The bankruptcy journey

The bankruptcy process, step-by-step in plain English.

Bankruptcy. We've all heard of it, and we all know it sounds scary.

But what is bankruptcy really? At its most basic, bankruptcy is a way for people in financial trouble to get relief from their debts.

There were 15,329 bankruptcies in Australia in 2018–19.

For those people for whom bankruptcy is the right option, it's a way to take control of their financial situation and get a fresh start.

Although bankruptcy can provide relief if you can’t repay your debts, there are consequences too. Here are the advantages and disadvantages of bankruptcy:

Advantages

Bankruptcy stops most creditors chasing you for money.
It clears most of your debts.
You get a fresh start to rebuild your finances.

Disadvantages

Bankruptcy may affect your income, employment and business.
You can lose assets.
It affects your ability to travel overseas.
Your name will permanently appear on the National Personal Insolvency Index.
Bankruptcy can affect your ability to obtain credit in the future.

To help you decide if bankruptcy is the right option for you, here’s an overview of the bankruptcy journey from start to finish.

1. Add up your debts

Are you broke? This is a tough question to face – but you need to.

If you're struggling to keep up with debt repayments or feeling like your debt is spiralling out of control, knowing exactly how much you owe is the important first step to getting out of financial difficulty:

Add up the total amount of all your debts such as home loan, credit cards, personal loans, car finance, store cards, etc.
Add up all the minimum monthly payments from all your debts.
Add up your monthly income from all sources such as wages, investments, government benefits, etc.
Work out your monthly expenses (not including debt repayments) such as rent, food, gas and electric, rates, car and transport, insurance, medical expenses, recreation, etc.

Now you have to make an honest, objective, unemotional assessment of how much money is coming in each month and how much you have to pay out.

And remember, paying only the minimum monthly amount on credit cards and other debts usually means you will take many years to pay off the balance and will pay a large amount of interest over that period.

If you have little or no realistic opportunity to repay your debts, you should consider bankruptcy.

If you have an income but probably can’t repay your debts in full within three years while maintaining a reasonable standard of living, you should consider bankruptcy.

If you’re considering bankruptcy, the next step is to get some advice.

2. Get expert advice

The one thing you do not want to do is attempt the bankruptcy journey on your own.

You need to consider the consequences of bankruptcy carefully. While it releases you from most of your debts, it also imposes strict obligations which must be upheld. It’s important that you understand what declaring bankruptcy means for you now and in the future.

Even if you’re sure bankruptcy is your best (or only) option, it is still a good idea to get some advice about your situation.

The best bankruptcy advice is from an insolvency practitioner.

Insolvency practitioners are the professionals who are licensed by government authorities to manage insolvency procedures such as bankruptcies. They are usually qualified accountants and are experienced at getting people in financial distress back on their feet.

Most insolvency practitioners offer a free no-obligation and confidential initial consultation to help you understand your financial position, what options you have available and help you set a path forward.

To find an insolvency practitioner see this online directory

Beware of dodgy advisers

There are a lot of untrustworthy business and debt advisors offering dodgy bankruptcy advice. They take advantage of vulnerable people and can get them into trouble by advising action that is against the law.

3. Start the bankruptcy process

There are two requirements for applying for bankruptcy:

you're unable to pay your debts when they are due, and
you're in Australia or have a residential or business connection to Australia.

There’s no minimum or maximum amount of debt or income you need to be eligible. And there’s no fee to apply for bankruptcy.

Declaring yourself bankrupt

Generally, a person declares themselves bankrupt either via a debtor’s petition or they are declared bankrupt by a court following an application by a creditor.

If after taking advice you've decided bankruptcy is the right option for your situation, there are two ways for you to begin the process:

Appoint an insolvency practitioner to do it for you
The easiest way to declare yourself bankrupt is to ask an insolvency practitioner to act as your bankruptcy trustee. The insolvency practitioner will help you with the paperwork and lodge a debtor’s petition on your behalf.
Complete a Bankruptcy Form online
If you want to declare bankruptcy yourself, you complete a Bankruptcy Form on the Australian Financial Security Authority (AFSA) website.

You can also be made bankrupt if one of your creditors lodges a creditor’s petition and a court makes an order to bankrupt you.

Statement of Affairs

The Statement of Affairs is one part of the Bankruptcy Form. It sets out all your personal and financial information. It is one of the most important documents in the bankruptcy process because:

It gives the complete picture of your financial situation including all your assets and debts. This information is used to manage your bankruptcy.
The date when the Statement of Affairs is lodged determines when your bankruptcy ends.

You must ensure you complete the Statement of Affairs fully and accurately. It’s important to include all your debts when completing the Statement of Affairs. Notify your bankruptcy trustee straight away if you forget to include any.

Date of your bankruptcy

You are made bankrupt when AFSA processes your debtor’s petition and issues an estate number.

If you’re bankrupted by a creditor, your bankruptcy starts when the court makes an order for your bankruptcy.

The bankruptcy trustee

When you are made bankrupt, a bankruptcy trustee (or simply ‘trustee’) is appointed to manage your bankruptcy.

If you have taken advice from an insolvency practitioner, you can ask them to be your trustee. Otherwise the Official Receiver (AFSA) will be your trustee.

Your trustee takes over managing your debts and works out how best to pay back what you can afford. They may use your ‘non-essential’ assets to help pay back what you owe. (You can usually keep household items and things you need for your job.)

4. You stop paying most of your debts

As soon as you’re declared bankrupt you stop making payments towards most of your debts (see which debts bankruptcy covers below).

Creditors must stop contacting you and asking for money, and they can’t add any further penalties or interest to the debt you owe.

Your trustee notifies your creditors that you’re bankrupt and takes over managing your debts.

Which debts does bankruptcy cover?

It’s important to know which debts will be covered by bankruptcy and which will remain.

Unsecured debts

Unsecured debts are those where no security or collateral is given to guarantee the loan. Bankruptcy covers most unsecured debts, such as:

credit and store cards
unsecured personal loans and pay day loans
gas, electricity, phone and internet bills
overdrawn bank accounts and unpaid rent
medical, legal and accounting fees.

Secured debts

Secured debts are tied to specific assets such as a house or car. This means the lender has the right to take possession of the asset if you don’t pay the debt.

Examples of secured debts include:

home loan (house is security)
car loan (car is security)
hire purchase or rent to buy (e.g. furniture or electronics are security).

Secured debts may also survive your period of bankruptcy. Secured creditors keep their rights over any securities.

You should contact your secured creditors to discuss your debt. If you can’t keep up the repayments, you may be able to give back the asset or the creditor may repossess the asset.

Sometimes the creditor may sell the asset. If the sale proceeds don’t cover the total debt this leads to a shortfall. If you list the shortfall in your bankruptcy the creditor can no longer pursue you for this debt.

Other debts bankruptcy doesn’t cover

There are some other debts bankruptcy doesn’t cover, including:

court imposed penalties and fines
child support & maintenance
HECS & HELP debts (government student loans)
debts you incur after your bankruptcy begins
unliquidated debts (a debt where you and your creditor are yet to determine how much you owe).

What happens to my assets?

Your trustee can claim and sell some of your assets. They will use the money from the sale of your assets to repay as much of your debt as possible.

Assets that can be claimed include:

real estate, such as homes and land
cars over a certain value
artworks of significant value and some jewellery
any inheritance, tax refunds or winnings
money in bank accounts in excess of $1,000 (at the beginning of bankruptcy).

Assets you’ll keep include:

household goods of reasonable value, such as furniture, TVs and computers
a car worth less than a certain value
tools of trade worth less than a certain value
in most cases – superannuation, life insurance policies and personal injury compensation payments.

It’s important to understand the trustee’s job isn’t to take everything from you, but to manage fair repayment of your debts.

If you don’t own anything or have any extra income you won’t be asked to repay.

5. Comply with obligations

Once you are bankrupt you must comply with the following obligations:

You must:

provide details of your debts, income and assets to your trustee
assist your trustee in selling certain assets to help pay your debts
make compulsory payments if your income exceeds a set amount. See AFSA's income contributions calculator

You must inform your trustee if you:

change your name, address, income or employment
forgot to include debts or assets in your Bankruptcy Form
buy or gain new assets (e.g. house, car, winnings)
receive an inheritance (including cash, shares or other assets).

You must also:

request permission from your trustee to travel overseas
reveal your bankruptcy if you apply for a loan or credit over a set amount
disclose your bankruptcy if you trade under a business name that doesn’t contain your name
provide information to your trustee regarding your finances (such as income and mortgage statements)
lodge your statement of affairs within 14 days (of notification of bankruptcy) if you've been made bankrupt by a creditor.

Penalties apply if you don't comply with the above obligations. In some cases, your trustee may extend your bankruptcy.

6. Your bankruptcy ends

Your bankruptcy generally ends when you’re ‘discharged’, which is usually automatic three years after the filling date of your Statement of Affairs. It can be longer in some circumstances, for example if you do not cooperate with your trustee.

In certain circumstances a bankruptcy can also be ended by an ‘annulment’, which cancels the bankruptcy as if it never occurred.

When your bankruptcy ends, most of your debts are cleared (debts not covered by your bankruptcy won’t be cleared). Your bankruptcy obligations are also ended.

However, your trustee may continue investigations, selling assets and generally managing the bankruptcy for a period after you’re discharged. Also, any outstanding income contributions must still be paid to the trustee after discharge.

After you’re discharged

All your debts covered by the bankruptcy are cleared.

The National Personal Insolvency Index is updated to show you have been discharged from bankruptcy.

Credit rating agencies can keep a record of bankruptcies for up to five years from the date of bankruptcy, or two years from the date of discharge, whichever is longer.

You can contact credit rating agencies to have your file updated to reflect the date of discharge.

While the restriction on applying for credit is lifted after discharge, lenders may require you to disclose if they have ever been bankrupt. It’s up to the lender to decide whether to lend you money or not.

The most important thing …

If you're struggling with too much debt, it's important to realise you're not alone. Every year thousands of Australians find themselves in the same situation. So, don’t see this as a personal failure.

And remember, there is help available. The most important thing is to get advice as quickly as you can. Why not talk to an insolvency practitioner today? Most offer a free first consultation