Back to Basics: Personal Insolvency

Tadhg Schultz, Accountant

With the rising cost of living and increased rates of insolvency across Australia, it’s come as no surprise that we have seen more enquiries with respect to Personal Insolvency options for their clients. To assist, we thought we’d go back to basics and provide you with an overview of Personal Insolvency options as well as look at some of the benefits of initiating Bankruptcy Voluntarily through a Debtor’s Petition.  

Overview of Bankruptcy

Bankruptcy is a legal process under the Bankruptcy Act 1966 where a Bankruptcy Trustee is appointed to administer an insolvent person’s (“the debtor”) affairs. Bankruptcy ultimately aims to provide the debtor with a fresh start, protecting them from being pursued by Creditors and releasing their debts upon discharge of the appointment.

A debtor can file for bankruptcy themselves through a Debtor’s Petition or a Creditor can, through the courts, serve a bankruptcy notice on the debtor. If the debt remains unsatisfied at the expiry of the bankruptcy notice, they may file a Creditor’s Petition with the court seeking a Sequestration Order.

Upon appointment the debtor becomes “a Bankrupt” and must complete a Bankruptcy form disclosing an array of personal and financial information to assist the trustee in administering the estate and determine when the bankruptcy will end.

The Bankruptcy Trustee is a registered specialist who is either an officer of the court or a public servant. A Bankruptcy Trustee has the power to:

• Sell any divisible property of the Bankrupt;
• Investigate the affairs of the Bankrupt;
• Examine the Bankrupt and their associates under oath;
• Conduct and sell any business of the Bankrupt;
• Admit debts; and
• Distribute dividends.

Effects of Bankruptcy

• During the Bankruptcy period, a Debtor is unable to act as a company officer;
• A Debtor can continue to earn income, however, should that income exceeds an indexed threshold, then a contribution will be payable to the Bankrupt Estate.

Some property is not counted as divisible, such as necessary household items, tools of trade under $4,200, vehicles under $9,100, life insurance, damages or compensation payments, and superannuation. A Bankruptcy trustee will also consider any sales or transactions for up to five years prior to appointment that.

Bankruptcy ends after three (3) years and one (1) day, from the filing date of the Statement of Affairs. A Bankruptcy may also be annulled early if creditors and the costs of the administration can be paid in full, the court orders it, or a Section 73 proposal is accepted by Creditors (see our recent article on this here).

Benefits of a Debtor’s Petition

As noted above, a Debtor’s Petition is the voluntary form of Bankruptcy. There is no minimum debt requirement to voluntarily file for bankruptcy and it begins when the insolvent person lodges a Declaration of Intention to Present a Debtor’s Petition to AFSA.

The primary benefit of a Debtor’s Petition compared to a Creditor’s Petition is that it can provide immediate breathing room to the insolvent person during the stay period and is initiated voluntarily rather than enforced through the courts.

We’re Here to Help

At Hamilton Murphy Advisory, we understand that considering personal insolvency can be incredibly stressful. If you have a client that is facing financial troubles, or if you have any questions in relation to this article, please, read more about our personal insolvency services or reach out to our team.