The decision to declare Bankruptcy in Australia is a pivotal financial decision, offering a path to a “fresh start” for individuals struggling with excessive debt. This process is governed by the Bankruptcy Act 1966 and administered by the Australian Financial Security Authority (AFSA).
It is a formal legal process that eliminates most unsecured debts while enforcing specific rules on the debtor’s assets, income, and business activities for a set period. Understanding these implications is essential before applying, as the Bankruptcy Act 1966 has distinct rules regarding public disclosure, asset management, and professional restrictions.
How Long Bankruptcy Lasts and What Follows
In Australia, bankruptcy generally lasts for three (3) years and one (1) day, starting from the date AFSA formally accepts the debtor’s application or when a sequestration order is issued. However, this period can be extended to 5 or 8 years if your Trustee lodges an objection due to non-compliance.
The effects of insolvency continue even after your bankruptcy officially ends:
- Credit file: The listing remains on your consumer credit file for five (5) years from the date you became bankrupt or two (2) years from the date your bankruptcy ends, whichever is later.
- NPII: Your name is listed permanently on the National Personal Insolvency Index (NPII). This is a public, searchable government register accessible to lenders, landlords, and employers.
What Happens to your Assets? (Divisible vs Non-Divisible)
Upon becoming bankrupt, a trustee (either AFSA’s Official Trustee or a Registered Trustee) is appointed to administer the bankrupt estate. The Bankruptcy Act 1966 strictly categorises assets into two (2) distinct groups:
- Divisible Assets: These are assets that legally transfer to the Trustee to be sold for the benefit of creditors.
- Real Estate: Your interest in any real property transfers to the trustee. If you own a house or an investment property, even if it is jointly owned with a spouse, the trustee can sell your share to realise the available equity.
- Cash and Savings: Funds held in bank accounts at the date of bankruptcy are transferred to the Trustee subject to a small allowance to cover immediate living expenses.
- Investments: Shares, stocks and managed funds are fully divisible.
- Cryptocurrency: Digital assets such as Bitcoin are treated as property and will be sold by the Trustee.
- Lottery wins and other windfall gains: Any inheritance, lottery winning or significant tax refund received during bankruptcy period is generally claimed by the trustee.
- Non-Divisible Assets: These are protected assets that a bankrupt is allowed to keep.
- Superannuation: Funds held in a regulated superannuation fund are typically protected provided they were not contributed solely to defeat creditors.
- Vehicles: A primary means of transport (car or motorbike) is protected up to an indexed amount (Currently $9,600).
- Tools of Trade: Tools and equipment required for your employment are protected up to an indexed limit (Currently $4,450).
- Household Goods: Property for everyday household use is protected.
- Compensation Payments: Payments resulting from personal injury or wrongful death are protected.
- Life Insurance Policies: Amounts paid under the life insurance policies do not vest in the Trustee.
How Bankruptcy Affects Income, Employment and Professional Roles
- Income Contribution:
Bankruptcy does not prohibit working, but the Bankruptcy Act 1966 requires income contributions if an individual’s earnings exceed a statutory threshold. This is called the Actual Income Threshold Amount (AITA). If you earn below the threshold, you can keep all your income. If you earn above the threshold, you must pay 50% of the excess to your trustee. This threshold is indexed and varies based on the number of dependants. Currently, the threshold for a person with no dependants is $75,475.40 (after tax) per year.
- Company Director:
An undischarged bankrupt is disqualified from acting as a director of a company or being involved in its management unless they obtain court permission.
- Professions:
Certain professional or licensed trades (including accountants, tax agents, builders, etc.) may require the debtor to notify their governing body of their bankruptcy status, which can impact their ability to hold specific licenses.
What is covered and not covered in Bankruptcy?
Bankruptcy releases you from all provable debts, however, specific classes of debt are excluded from the process.
- Debts Covered in Bankruptcy
Once your bankruptcy ends, you are released from the obligation to pay most unsecured debts, including:
- Credit cards;
- unsecured personal loans;
- legal fees;
- utilities;
- trade debts; and
- employee wages.
- Debts not covered in bankruptcy
The bankrupt remains fully liable for these debts, which include:
- HECS & HELP debts (government student loans);
- The court imposed fines and penalties (e.g. speeding tickets);
- Child support and maintenance;
- Debts incurred after the bankruptcy begins; and
- Unliquidated Debts.
Travel and Credit Restrictions During Bankruptcy
- Overseas Travel Permission
The law requires you to obtain written permission from your trustee to travel overseas. Travelling without this consent constitutes a criminal offence. To obtain this, the bankrupt typically must submit a formal travel request form and provide evidence of a return ticket to the trustee.
- Credit Limit Disclosure
You must disclose your bankruptcy status to any provider if you seek to borrow money or buy goods on credit exceeding the indexed limit (Currently $7,310).
At HM Advisory Pty Ltd, we recognise that navigating personal insolvency can be a highly stressful. Whether you are dealing with financial stress yourself or supporting someone who is, our personal insolvency team are available to provide guidance.