Although bankruptcy can provide bankrupts with relief from the majority of their debts, and essentially allow them to make a fresh start, there are also downsides. This article explores the consequences of declaring bankruptcy for both the bankrupt and their business.
The ramifications of bankruptcy are laid out in the following table:
| No | Consequence | Comments |
| 1 | A trustee-in-bankruptcy (trustee) will be appointed to manage a bankrupt’s affairs | A trustee is the individual, or entity, that manages the bankruptcy process. The trustee will work with the bankrupt, and their creditors, to achieve a fair and reasonable outcome for all. During bankruptcy, the bankrupt has an obligation to fully disclose all relevant information to the trustee, including any changed circumstances. This may involve providing books, bank statements and other financial documents, as required by the trustee. A bankrupt, in applying for voluntary bankruptcy, can nominate a registered trustee of their choice. If the bankrupt chooses not to nominate a trustee, the Australian Financial Security Authority (AFSA), as Official Trustee, is generally appointed. In some circumstances, the Official Trustee, may transfer the administration of a bankrupt’s estate to a registered trustee. Further details on the criteria for determining such transfers of estates, can be found on our Pinpoint platform here. |
| 2 | The length of bankruptcy | Bankruptcy normally lasts for a period of 3 years and one day from the date on which AFSA accepts a bankruptcy application. However, this timeframe can be extended for up to 8 years if a trustee seeks to lodge an objection. This length of time can result in significant inconvenience for a bankrupt. |
| 3 | Bankruptcy does not release a bankrupt from all debts |
Bankruptcy is not a “get out of jail free” card. It will generally release a bankrupt from most unsecured debts. An unsecured debt is a debt which is not tied to specific property, such as the family home. Unsecured debts may include:
But, declaring bankruptcy will not release a bankrupt from the following debts:
This means that the bankrupt is still liable for the payment of these debts. They will need to discuss payment options, or a payment plan, with their creditors |
| 4 | Bankruptcy will impact on a bankrupt’s ability to direct a company | A bankrupt cannot be a director of a company during their bankruptcy, s 206B of the Corporations Act 2001 (Cth). This prohibition also applies if the director is subject to a Personal Insolvency Agreement (PIA). A PIA is an agreement reached between a director and their creditors. It is an alternative to bankruptcy and avoids a director having to declare themselves bankrupt. The prohibition remains in place until after the bankruptcy is discharged or, in the case of a PIA, after all the terms of the PIA have been fully complied with. The only exception to this prohibition is where a director has been granted leave of the court to manage a corporation. |
| 5 | Bankruptcy may affect a bankrupt’s income and employment |
If a bankrupt earns over a set amount, they may need to make certain compulsory payments to their trustee. This amount is currently set at $59,559.50 (after tax), for a bankrupt with no dependants, pursuant to s 139K of the Bankruptcy Act 1966 (Cth). These compulsory payments will impact on the disposable income available to the bankrupt.
|
| 6 | Bankruptcy may affect the ability of a bankrupt to travel overseas | A bankrupt must request permission from their trustee in order to travel overseas. It is an offence for a bankrupt to travel abroad without written consent from their trustee. A trustee, in considering a request, may ask a bankrupt for further details, as to the reasons for, and nature of the travel. |
| 7 | Bankruptcy can affect a bankrupt’s ability to obtain future credit |
A bankrupt must inform a credit provider of their bankruptcy, if they are applying for credit over a set amount. This amount is currently set at $5,934.00, pursuant to s 269 of the Bankruptcy Act.
whichever is the latter. |
| 8 | A bankrupt’s name 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 which will appear on the NPII register, includes:
A bankrupt can request for their personal details to be suppressed on the NPII register only in exceptional circumstances. For example, where there is a threat of violence. |
| 9 | The trustee may sell a bankrupt’s assets |
A bankrupt is permitted to keep:
A trustee can sell a bankrupt’s other assets, including their house, in order to cover, or contribute towards, their debts. A bankrupt must declare all assets, when they apply for bankruptcy, and must not dispose of any property belonging to the trustee. The declaration of property extends to any assets attained by the bankrupt during the period of bankruptcy. |
| 10 | A bankrupt may lose the right to take, or continue, legal proceedings | The bankrupt must inform their trustee if they are involved in any ongoing legal proceedings. If the bankrupt has a pending court case, they must contact the relevant court to determine if they must still attend. |
Other studies
Further studies, by the Queensland University of Technology, have examined the effect of bankruptcy on business activity, in particular the ability for bankrupts to achieve a “fresh start” whilst records of individual bankruptcies are publicly available, with no restrictions on their use. The availability of this information may adversely impact future investment in businesses and the ability of corporations to engage in capital raising, thereby stifling capital and economic growth. These studies raise broader legal policy questions regarding whether, and for how long, public records in relation to bankruptcy, should be made available.
____________
Sources: AFSA, Consequences of bankruptcy, accessed 7 April 2021.
Howell N J, Koessler A-K, Mason R, Dulleck U (2020), Behavioural insights into the impact of bankruptcy’s public record on business activity, Queensland University of Technology Insolvency Law Journal, 28(3), pp. 125–148, accessed 7 April 2021.
CCH Pinpoint ®, AFSA consultation on transferring bankrupt estates to registered trustees, 30 March 2021, accessed 7 April 2021.
© CCH
