What is bankruptcy?

Bankruptcy is a process where a person (‘debtor’) who cannot afford to pay their debts, gives up their assets and control of their finances, either voluntarily or by court order, in exchange for protection from legal action by their creditors who are pursuing payment.

By way of definition, bankruptcy is a legal status that a person has under the Bankruptcy Act 1966 (Cth) where, once they are declared bankrupt:

1. with some exceptions, creditors are prevented from further pursuing them for payment,
2. certain restrictions are placed on them, and
3. their property (with some exceptions) is made available, through a trustee, for distribution among creditors.

A person can enter into voluntary bankruptcy. It is also possible that someone who is owed money (a creditor) can make a person bankrupt through a court process, known as a sequestration order.

Who can be subject to bankruptcy proceedings?

Any person can be subjected to bankruptcy proceedings. The only exception to commencing bankruptcy proceedings is where a person is already bankrupt and has not been discharged from that bankruptcy.

Purpose of bankruptcy

The two main purposes of bankruptcy are:

1. to give the debtor a fresh start by releasing them from most of their debts, and
2. to fairly distribute the debtor’s assets among creditors.

Obligations under bankruptcy

If made bankrupt, there are obligations that must be upheld. These include that:

1. The debtor must provide details of debts, income and assets to the trustee,
2. The trustee notifies creditors that the debtor is bankrupt which prevents most creditors from contacting the debtor about the debt,
3. The trustee can sell certain assets to help pay the debtor’s debts, and
4. The debtor may need to make compulsory payments if their income exceeds a set amount.

Commencing bankruptcy proceedings

Applications for Bankruptcy Notices are governed by the Bankruptcy Regulations 1996, which requires that an application be lodged in the approved form along with:

• a copy of the sealed or certified judgment order,
• a certificate of the judgment, or
• order or a copy of the entry of the judgment sealed by the court or signed by a court officer.

A final judgment or order for a debt must be obtained in the Magistrates’, County or Supreme Courts against the debtor by the creditor prior to bankruptcy proceedings being commenced.

Once judgment is obtained, the creditor can prepare a Bankruptcy Notice against the debtor. Once a Bankruptcy Notice is filed electronically with the Australian Financial Security Authority, it must be personally served on the debtor. Service must be done within six months of filing.

If a debtor is unable to be served within this timeframe, the Bankruptcy Notice will lapse and need to be refiled. Once the Bankruptcy Notice is served, the debtor has 21 days to comply. The debtor can opt to pay the full amount of the debt or enter into a payment arrangement. If the debtor fails to comply with the requirements within the 21-day period, an act of bankruptcy has occurred.

A bankruptcy case may be heard by the Federal Court or the Federal Circuit Court. Most bankruptcy cases are heard by the Federal Circuit Court. The rules, forms and procedures are the same in each court for bankruptcy cases.

How can Sharrock Pitman Legal help?

If you require advice on whether you should be considering bankruptcy or you have been served with a Bankruptcy Notice, we have legal practitioners who specialise in and can assist in personal insolvency and sequestration legal proceedings. Contact our Commercial Litigation team on 1300 205 506 or by email at litigation@sharrockpitman.com.au.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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