The consequences of bankruptcy – Lexology
A bankruptcy trustee (trustee) will be appointed to manage the affairs of a bankrupt
A trustee is the person or entity who manages the bankruptcy process. The trustee will work with the bankrupt and his creditors to achieve a fair and reasonable result for all. During bankruptcy, the bankrupt has an obligation to fully disclose all relevant information to the trustee, including any change in circumstances. This may involve providing books, bank statements and other financial documents, as required by the trustee.
A bankrupt, by applying for voluntary bankruptcy, can appoint a registered trustee of their choice. If the bankrupt chooses not to appoint an administrator, the Australian Financial Security Authority (AFSA), as the official administrator, is usually appointed. In certain circumstances, the official trustee may transfer the administration of the estate from a bankrupt to a registered trustee. Further details on the criteria for determining these inheritance transfers are available on our Pinpoint platform. here.
The duration of the bankruptcy
Bankruptcy normally lasts 3 years and one day from the date AFSA accepts an application for bankruptcy. However, this period can be extended up to 8 years if a trustee seeks to file an opposition.
This period can cause significant inconvenience for a bankrupt.
Bankruptcy does not release the bankrupt from all his debts
Bankruptcy is not a “free jail” card. It will generally free a bankrupt from most unsecured debt. Unsecured debt is debt that is not tied to a particular asset, such as the family home. Unsecured debt can include:
Unsecured personal loans
Bills – such as gas, electricity, telephone, municipal tariffs, insurance, etc.
Bank overdraft accounts
Medical, legal and accounting costs
But, declaring bankruptcy will not release a bankrupt from the following debts:
Unliquidated debts, that is, a debt of which the bankrupt and the creditor have not yet determined the amount
The court imposed penalties and fines
Alimony and maintenance of children
HECS and HELP debts i. government student loans
Debts incurred by the bankrupt after the start of his bankruptcy
This means that the bankrupt is still responsible for paying these debts. They will need to discuss payment options, or a payment plan, with their creditors.
Bankruptcy will impact a bankrupt’s ability to run a business
A bankrupt cannot be a director of a company during its bankruptcy, art. 206B of the Corporations Act 2001 (Cth).
This prohibition also applies if the administrator is the subject of a personal insolvency agreement (PIA). A PIA is an agreement between an administrator and his creditors. It is an alternative to bankruptcy and saves an administrator from having to file for bankruptcy.
The ban remains in effect until the bankruptcy is discharged or, in the case of a PIA, after all the conditions of the PIA have been fully met.
The only exception to this prohibition is when a director has obtained permission from the court to manage a company.
Bankruptcy can affect a bankrupt’s income and employment
If a bankrupt earns more than a specified amount, he may have to make certain mandatory payments to his trustee. This amount is currently set at $ 59,559.50 (after tax), for a bankrupt without dependents, in accordance with s. 139K of the Bankruptcy Act 1966 (Cth). These mandatory payments will have an impact on the disposable income of the bankrupt.
There may also be certain restrictions on the employment of a bankrupt. For example:
Some professional or licensing bodies impose restrictions on bankrupts in certain trades or professions
There may be certain limits to operating as an individual entrepreneur
A bankrupt cannot manage a trust account – For example, as a lawyer or accountant
A bankrupt cannot hold certain public positions – for example, as a senator or deputy.
Bankruptcy can affect a bankrupt’s ability to travel internationally
A bankrupt must seek the authorization of his trustee to travel abroad. It is an offense for a bankrupt to travel abroad without the written consent of his trustee. A trustee, when considering an application, may ask a bankrupt for additional details as to the reasons and nature of the trip.
Bankruptcy can affect a bankrupt’s ability to obtain future credit
A bankrupt must inform a credit provider of his bankruptcy, if he requests more credit than a specified amount. This amount is currently set at $ 5,934.00, in accordance with s. 269 of the Bankruptcy Act.
Credit bureaus will keep a bankruptcy file for:
5 years from the date of the onset of bankruptcy, or
2 years from the end of the bankruptcy
whichever is the last.
The name of a bankrupt will appear permanently on the National Personal Insolvency Index (NPII)
The NPII is a searchable public register, which lists insolvency proceedings in Australia, including bankruptcy. The personal information of the bankrupt that will appear on the NPII register includes:
Name, date of birth, residential address and occupation
All previous names and aliases, if known
The type of procedure, the start date and the AFSA administration number
The name and contact details of the trustee or administrator of the proceedings
The current state of the proceedings i.e. still bankrupt or discharged from bankruptcy etc.
A bankrupt can only request the deletion of his personal data from the NPII register in exceptional circumstances. For example, when there is a threat of violence.
The trustee can sell the assets of a bankrupt
A bankrupt is allowed to keep:
Ordinary household items,
Tools up to a certain amount used to earn income, and
Vehicles worth up to a certain amount.
A trustee can sell a bankrupt’s other assets, including his house, in order to cover or contribute to his debts. A bankrupt must declare all assets, when applying for bankruptcy, and must not dispose of any property belonging to the trustee. The declaration of ownership extends to all property acquired by the bankrupt during the period of bankruptcy.
A bankrupt may lose the right to initiate or continue legal proceedings
The bankrupt must inform his trustee if he is involved in pending legal proceedings. If the bankrupt has a case pending in court, he should contact the appropriate court to determine if he still needs to appear.