Some Basics of Bankruptcy
A person can become bankrupt under the Bankruptcy Act 1966 (Cth) in the three following ways:
- voluntary bankruptcy: the debtor files a debtor’s petition (approximately 80% of bankruptcies);
- forced bankruptcy: the creditor(s) files a creditor’s petition; or
- deceased bankruptcy: either the legal personal representative of the deceased or the creditor can petition for an order that treats the deceased person as a bankrupt.
The Bankruptcy Act is a Commonwealth Act; therefore it applies in all states and territories. The relevant courts are the Federal Court of Australia, General Division, and the Federal Circuit Court. The Family Court of Australia also has jurisdiction under the Bankruptcy Act where the trustee is a party to family law property or spousal maintenance proceedings. Furthermore, both the Federal Court and the Federal Circuit Court are empowered to transfer proceedings to the Family Court under the Bankruptcy Act(ss35 & 35A).
The Basics of Bankruptcy
There are a few basic points that you should know about bankruptcy:
- The two main purposes of bankruptcy are to give the debtor a fresh start by wiping most of their debts; and to fairly distribute the debtor’s assets amongst creditors.
- the minimum amount that a debtor must owe before a creditor can obtain a bankruptcy notice or bankrupt the debtor is $5,000 (effective from 11 August 2010);
Only people can be made bankrupt, not businesses or companies. Where a partnership or persons trading under a business name are insolvent, it is not the business that is bankrupted but the individual or individuals who run that business. The Bankruptcy Act does not cover companies (s7).
A person under the age of 18 years can be made bankrupt (s7(1A)), but not if the debts which are the trigger for the bankruptcy are unenforceable due to the person’s age.
The Australian Financial Security Authority (AFSA) undertakes the roles of Inspector-General in Bankruptcy, Official Receiver and Official Trustee in Bankruptcy. When a person becomes bankrupt all their “divisible property” vests in (ownership rights are moved to) the Official Trustee in Bankruptcy or in the registered trustee if there is a private trustee. The trustee can require a bankrupt to provide all financial documents and any other information relevant to the bankruptcy. The trustee might require the bankrupt to hand over their passport. A trustee in bankruptcy also has the power to:
- investigate the conduct and dealings of the bankrupt and the reason for bankruptcy; and
- seize and sell certain assets and distribute the proceeds. AFSA in its role as the Official Trustee in Bankruptcy is the trustee of about 86% of bankruptcies, the remainder are under the control of private registered trustees.
The Effect of Bankruptcy on Debts: Provable and non-provable debts
The effect of bankruptcy is that the bankrupt is released from almost all ‘provable’ debts. However, a bankrupt is not released from ‘non-provable’ debts. A ‘provable’ debt allows a creditor to lodge a proof of debt and will then be paid a proportion of the money after the bankrupt’s property is sold. Most debts incurred by a bankrupt will be provable. Exceptions do exist however. Provable debts that the bankrupt will still have to pay include those incurred by fraud; those that are under a child support maintenance order and those that relate to a bond or to some other types of criminal law penalty. Non-provable debts are those are not released by bankruptcy. Such debts include those incurred after the date of bankruptcy; court fines and those debts claimed by a creditor for damages which have not been fixed by formal agreement or by the court (these are known as unliquidated damages).