The consequences of bankruptcy
LegalFinanceCorporate8/04/2021 12:00:00 AM

Bankruptcy & Insolvency - The Consequences of Bankruptcy

Bankruptcy is one option for dealing with insolvency. Insolvency is the inability for an individual, or company, to pay their debts as and when they fall due. 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:

  • Credit cards
  • Unsecured personal loans
  • Bills – Such as gas, electricity, phone, council rates, insurances, etc
  • Overdrawn bank accounts
  • Unpaid rent
  • Medical, legal and accounting fees

But, declaring bankruptcy will not release a bankrupt from the following debts:

  • Unliquidated debts ie a debt where the bankrupt and the creditor are yet to determine the amount
  • Court imposed penalties and fines
  • Child support and maintenance
  • HECS and HELP debts i. government student loans
  • Debts incurred by the bankrupt after their bankruptcy commences

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.

There may also be some restrictions on a bankrupt’s employment. For example:

  • Certain professional or licensing bodies impose restrictions on bankrupts in some trades or professions
  • There may be certain limitations to operating as a sole trader
  • A bankrupt can’t operate a trust account — For example, as a solicitor or accountant
  • A bankrupt can’t hold certain public positions — For example, as a senator or member of parliament.
 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.

Credit reporting agencies will keep a record of bankruptcy for:

  • 5 years from the date of bankruptcy commencing, or
  • 2 years from when the bankruptcy ends

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:

  • Name, date of birth, residential address, and occupation
  • Any previous names and aliases, if known
  • The type of proceeding, the start date and the AFSA administration number
  • The name and contact details of the trustee or the administrator of the proceedings
  • The current status of the proceedings ie still bankrupt or discharged from bankruptcy, etc.

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:

  • Ordinary household goods,
  • Tools up to a set amount used in earning an income, and
  • Vehicles with a value up to a set amount.

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