Bankruptcy is a way to declare personal incapacity to repay or write-off your debts. It creates a permanent record for 3 years and one day from date of filing, and can have severe and long lasting impacts on a debtor’s future.
By filing for bankruptcy an individual can clear most unsecured debts, including credit cards, personal loans, utility, internet and phone bills, as well as bank account overdraft and rental arrears. Any legal and accounting fees incurred as part of the process are typically added to debts and written off.
Bankruptcy will not clear: student loans, fines, tax debt and any other government debts.
Types of bankruptcy in Australia
There are two ways to become bankrupt in Australia. The first is voluntary bankruptcy; where an individual declares themselves bankrupt and insolvent (unable to repay debts and outstanding bills).
To do this the debtor must apply for and be approved to file for bankruptcy, which usually involves providing evidence to the AFSA of their insolvency, and then (if approved) enlisting a trustee to assess and manage debts.
There are no fees involved with voluntary bankruptcy, and any administrative or legal costs incurred are subsidised.
The second form of bankruptcy is involuntary bankruptcy, which occurs when a creditor files a sequestration order against the debtor, to declare them insolvent. This method is more commonly dealt with for business insolvencies, rather than against individuals, as it can be costly and time consuming.
Creditors can make a debtor bankrupt if the amount owing exceeds 10,000 or if a combination of creditors join together and combined debts amount to 10,000.
It is possible for bankruptcy to be threatened to non-business debtors, but it is rarely carried out.
A creditor must take the following steps to declare a debtor bankrupt: ● Obtain court or judgement order ● Deliver a personal bankruptcy notice to the debtor asking for payment within 21 days ● Debtors who cannot pay within 21 days then commit an ‘act of bankruptcy’, which then entities the creditor to submit a petition to make the debtor bankrupt ● A creditor then must pay the filing fees and issue the appropriate documentation showing that the preceding steps have been followed. Fees are then added to the debts owed by the debtor
If the debtor can prove that they are able to pay what they owe they can avoid bankruptcy.