Restructuring, Turnaround and Insolvency Specialists

Bankruptcy – What Happens?

A debtor may be declared bankrupt by presenting their own petition (known as a Debtor’s Petition) or on the application to the Court by a creditor . In the case of the latter, the creditor’s (or creditors’) costs become the priority payment in the bankrupt’s estate.

If a person becomes bankrupt, a trustee is appointed to administer the Bankrupt Estate in accordance with the provision set out in the Bankruptcy Act 1966. A Registered Trustee can be appointed to administer the estate. Alternatively if a Consent to Act as Trustee has not been filed by a Registered Trustee, then the government trustee (AFSA) will be appointed.

Debtor’s Petition

A debtor may be declared bankrupt by voluntarily presenting their own petition.

During the process to declare yourself a bankrupt, you will have to complete and lodge a Debtor’s Petition along with a Statement of Affairs (an SOA) with the Australian Financial Security Authority (AFSA).

If you are an affected person, these forms will have to be completed and lodged within 28 days of you signing them. It usually takes 24 to 48 hours for the forms to be processed. You will be declared bankrupt once AFSA accepts the forms. You will then receive a letter containing your bankruptcy number and an outline of your duties and obligations.

Bankruptcy is a serious issue and cannot be cancelled simply because you change your mind. It is therefore recommended that advice be sought prior to taking steps to proceed into bankruptcy. The Partners of Brooke Bird are Registered Trustees and can assist.

For further details on the required forms, please refer to the Forms for Declaring Bankruptcy on the AFSA website.

Creditor’s Petition

A debtor may be declared bankrupt after a creditor (or creditors) makes an application to Court seeking an order for the debtor’s bankruptcy. Such an order is known as a Sequestration Order.


Bankruptcy means the bankrupt person’s property*will vest with the trustee and be divided among creditors by reason of Sections 58 and 116 of the Bankruptcy Act 1966. There are certain exemptions, principally for:

  • necessary apparel and household property;
  • superannuation;
  • ordinary tools of trade**; and
  • a motor vehicle**provided it is used as a primary transport vehicle.

Further, any property an affected person acquires whilst bankrupt will, according to law, vest in the trustee.

(*Property includes any cash in bank accounts, negotiable securities or jewellery.)
(**Up to a capped legislated amount)

Restrictions as an Undischarged Bankrupt

A person will remain bankrupt until legally discharged. Generally, bankruptcy lasts for three years from the date on which the affected person files their Statement of Affairs (SOA). This may, however, be extended for a further two or five years if the bankrupt person fails to cooperate with the appointed trustee or fails to comply with the requirements of the Bankruptcy Act.

An “undischarged bankrupt” is prohibited from obtaining credit and conducting business under another name without declaring this fact to persons with whom dealings are conducted. Restrictions contained in Section 269, when briefly paraphrased, state that a bankrupt person shall not, without disclosing their undischarged bankrupt status, do the following*:

  • Obtain credit.
  • Obtain goods or services by drawing a cheque (or by other means).
  • Agree to lease or hire goods.
  • Obtain goods or services.
  • Obtain funds in exchange for a promise to supply goods or services.
  • Carry on business alone, or in partnership, under a different name.

(*Up to a capped legislated amount)

There is a penalty of up to three years’ imprisonment for a breach of any of these provisions. Furthermore, under national companies’ legislation (Section 206B of the Corporations Act 2001) an undischarged bankrupt is prohibited, without the leave of a court, from acting as a director or a promoter or being in any way – whether directly or indirectly – concerned in or taking part in corporation management. (The penalty here can be a fine of up to $5000 or 12 months’ imprisonment, or both.)

Procedure on Appointment

The trustee will contact the debtor and make clear the restrictions and responsibilities related to bankruptcy. If the bankruptcy is the result of a creditor’s petition the trustee will also advise the bankrupt person that he or she must file a Statement of Affairs with the Australian Financial Security Authority (AFSA). The usual bankruptcy period lasts for three years from the date on which the SOA is filed.

The trustee will send a notice to the creditor (or creditors) providing details of the bankruptcy, the information disclosed on the SOA, details about proposed investigations and the likelihood of a dividend to be received. This notice must be sent to the creditor (or creditors) within 28 days of the AFSA receiving the SOA, or within 60 days of the bankruptcy if no SOA has been received by that time.

Meeting of Creditors

If the trustee believes it is in the interests of the creditors, a meeting of creditors will be called. Creditors can request such a meeting. At this meeting, creditors are provided with the bankrupt person’s submitted SOA and can ask questions of the trustee and the bankrupt person.

Co-operation and Disclosure

Under Section 77, bankrupt individuals must do the following:

  • Immediately deliver to the trustee all books, documents, papers and writings relating to trade dealings, property and affairs and a current passport (if one exists).
  • Attend, upon a trustee’s reasonable request, to provide information about conduct, trade dealings, property and examinable affairs.
  • Attend a meeting of creditors, if convened, and any subsequent meeting if required.
  • Give information to any meeting of creditors about conduct, trade dealings, property and affairs.
  • Assist in realising property as required by the Bankruptcy Act.
  • Disclose to the trustee any acquired property divisible amongst your creditors.
  • Provide the utmost help during the administration of the estate.

Under Section 78 you could be arrested and jailed if you either:

  • Conceal or, without your trustee’s permission, remove any property.
  • Without good cause neglect or fail to comply with a court order or any obligation under the Bankruptcy Act, including the requirement to prepare and file a Statement of Affairs.

Change of Name or Address or of Employment, Occupation, Business or Profession.

A bankrupt person must inform their trustee (in writing) if they change their name; address; principal place of residence; another address (if any) where documents can be sent; and their business hours telephone number. Any changes in employment, occupation, business or profession must also be forwarded.

Compulsory Income Contributions

Sections 139J to 139ZP of the Bankruptcy Act state that, in certain circumstances, a bankrupt person is required to make contributions from their income to a creditor (or creditors). These contributions are required by law if the income – of any source – exceeds the set threshold amount calculated by the formula prescribed by the Bankruptcy Act 1966. Income includes wages, rental income and motor vehicle or other benefits. If contributions are not paid, they are recoverable as a civil court-approved debt applicable even after a state of bankruptcy has been discharged.


Under Section 265, a bankrupt person can be sentenced to up to 12 months’ jail if he or she fails to do any of the following:

  • Fully and truly disclose to the trustee all property and its value to the best of their knowledge and belief.
  • Fully and truly disclose to the trustee particulars of any disposition of property made within two years prior to the date of bankruptcy, to the best of their knowledge and belief.
  • To comply with the trustee’s direction to deliver up property in their custody or under their control.
  • To disclose to the trustee information about conduct and examinable affairs.
  • To disclose to the trustee the location of any books, documents, papers or writings relating to trade dealings, property or affairs.
  • To comply with the direction of the trustee to provide said books, documents, etc. in their custody or control.
  • Omits any material, particularly from a statement, about trade dealings, property or affairs.
  • To inform the trustee of a known false proof of debt.
  • To give the trustee a full and proper explanation about any loss or depreciation of assets within the period of two years prior to the date of bankruptcy.

Under Section 272, a penalty of up to three years’ jail can be imposed on a bankrupt person who – before discharge and without the trustee’s written consent, or if required by court – leaves Australia or prepares to do so.

Objections to Discharge

As stated earlier, the period of bankruptcy is generally three years. It can be longer, however, if a creditor or trustee lodges an objection to discharge. Certain grounds – such as compulsory contributions not being paid or a bankrupt person conducting themselves inappropriately – may lead to the trustee to apply to have the bankruptcy extended. The trustee must, however, be satisfied this action would benefit the creditor (or the creditors).

Compositions and Schemes of Arrangement

A bankrupt person may seek to make an arrangement similar to a Part X after bankruptcy has been declared. A proposal must be forwarded to the trustee, who will call a meeting of creditors to allow them to consider the proposal. The same conditions apply in relation to the voting rights under a Personal Insolvency Agreement.

If the proposal is accepted the bankruptcy is annulled from the date of the acceptance. The bankrupt person is then no longer bound by bankruptcy constraints.

Further information regarding Bankruptcy can be found HERE.


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