What is bankruptcy?

Bankruptcy involves an exchange. You hand over control of your property and finances to a Trustee (the person who takes control over your property) in exchange for protection from legal action by your creditors (the people/companies you owe money to). You do not have to have a minimum amount of debts or property to enter bankruptcy.

Some of your assets (property you own) may be sold to pay your debts. If your annual income is over a certain amount you must make payments to your Trustee, which go towards paying your debts.

Bankruptcy usually lasts 3 years but can be shortened (applies only to persons who became bankrupt before 5 May 2003) or extended. At the end of the bankruptcy your debts (with a few exceptions) will be cleared.

Advantages of bankruptcy

Most debts are cleared when you are discharged from bankruptcy. Examples of debts not cleared by bankruptcy are:

• Court fines
• HECS debts
• Child support payments
• Debts incurred by fraud
• Student Loans

You will need to continue to make these payments while you are bankrupt.

Once you become bankrupt your creditors and their debt collectors must cease collection of the debt(s) from you.

Disadvantages of bankruptcy

Your assets that vest in your Trustee might be taken and sold to pay your debts. The following assets do not vest and so they cannot be taken:

• A car up to the value of about $5650
• Necessary household property and clothes
• Tools of trade up to $2850
• Money or property bought with compensation payments for personal injuries
• Superannuation and life insurance may be protected. Check with your insurer.

Warning: Your home may be taken and sold by the Trustee even after you have been discharged from bankruptcy.

• You cannot borrow more than $3901 without informing the lender that you are an undischarged bankrupt.
• Your bankruptcy will be recorded on your credit record for 7 years from the date you become bankrupt. After you have been discharged from the bankruptcy you can have this fact noted on your credit report. See Fact Sheet: Your Credit Report for more information. The listing may cause you problems with borrowing money.
• Your bankruptcy will be recorded permanently on the National Personal Insolvency Index which is a public record
• You may have to surrender your passport to your Trustee. You will need the permission of the Trustee to travel overseas. (Note: Travelling overseas without the Trustee's permission is an offence under the Bankruptcy Act for which you can be prosecuted.)
• You may not be able to continue working in some professions and you cannot be a company director or manager while you are bankrupt.

Other things you need to know

Whilst currently there is no minimum amount of debt required for a debtor to present their petition for bankruptcy, as from 5 May 2003 the Official Receiver will have the discretion to reject a debtor's petition if the Official Receiver considers that the debtor:

• Would be able to pay the debts within a reasonable time; and/or
• Is unwilling to pay one or all of his/her debts; and/or
• Has been previously bankrupt on a debtor's petition at least 3 times or at least once in the past 5 years.

You can be forced into bankruptcy if you owe a debt over $2000. For a creditor to force you into bankruptcy they must:

• Obtain a court judgment against you stating that you owe the creditor a debt over $2000
• Arrange for a bankruptcy notice to be issued and served on you. If you do not pay the amount listed on the bankruptcy notice within the time specified in the notice (21 days), you can be made bankrupt. If you receive a bankruptcy notice and you do not want to be made bankrupt you must either pay the amount owing, make an agreement to pay the money or get an order from the Court that you can pay the debt by instalments.
• Have a creditor's petition (an application to have you made bankrupt) served on you
• Have the Federal Court or Federal Magistrates Court make a sequestration order against you ie declare you bankrupt

There is an alternative to bankruptcy called a debt agreement. If you want know more about this see Fact Sheet: Debt Agreements .

Applying for bankruptcy

Declaring yourself bankrupt is not difficult.

Step 1: Request a bankruptcy kit from ITSA. ITSA can be contacted on 02 8233 7800. Requesting a bankruptcy kit does not make you bankrupt or force you to become bankrupt. Read the information in the kit. All the forms you need to fill out and lodge to become bankrupt are in the kit with instructions.

Step 2: Complete and lodge the forms. If you are having difficulty completing the forms make an appointment to see a free financial counsellor. Ring 1800 808 488 to find your nearest financial counsellor. Remember: Make sure all of your debts are listed in the Statement of Affairs.

When should I consider bankruptcy?

You will not have sufficient money to live on if you make all the monthly repayments you are required to make to your creditors and you are on social security or on a low income (under $43,000 gross) and you do not have assets that could be sold to repay the debt and you can live with the restriction on access to credit for 7 years (the bankruptcy listing on your credit report. See Fact Sheet: Your Credit Report for more information.)

This is only a guide and it is recommended that you speak to a financial counsellor to discuss the best option for you in your circumstances.