Bankruptcy in Australia Explained

Bankruptcy is often talked about in extremes; as either a failure or a fix. In reality, it’s a legal process designed to deal with unmanageable personal debt when other options are no longer viable.

What matters most is: knowing how Bankruptcy in Australia works, and what alternatives exist that could deliver a better long-term outcome.

HM Advisory team reviewing a client file

What is Bankruptcy in Australia?

Bankruptcy is a legal process under Australian law that applies to individuals who are unable to pay their debts. It is governed by federal legislation and administered through a regulated framework involving the Australian Financial Security Authority (AFSA) and appointed Registered Trustees.

Bankruptcy can arise in two ways:

Voluntary Bankruptcy, where an individual chooses to declare Bankruptcy themselves.
Involuntary Bankruptcy (or Sequestration Order), where a creditor applies to the court to make a person bankrupt due to unpaid debts.

Bankruptcy normally lasts for 3 years and 1 day. Once it begins, control of certain financial affairs passes to a Registered Trustee, who manages assets, investigates financial affairs, and distributes available funds to creditors in line with Bankruptcy regulations.

How Does the Bankruptcy Process Work?

A person who chooses to become bankrupt must complete the required forms and provide information about their debts, assets, income and financial affairs.

Once Bankruptcy begins, a Registered Trustee administers the estate. This can involve:

Reviewing the bankrupt person's financial affairs
Identifying assets that may be available to creditors
Assessing creditor claims
Managing income contributions where applicable
Investigating certain transactions or transfers of assets
Distributing available funds to creditors

Am I Eligible for Bankruptcy?

In Australia, Bankruptcy criteria or eligibility is based on financial position rather than a fixed dollar amount.

You may meet Bankruptcy criteria if you:

Cannot pay your debts when they fall due
Have creditors pursuing recovery
Are facing legal action, garnishee orders, or enforcement proceedings
Have personal guarantees linked to business debts
Are a sole trader with business liabilities in your own name

It’s important to note that Bankruptcy is not a financial strategy; but rather, a legal Insolvency process. In many cases, alternatives exist that protect more assets and provide better long-term outcomes.

You can learn more about Personal Insolvency options that may provide a more sustainable way forward.

How Bankruptcy Affects Assets, Income, and Future Activities

Bankruptcy has practical consequences that extend beyond debt itself, affecting income, assets, employment, and future financial activity.

Income, Employment, and Compulsory Contributions

Becoming bankrupt does not prevent you from working, and there is no limit on how much income you can earn or save. However, if your after-tax income exceeds legislated thresholds (which vary depending on dependants), you may be required to make compulsory income contributions. These thresholds are reviewed annually and may change over time.

Superannuation

Superannuation is protected under the Bankruptcy Act 1966, regardless of value. Trustees may review contributions to confirm that no payments were made to defeat creditors.

Cash, Assets, and Property

A Trustee may claim funds held in bank accounts at the date of Bankruptcy, while leaving sufficient funds for living expenses. Certain assets are protected, including limited tools of trade and vehicles used for transport (subject to value thresholds).

Other assets (including property, investments, bank balances, lottery winnings and interests in Deceased Estates) may be claimed and sold to repay creditors, depending on ownership and legal protections.

Company Directorship and Tax Obligations

A bankrupt individual cannot act as a Company Director during the Bankruptcy process. This restriction ends once Bankruptcy is finalised.

Tax obligations continue throughout Bankruptcy, including the requirement to lodge returns. Tax refunds may be claimed by the Trustee depending on when the income was earned and how it is classified.

Which Debts are Covered by Bankruptcy?

Bankruptcy can release you from many unsecured debts, but not all. Certain debts may continue after Bankruptcy, including some court-imposed penalties, child support, maintenance debts, and debts incurred after Bankruptcy.

A full review of your debts should be undertaken before deciding whether Bankruptcy is appropriate.

Life After Bankruptcy

After Bankruptcy ends, there are no legal restrictions on applying for credit, although lending decisions are made by individual providers. Bankruptcy remains on a credit report for two years after discharge or five years from commencement (whichever is later).

There are no restrictions on overseas travel, and most people no longer need to remain in contact with their Trustee.

The Bankruptcy Act 1966 does not impose employment restrictions, but some professions and licensing bodies may.

Rebuilding financial stability takes time, and many people benefit from professional financial and accounting support after Bankruptcy.

What Happens When Bankruptcy Ends?

Ending Bankruptcy doesn’t mean your financial affairs return to how they were before Bankruptcy. Some records and reporting requirements remain, and lenders may take your Bankruptcy into account when assessing future applications.

For many people, the next stage involves rebuilding savings, establishing a manageable budget, and gradually restoring access to financial products.

Is Bankruptcy the Only Option?

Personal Bankruptcy is a serious step, but it’s not always the best solution. There are several alternatives to Bankruptcy, which include debt agreements, informal creditor arrangements, Business Restructuring options, Voluntary Administration, personal restructuring pathways, and Section 73 Compositions.

Option	Potential benefit
Bankruptcy	Can provide relief from many unsecured debts and a structured Insolvency process
Debt agreement	May allow you to negotiate a formal arrangement to repay creditors
Informal creditor arrangement	May provide flexibility without entering formal Insolvency
Personal restructuring	May allow eligible individuals to retain control of their affairs while repaying creditors
Section 73 Composition	May allow an existing Bankruptcy to be annulled following an accepted settlement

The right pathway depends on factors like the amount and type of debt you owe, your income, the assets you own, whether you operate a business, and whether there’s a realistic prospect of repaying creditors.

Section 73 Composition (Bankruptcy Act)

A Section 73 Composition allows a person who is already bankrupt to propose a formal settlement to creditors to resolve debts and bring Bankruptcy to an earlier end. This may involve a lump sum payment or structured repayments. If accepted by creditors and approved, the Bankruptcy can be annulled.

This option may be appropriate where third-party funds are available, assets can fund a settlement, or there is capacity to make structured repayments. When properly structured, a Section 73 Composition can provide a more controlled pathway through financial distress.

The HM Advisory Difference

At HM Advisory, we don’t see financial distress as an endpoint; we see it as a problem to be solved. Our focus is always on recovery, restructuring, and long-term viability, not defaulting to liquidation or Bankruptcy as a first response.

Our team is genuinely committed to doing everything possible — when it’s viable — to stabilise businesses, protect value, and return organisations to profitability.