be made to creditors. The debtor and/or the proposed Controlling Trustee may also ‘sound out’ the major creditors to ascertain whether they will give the proposal favourable consideration. If the major creditors indicate that they will not accept the proposal there is little utility in proceeding with the proposal. Step 2 – Preparing the Proposal and Report to Creditors Once appointed, the Controlling Trustee takes control of the debtor’s property, looks into the debtor’s affairs and examines the debtors' proposed PIA. The Controlling Trustee will also call a meeting of the debtor's creditors to consider the debtor's affairs and proposed PIA.  The meeting must be held not more than 30 business days from the Controlling Trustee’s appointment and notice must be given not less than 10 business days before the day of the meeting. The notice of the meeting is to be given to the Inspector-General (AFSA) in accordance with the approved form and will be published on the AFSA website. When giving notice of the meeting, the Controlling Trustee must give the Official Receiver, the debtor and all creditors copies of the debtor's statement of affairs, the Controlling Trustee's report and the Controlling Trustee's statement in relation to the special resolution expected to be passed at the meeting. The Controlling Trustee's report must summarise and comment on the debtor's affairs, state whether the Controlling Trustee believes that the creditor's interests would be better served by accepting the PIA proposal or the debtor's bankruptcy, and name each creditor identified as a related entity of the debtor. The main purpose of the report is to inform creditors of the amount of any dividend (that is, how many cents in the dollar) they can expect if they accept the proposal compared with the amount of dividend they would receive if the debtor went bankrupt instead. The Controlling Trustee makes a recommendation as to whether he or she is of the view that it is in the interests of the creditors to accept the proposal. Since creditors must receive notice of the meeting and the report not less than 10 business days before the meeting, the Controlling Trustee has a very limited time span in which to undertake the investigations and compile a comprehensive report to creditors. Most of the investigating time is spent on determining what could be expected from the debtor’s bankruptcy, which would involve possible voidable antecedent transactions and income contributions. Due to the limited time available to conduct the investigations and compile the report, the Controlling Trustee will often employ several staff to spend considerable time completing the exercise. Consequently, the Controlling Trustee’s remuneration and expenses can be substantial if the debtor’s affairs are complex. Generally, in Sydney an upfront payment of not less than $15,000 is often required. The Official Trustee (AFSA) would charge $62.50 per 15 minutes or part thereof (as at October 2025, check the AFSA website for up-to-date fees). Step 3 – The creditors’ meeting The meeting of creditors is held to consider the debtor’s proposal. Creditors can attend in person, by proxy or attorney or by telephone if they cannot attend in person. The debtor must also attend the meeting unless excused by the Controlling Trustee. Creditors may ask questions of the Controlling Trustee and pass on information about the debtor’s affairs (such as information the creditor thinks is relevant and may not have been disclosed by the debtor). Likewise, the creditors can question the debtor and discuss the proposal before voting. For the PIA to be accepted, a ‘special resolution’ must be passed, which comprises at least the majority of unsecured creditors (by number) who represent at least 75% of the dollar value of the total debts of the creditors who attend the meeting and vote on the resolution.  Accordingly, the debts of those unsecured creditors who either do not attend the meeting or who attend the meeting but abstain from voting are not taken into consideration for resolution purposes. The debtor can be given the opportunity at the meeting to increase his or her offer. If all the known creditors are represented at the meeting (usually unlikely), the creditors can vote on the increased offer. However, in the absence of all creditors, the meeting can be adjourned to enable all the creditors to be informed of the increased offer and given an invitation to attend the adjourned meeting to vote on the increased offer. Step 4 – Voting Creditors may vote, by special resolution, to: resolve the debtor's property no longer by subject to the Controlling Trustee's control; or require the debtor to execute a PIA; or require the debtor to present a Debtor's Petition within 7 days. Acceptance of the PIA If a special resolution is passed at the meeting to accept the PIA proposal, creditors then vote on the appointment of a trustee to administer the PIA. The trustee of the PIA must have lodged a written consent to act as trustee of the PIA with the Controlling Trustee prior to meeting to vote on the proposed PIA. Commonly, the Controlling Trustee will also be appointed as trustee to administer the PIA. The trustee can be either the Official Trustee or a registered trustee – it cannot be a solicitor unless they are also a registered trustee. The trustee of the PIA and the debtor (and any other person who is a party to the PIA such as the provider of the funds to be offered to creditors) must execute the PIA (in the form of a deed) within 21 days of the resolution being passed. Once the PIA is executed, all creditors are bound by the terms of the Personal Insolvency Agreement. The controlling trusteeship is also terminated upon execution and the Controlling Trustee must notify the Official Receiver and each creditor that a PIA has been executed. The rights of secured creditors to repossess and/or sell their security are not affected. Rejection of the PIA or failure to pass any resolution If the creditors do not pass a special resolution to accept the PIA, they may instead vote to end the controlling trusteeship or require the debtor to present a Debtor's Petition within 7 days. As noted in Chapter 5, even if the controlling trusteeship ends, the debtor has still committed an act of bankruptcy which can support a Creditor's Petition that will be difficult for the debtor to oppose. If the creditors fail to pass any special resolution, the Controlling Trusteeship comes to an end after 4 months and the debtor regains control of his or her property. Alternatively, the Inspector-General, a creditor, or the Controlling Trustee may make an application to the Court under s 221 for a sequestration order. Where the proposal has been rejected or lapses, the debtor can only appoint another Controlling Trustee after six months have passed or with the leave of the court (to do so within a shorter period). Step 5 – Administration of the PIA How a PIA agreement is administered will depend on its terms. Generally speaking, the tasks of the trustee of a PIA will be similar to that of a trustee in bankruptcy and may include selling assets, gathering payments/property from the debtor or third parties, recovering funds/property from void antecedent transactions (where the PIA provides that the antecedent transaction provisions of the Act apply), determining the creditors’ claims and paying a dividend to unsecured creditors. The trustee will also be required to issue a certificate, on the debtor's request, if it is satisfied that all obligations under the PIA have been discharged. The trustee’s remuneration for the administration of the PIA is usually approved at the meeting of creditors and is usually capped at a maximum amount. If additional and unexpected work is required, the trustee seeks approval from the creditors for the additional remuneration. If creditors do not approve the remuneration in either of the above instances, the trustee can have the Inspector-General decide the amount of the remuneration. When the trustee’s remuneration reaches either the amount approved by creditors or decided by the Inspector General, the trustee is required to notify creditors by way of a Remuneration Claim Notice, which also informs creditors and the debtor that they can apply to the Inspector-General for a review of the trustee's remuneration within 20 business days after receiving the notice. There is also a government levy, called a realisations charge, (currently 7% as at May 2024) payable on any funds realised by the trustee. The interest earned on the funds held in the bank account for the PIA is payable to the government. Part 2: Variation of a PIA The Act provides that creditors can approve a variation of a PIA by way of special resolution and with the debtor’s written consent. In practice, the debtor usually puts forward a proposal to the trustee to vary the terms of the PIA that is then presented by the trustee. The trustee must then give a notice to all creditors (who would be entitled to receive notice of a creditors’ meeting) including: a statement of the reasons for the variation and the likely impact it will have on creditors; specification of a date (at least 14 days after the notice is given) from which the proposed variation will take effect; and state that any creditor may, by written notice to the trustee at least 2 days before the specified date, object to the variation taking effect without there being a meeting of creditors. If the terms of the variation are reasonable, creditors generally raise no objection. The variations usually relate to a reduction of the amount of periodic payment with a corresponding increase in the number of payments in which case, the total amount paid remains the same. In some instances, a lump sum might be offered instead of the remaining periodic payments. If an objection is raised, then a creditors’ meeting will need to be called to vote on the proposal (or the variation may not be pursued). Part 3: Termination of a PIA A PIA can be terminated in a number of ways: the occurrence of an event stipulated in the PIA such as the unemployment or death of the debtor following the default of a term of the PIA, the trustee can propose the termination of the PIA by giving notice to creditors which, among other things, specifies a date (at least 14 days after the notice is given) for which it is proposed that the termination will take effect. The termination will take effect from that date unless, at least 2 days before the specified date, a creditor objects in writing that the termination should take effect without a meeting of creditors the passing of a resolution by creditors that the PIA be terminated at a meeting called for that purpose. Creditors can only do so on the basis that the debtor is in default, if property of the debtor is covered by a restraining order or forfeiture order, or a pecuniary penalty order made against the debtor is in force by an order of the court on the application of the debtor or their executor/executrix, the trustee or a creditor (or creditors). Part 4: Complaints Complaints about Controlling Trustees and administering trustees in relation to PIAs are handled by AFSA Regulation. Information about lodging complaints is contained in Inspector-General Practice Statement No 10, Process for handling complaints against practitioners and debtors. Enquiries and complaints can be made to AFSA’s Enforcement and Practitioner Surveillance division by telephone (on 1300 364 785), post, e-mail or through an online form.  

Updated: October 2025 Note: This checklist is only a guide. Find the most recent indexed amounts on the AFSA website, as these are updated regularly. It is the responsibility of the worker using the list to ensure that the information provided to clients is comprehensive, accurate and up-to-date. Interactive PDF Click the button above to open an interactive PDF version of this form. To save any information you complete on the form you will first need to download and save a copy of the form onto your computer. Client Name: Date: Worker: File no:   Part 1: Advantages and Disadvantages of Bankruptcy Advantages Fresh start Harassment stops Legal proceedings stop (for provable debts) Keep protected property (see below) Travel in Australia allowed Voluntary payments towards debts can be made Goods seized by Sheriff returned (if protected and not already sold) Garnishee of wages/salary stops Sole traders may be able to continue in self-employment in some circumstances  Disadvantages Difficulties obtaining credit (see NPII and credit file) All property/assets go to bankrupt estate (real estate, vehicles, shares, antiques, expensive jewellery): savings over $2,000 - $3,000 Tax refund (pre-bankruptcy earnings) Property now owned by others (undervalue transactions, transfers to defeat creditors) Money already paid to creditors (preferential payments) Business usually sold or liquidated Property acquired during bankruptcy - vests in Trustee, potential annulment and return of surplus if sufficient amount: Asset purchases Gifts Winnings Inheritances Must continue to pay secured debts or forfeit security property Can't be director of a company/incorporated organisation or involved in its management (must resign directorship) Disclosure obligation when borrowing/passing cheques etc. over $7,173 (October 2025) May be required to pay bond to secure utilities and communications services May have difficulties obtaining some types of insurance May have difficulty securing rental property Guarantors and joint-debtors still liable Restriction on ability to take legal action Impact on intellectual property/copyright Migrants and sponsors of migrants need to check impact on visas/immigration status Part 2: Nature of bankruptcy  Requirements for applying for bankruptcy Must have a connection to Australia Possible referral to court by AFSA (joint petitions and partnerships) May be rejected where it appears debts can be paid Increased risk of rejection where previous bankruptcies Forms will be returned and not processed if incorrect or incomplete Debtor must read the Prescribed Information (or have it read to them) General warnings Penalties for incorrect, misleading information or material omissions Data will be cross matched (e.g. with ATO) for accuracy Name, date of birth, address, occupation all on public record Suppression of address possible where applicants have genuine fear of safety (ie Family violence, see below) Generally, bankruptcy cannot be undone only annulled at significant cost Duration of bankruptcy & its effects 3 years and 1 day unless extended Can be extended by objection for 5 or 8 years for breaches Continues indefinitely if no SOA filed (debtors made bankrupt by court) NPII listing for life Credit listing 5 years from start or 2 years from end, whichever is longer Family/Domestic violence Where personal safety is at risk, AFSA will consider all requests to suppress addresses from the NPII If you have been affected by family/domestic violence, AFSA will consider your request to suppress your address. The form to request this suppression is on AFSA's website under Request for information to not be on the NPII. Providing evidence of the violence, such as a copy of an Intervention Order or a report from a support worker, is important. Part 3: Debts covered and enforceable What sorts of debts are covered (provable)? Note: All debts, provable and not, secured or not must be listed in the SOA Individual debts Joint debts Unsecured debts - credit cards, personal loans, payday, BNPL, business loan, trade creditor etc. Centrelink (if no fraud) Interest/penalties only on Child Support Private debts (friends & family) Rental arrears Energy debts Telecommunications debts Tax debts GST debts Guarantees (for loans obtained by others) Personal guarantees given for company/business debts Contingent liabilities (e.g. goods or car lease entered prior to bankruptcy but later defaulted on) Court-ordered restitution amounts (if the amount was fixed before became bankrupt) Car accident with judgment or exchange of letters that liquidate debt Genuinely forgotten debts can be added later What sorts of debts are not covered (not provable)? What debts can be enforced against the debtor? Most court fines Director's fines Debt incurred after date of bankruptcy Student assistance (HECS/ HELP/ SFSS) Unliquidated debts What debts cannot legally be enforced against debtor? Statute barred debts Illegal debts (debts to drug dealers and loan sharks) Tricky debts Secured debts - (repossession can occur, only provable if security sold for shortfall) Home loans Car loans Water and council rates Debts incurred by fraud (e.g. Centrelink. Provable, enforcement ceases during bankruptcy but can recommence afterwards as debt not released by discharge, possible prosecution) Bail bonds Debts on recognisance Fines where licence or registration at risk (waiver may be available) Child support (provable, enforceable against the client, not released upon discharge) Gambling debts (provable but possible prosecution) Debts to government or financial institutions with set off rights (e.g. ATO and future refunds if tax liability) Overseas debts Victims of crime-type levies (depends on factors such as state laws and when or if debt registered) Protected Property Note: All property must be listed in the SOA where appropriate whether protected or not. Ordinary clothing Necessary household furniture & effects Motor vehicle up to $9,600 (net, if under finance) (October 2025) Property belonging to non-bankrupt spouse/partner/co-occupant Property held in trust for others (subject to conditions) Tools of trade worth up to $4,450 (October 2025) Wedding rings, jewellery and other items of sentimental value in some circumstances Life assurance or endowment policies Superannuation (in a regulated Super fund) Some Rural Assistance Grants (generally older) Protected money including: Proceeds of life insurance or endowment policies received on or after date of bankruptcy Funds withdrawn from super on or after date of bankruptcy Personal injury compensation received by the bankrupt Property purchased substantially wholly with protected money (bankrupt's name on title) Part 4: Other features of the bankruptcy Real Estate (tricky issues) Bankrupt's interest vests in Trustee (joint tenancy converts to tenants-in-common) Joint owners can buy Trustee's share or property will be sold Name on title not full story - transfers from bankrupt, significant contributions by bankrupt Trustee has many years in which to sell (even after discharge, as interest still vests in Trustee for generally another 6 years, and may be extended) Discharged bankrupt can offer to buy back equity at discharge if not already sold Pros and cons of retaining negative equity property Retain equity in Defence Service home loan (provided not paid out in full during bankruptcy) If property might be protected, evidence will be required May be able to recover protected money even if property not fully protected Travel restrictions Passport may be taken Can't leave Australia without Trustee's consent Fee payable to seek consent (from AFSA) $150 (October 2025) Will need to plan ahead and have good reason for travel Consent may be subject to conditions Contribution payers will need to pay in advance Contributions Contributions payable if earn above prescribed amount ($74,064.90 (after tax) with no dependents, 50% of income above threshold - October 2025) Number of dependents increases the prescribed amount Salary sacrifice/fringe benefit arrangements grossed up Must keep Trustee informed of changes of circumstances Deemed income/ non-monetary benefits counted as income (such as, residing rent-free) Extensive power to enforce payment (objection to discharge, supervised accounts, garnishees) Hardship available in limited circumstances Income contributions can be reassessed even after discharge (where there has been non-disclosure) Employment Note: Debtor should make their own enquiries of any relevant professional body or licensing/registration authority Prohibition on being a director/managing a corporation Armed forces Police Some public service Lawyers Partnerships Accountants Tax Agents Sheriff Real estate agent Gaming licence Politicians Finance industry Key personnel under Aged Care Act Subcontractors who need licence Other licensed or registered trades or professions Other Prosecution for non-compliance Possible referral to private trustee by AFSA Power of Attorney Need to keep trustee informed of changes of name, address, income and property Annulment (upon payment of debts, interest and substantial fees) Annulment noted on public record, but bankruptcy remains on record Composition or arrangement  

Updated: 14 August 2024 Note: This checklist is only a guide. Find the most recent indexed amounts on the AFSA website, as these are updated regularly. It is the responsibility of the worker using the list to ensure that the information provided to clients is comprehensive, accurate and up-to-date. Interactive PDF Click the button above to open an interactive PDF version of this form. To save any information you complete on the form you will first need to download and save a copy of the form onto your computer. Client Name: Date: Worker: File no: Most common process for making a person bankrupt: Obtain a judgment(s) for debt for $10,000 or more Apply for and serve a Bankruptcy Notice (within 6 years of date of judgment) File and serve a Creditor’s Petition (within 6 months of the expiration of the Bankruptcy Notice) Other acts of bankruptcy that a Creditor’s Petition can be based on (these are examples – there are many others): Debt Agreement proposal or termination = no judgment required Execution of a writ on a judgment against the person's property = judgment may be more Where is your client up to in the process? Judgment but no Bankruptcy Notice – Go to 1 Bankruptcy Notice – Go to 2 Creditor’s Petition – Go to 3 Note: If your client has failed to comply with a Bankruptcy Notice or the date for a Creditor’s petition hearing has passed, contact the court (or use the Commonwealth Courts Portal) to determine whether a sequestration order has already been made. If yes, refer for immediate legal advice. Time limits apply.   1: Options after judgment but before issue of a Bankruptcy Notice: Pay the creditor (all or as much as possible – try and get the debt below $10,000 noting a Bankruptcy Notice can still be issued unless all is paid. Partial payment does not have to be accepted) Apply to pay by instalments through the relevant Court (and seek a stay of enforcement if not automatic) Get legal advice about setting judgment aside (if obtained by default) or appeal if obtained at hearing If the debt collector or creditor is a member of the Australian Financial Complaints Authority, consider lodging to assist with a realistic repayment arrangement. Note: You can negotiate an informal repayment arrangement but this will not prevent the issue of a Bankruptcy Notice. Only a stay of enforcement in the original court will prevent the issue of a Bankruptcy Notice.   2: Options after a Bankruptcy Notice has been served (personal service is NOT required): Pay within time limit, usually 21 days (pay all or as much as possible – get debt below $10,000 if possible. Note, partial payment does not have to be accepted.) Negotiate repayment arrangement extending time to comply with the Bankruptcy Notice (noting, the creditor may want payment within 6 months of the validity of the notice) Get legal advice about setting judgment aside (if obtained by default) or appeal if obtained at hearing AND applying for time to extend compliance with the Bankruptcy Notice Note: You can still apply to pay by instalments after a Bankruptcy Notice has been issued but this will NOT prevent the creditor from continuing with bankruptcy proceedings.   3: Options after a Creditor’s Petition has been served (personal service is required unless a substituted service order has been made by the court – the debtor may only get a few days' notice): Pay the creditor (all or as much as possible – get debt below $10,000 if possible) – note that the creditor may not accept partial payment at this late stage Negotiate to adjourn by consent as you enter a repayment arrangement to pay or sell assets Always turn up to court or apply for permission to attend by telephone/online (debtors should never ignore a Creditor’s Petition unless they are content to be made bankrupt) At Court, seek adjournment to pay or seek legal advice   Grounds for a sequestration (bankruptcy) order to be made by the court: Act of bankruptcy less than 6 months before the filing of the Creditor’s Petition; and Debt of over $10,000 still owed (can be to a different creditor, a group of creditors, or other amounts owed to original petitioning creditor provided debts were owed prior to the act of bankruptcy relied on); and Creditor’s Petition validly served (personal service required). Note: Debtor can oppose the Creditor’s Petition in some circumstances but must get legal advice as otherwise they may incur costly, unnecessary legal costs from the creditor, which they will have to pay.   Warnings to clients: Legal fees accumulate with every document served and every court appearance (whether or not the debtor appears) Trustee’s fees start to accumulate as soon as a sequestration order is made – notify the Trustee if the client is likely to seek a review of the order or appeal, or seek annulment Get urgent legal advice if a sequestration order has already been made – time limits apply File a statement of affairs as soon as possible after a sequestration order has been made, even if the bankrupt intends to apply for a review or appeal because – the period of bankruptcy (3 years 1 day) does not start to run until a statement of affairs has been filed the bankrupt’s chances of successfully setting aside the sequestration order can be jeopardised by failure to supply a statement of affairs the bankrupt can be compelled to complete a statement of affairs and may be at risk of prosecution for non-compliance   For more information see Chapter 10 of the Bankruptcy Toolkit.  

Updated: October 2025 Note: This checklist is only a guide. Find the most recent indexed amounts on the AFSA website, as these are updated regularly. It is the responsibility of the worker using the list to ensure that the information provided to clients is comprehensive, accurate and up-to-date. Interactive PDF Click the button above to open an interactive PDF version of this form. To save any information you complete on the form you will first need to download and save a copy of the form onto your computer. Client Name: Date: Worker: File no: Informal Debt Agreement with Creditor Advantages Not a formal type of debt agreement so more flexible and less formalities required Can enable effective repayment through reduction of debt amount, extension of time, instalment or payment plan Disadvantages If using a third party to negotiate, may be required to pay fees. Agreement may not be enforceable in a Court, depending on the nature of the contract. Creditor may nevertheless seek bankruptcy meaning time spent negotiating this agreement is moot. Declaration of Intention (Temporary Debt Protection) Advantages 21 days breathing space Don’t have to pay fee Doesn’t necessarily have to proceed to bankruptcy (but can lead to Creditor’s Petition) Pauses court enforcement (garnishee, sheriff seizure of goods on writ) Gives time to negotiate with creditors or get advice No NPII or credit report listing Disadvantages Declaring Intention is an act of bankruptcy (which can lead to Creditor’s Petition) Need to complete mini-statement of affairs Gives a point in time snapshot of debtor’s affairs for future reference by Trustee if debtor does go bankrupt eventually Debt Agreement Requirements to enter a debt agreement Must be insolvent Must earn less than $111,097.35 (October 2025) Unsecured debts less than $148,129.80 (October 2025) Assets (equity only) less than $296,259.60 (October 2025) Must have had no bankruptcy, Debt Agreement or PIA in last 10 years Advantages Will be released from interest (from the date of the Debt Agreement) and sometimes part of principal debts if agreement completed May keep home and other unprotected assets that would not be protected in bankruptcy Can remain a director of a company (can’t if bankrupt or in PIA) Can hold key personnel role under Aged Care Act (can’t if bankrupt or in PIA) Challenges to antecedent transactions don’t apply (undervalue transactions, transfers to defeat creditors etc.) Future acquired property will not usually be affected (gifts, winnings, inheritances) No restrictions on overseas travel Disadvantages Substantial fees upfront and ongoing No refunds if not accepted or not completed Entering a debt agreement is an act of bankruptcy (can lead to Creditor’s Petition) Listed on NPII forever Listed on credit report for at least 5 years Many similar consequences to bankruptcy including impact on ability to get credit, access to services, insurance and potential impact on some forms of employment Can (and often does) last longer than bankruptcy Can cause hardship (will have to pay in accordance with agreement even if not earning enough to be required to pay contributions under bankruptcy) Secured creditors can still sieze and sell any assets held as security if you are behind in repayments Difficult to change when circumstances change – variation process similar to setting up agreement in the first place Not suitable for Centrelink recipients Serious non-completion risk (all advantages lost if not completed and bankruptcy likely)   Personal Insolvency Agreement (PIA) Requirements to enter a PIA Must be insolvent Must have a connection to Australia Must have had no other PIAs in the previous six months Advantages Will be released from interest and often part of debts if completed Home and other assets may be able to be retained (depending on agreement) Challenges to antecedent transactions may not apply (depending on agreement) Business may be able to keep trading Future acquired property will not usually be affected (gifts, winnings, inheritances) No restrictions on overseas travel Disadvantages Very substantial fees (minimum $10,000 – $15,000) No refunds if not accepted or completed Entering a PIA is an act of bankruptcy (can lead to Creditor’s Petition) Listed on NPII forever Listed on credit report for at least 5 years Cannot remain a director of a company (until agreement obligations completed in full) Rights of secured creditors remain - they can repossess assets if default in payments Many similar consequences to bankruptcy including impact on ability to get credit, access to services, insurance and potential impact on some forms of employment Non-completion risk – bankruptcy likely    

Updated: 17 September 2024 Note: This handout is only a guide. Find the most recent indexed amounts on the AFSA website, as these are updated regularly. Interactive PDF Click the button above to open an interactive PDF version of this form. To save any information you complete on the form you will first need to download and save a copy of the form onto your computer. Information for individuals who are bankrupt Now you are bankrupt you need to do the following: Lodge a statement of affairs (SOA) If you have been made bankrupt by the court and you have not already completed an SOA you must do this, your time until discharge does not start ticking until your SOA has been satisfactorily completed and is accepted by the Official Receiver at AFSA. Cooperate with your trustee in bankruptcy (the Trustee). Complete any paperwork required by the Trustee. Inform the Trustee in writing if you change your name or begin using a different name. Inform the Trustee in writing if you change your address or contact numbers. Inform the Trustee in writing if your income changes. Inform the Trustee in writing if you acquire money (above your declared income) or property (for example an inheritance). Pay your income contributions (if there are any assessed as payable). If you receive an insurance payout for damage to, or loss of, property that vested in the Trustee (or would have if it had not been lost/stolen/destroyed) you must give the proceeds of the claim to the Trustee. You may be asked to give any tax refund for the pre-bankruptcy period to your Trustee. You also need to do the following, if requested by your Trustee: May have to hand in your passport (generally only if you have a Private Trustee, which if you have been made bankrupt is likely). Give the Trustee access to your accounts and financial records. Attend a meeting of creditors. You must not: Travel outside Australia (or leave Australia) without the Trustee’s written permission. Further details about applying to travel overseas, and the required form, are on the AFSA website. Borrow over $ ........................... [insert the current indexed threshold amount which can be found on the AFSA website] without telling the person/company you are borrowing from that you are bankrupt (this also includes consumer leases and hire purchase contracts over this amount) Obtain goods and services on credit where the value is over $ ........................... [insert the current indexed threshold amount which can be found on the AFSA website] without telling the person/company you are getting credit from that you are bankrupt Pass a cheque for over $ ........................... [insert the current indexed threshold amount which can be found on the AFSA website] without telling the person/company you are making the cheque payable to that you are bankrupt. Offer to supply goods or services worth more than $ ........................... [insert the current indexed threshold amount which can be found on the AFSA website] without telling the person/company you supplying the goods or services to that you are bankrupt. Carry on a business in any name except the name that appears on your bankruptcy records, unless you inform people that you deal with that you are bankrupt. Make misleading statements to the Trustee, leave out important details when supplying information, or otherwise mislead or deceive the Trustee. Commence legal proceedings except in relation to personal injury (if you are served with court documents inform the Trustee). Destroy property or financial records. Try to sell, give away or otherwise deal with property that has vested in the Trustee - this includes a home which you are paying off (unless it is protected property). Run away or conceal your whereabouts. Some problems which may arise while you are bankrupt: You cannot afford your income contributions because of genuine hardship (medical expenses for example). Your accounts have been frozen by the Trustee. You are having income deducted or other action taken against you because of unpaid contributions. You cannot get permission to travel. You believe that money or property that the trustee is taking/demanding should be protected in bankruptcy. You want to claim on an insurance policy (or have received a payout) and you are not sure whether the proceeds of the claim should go to the Trustee or are protected. You are struggling to pay secured debts (such as your home or car loan). You are being chased for debts that you thought were, or should have been, included in the bankruptcy. You have received money or property and are trying to annul the bankruptcy, but you are in dispute with the Trustee about the amount required. The Trustee is objecting to your discharge. If you encounter these or any other difficulties, you may be able to get some advice or assistance from the following services: .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... [insert others including your own service if applicable] For access to information, advice and referrals to financial counselling in any state of Australia call the National Debt Helpline 1800 007 007. The Australian Financial Security Authority on 1300 364 785. If you have relatives or associates who are affected by your bankruptcy (for example because you own property jointly with them, or you have transferred money or property to them in the past) they will need to get their own independent legal advice.

Adsett v Berlouis and Others [1992] FCA 368 [Chapter 8] Autron Pty Ltd v Benk [2011] FCAFC 93 [Chapter 10] Barodawala v Perinparajah [2022] VSCA 198 [Chapter 9] Berryman v Zurich Australia Ltd [2016] WASC 196 [Chapter 6] Bosanac v Federal Commissioner of Taxation [2022] HCA 34 [Chapter 6] Calverley v Green (1984) 155 CLR 242 [Chapter 6] Carey, in the matter of Carey [2011] FCA 235 [Chapter 6] Cummins v Cummins (2006) 227 CLR 278 [Chapter 6] Department of Public Prosecutions v Luong [2021] VCC 1482 [Chapter 8] Di Cioccio v Official Trustee in Bankruptcy (as trustee of the Bankrupt Estate of Di Cioccio) [2015] FCAFC 30 [Chapter 8] Director of Public Prosecutions (Cth) v Keating [2013] HCA 20 [Chapter 9] James v Deputy Commissioner of Taxation [2010] FMCA 106 [Chapter 10] Lee v the State of Western Australia (No 2) [2023] WASC 247 [Chapter 6] Nguyen v Lion Finance Pty Ltd and Another [2012] FMCA 880 [Chapter 8]  Official Receiver v Prince [2006] FMCA 1917 [Chapter 8] Official Trustee in Bankruptcy v Brown and Another [2011] FMCA 88 [Chapter 6] Official Trustee in Bankruptcy v Kent [2023] FCA 1211 [Chapter 8] Maher v Maher [2022] FEdCFamC2G 14 [Chapter 10] Mannigel v Aitken [1983] FCA 183 [Chapter 8] Mutton (liquidator) v De Matteis, in the matter of De Matteis Pty Ltd (in liq) [2023] FCA 1649 [Chapter 10] Pattison v Hadjimouratis [2006] FCAFC 153 [Chapter 10] Phillips v Inspector-General in Bankruptcy [2012] AATA 788 [Chapter 8] Power v Kenny [1977] WAR 87 [Chapter 9] Quitlong v ACM group [2011] FMCA 688 [Chapter 10] Re Beddoe; Downes v Cotton (1893) 1 Ch 547 [Chapter 8] Stankovic v Van Der Velde [2012] FCA 1436 [Chapter 6] Sutherland v Byrne-Smith [2011] FCMA 632 [Chapter 6] Witt v Witt and Another (2007) 38 Fam LR 431 [Chapter 6]