Bankruptcy in Australia Explained
Bankruptcy is often talked about in extremes; as either a failure or a fix. In reality, it’s neither. It’s a legal process designed to deal with unmanageable personal debt when other options are no longer viable. For some people, it becomes a necessary reset. For others, it is one of several pathways that should be properly understood before any decision is made.
What matters most is: knowing how bankruptcy in Australia works, what it changes in your financial and professional life, and what alternatives exist that could deliver a better long-term outcome.
What is bankruptcy in Australia?
Bankruptcy is a legal process under Australian law that applies to individuals (not companies) 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.
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.
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.
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.
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.
If you’re facing financial pressure and need more than a standard solution, speak with a team that takes the time to understand your situation, and is prepared to fight for the best possible outcome.
We are here to help
If you require our services, please feel free to contact us for an initial consultation – this is free of charge and without obligation.
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