Who can be made bankrupt? Who should consider bankruptcy?
Who Can Be Made Bankrupt?
Only natural persons can be made bankrupt. Where there is a partnership or persons trading under a business name, it is not the firm which is made bankrupt, but the individual or individuals who make up that firm. Companies cannot become bankrupt under the Act (section 7 of the Bankruptcy Act 1966 (Cth)) although there are similar provisions (called administration and winding up) for them under the Corporations Act 2001 (Cth) (ss435C and 440A).
A person under the age of 18 (a minor) can only be made bankrupt if there is an enforceable debt which has not been paid, although minors can enter bankruptcy voluntarily. In most cases, only contracts for necessary goods or services are enforceable against persons under 18. The legal definition of necessaries is complex although it appears in practice that the trustee decides whether goods or services are necessary. A trustee might consider food, clothing and accommodation to be necessaries but other items, such as cars, or even trade debts, may not be.
People who are not insolvent (that is, who do have sufficient money or property to enable them to pay their debts) can be made bankrupt if they do not take action when a bankruptcy notice or petition is issued against them. It may be that after bankruptcy, the bankrupt can arrange to pay all of the debts or obtain annulment. Even so, there are still disadvantages from having been made bankrupt. The trustee in bankruptcy charges for administering the bankruptcy and some fees would have to be paid to the Registrar.
Who Should Consider Bankruptcy?
While a person may be the subject of a creditor’s action to bring about bankruptcy, others may choose bankruptcy themselves. Remembering the advantages and disadvantages of bankruptcy, and giving careful thought to advice taken before a person chooses to become bankrupt, for some people bankruptcy may be the most desirable course of action. Such people may include:
- single parents who do not own a house, whose household goods are on credit (but not on hire purchase or under a bill of sale), who are receiving a pension or benefit, who are unlikely to be earning other substantial income in the near future, and who are being harassed by creditors;
- deserted wives or widows who have debts of their own, and who are otherwise in the same position as the single parents just described. However, many debts for household goods may be the responsibility of the husband;
- persons on pensions who own houses or goods bought with money awarded as compensation for personal injury; or
- wage earners on low wages, especially if they have a large family, pressing debt problems and heavy, additional expenses, such as, a sick or handicapped child.
If the debtor would not benefit from bankruptcy, it may be possible to come to an arrangement with the creditors to pay all or part of the debts by installments over a particular period of time. However, the debtor should be warned that such agreements do not prevent a creditor from taking bankruptcy action against the debtor. Should the debtor subsequently become bankrupt, any money paid to creditors may be recovered later by the trustee because such payments gave a ‘preference’ to some creditors over others (s122, Bankruptcy Act 1966 (Cth)).
Page last updated 15/12/2017