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How does the bankruptcy process work in Australia?

If you’re reading this page, chances are you’re experiencing extreme financial stress. In this article we hope to answer some questions you might have, like “What is involved in declaring bankruptcy?”, “How does the bankruptcy process work?” and “What are the consequences of bankruptcy in Australia?”.

What brings you here? You very likely have debt collectors chasing you and strained personal relationships. Your work and health may be suffering. At a time when you need support and help more than ever, you may feel alone and isolated.

Before we get into explaining ‘how does the bankruptcy process work’, please be assured that there’s no financial problem that can’t be fixed; no financial stress that can’t be relieved.

Please keep in mind, however, that there are no one-size-fits-all solutions when it comes to money, which is why this information is provided for general purposes only. If you would like to speak with a debt specialist about a tailored money solution, please contact us to arrange a free, no obligation discussion.

How does the bankruptcy process work in Australia?

What is bankruptcy?

Bankruptcy is a legal process that releases you from your debts in the event that you cannot pay your creditors. Creditors are the people or companies that you owe money. When you enter into bankruptcy voluntarily, it is called a debtor’s petition. The debtor (you) is the person who owes other people money. Alternatively, your creditors can apply to the court to force you into bankruptcy, in which case the process is called a creditor’s petition.

Seven facts you need to know about bankruptcy 

There are some myths around bankruptcy, so here’s 7 facts you should know:

Fact 1: In exchange for giving up your assets and control of your finances, you receive protection from legal action by your creditors.

Fact 2: During bankruptcy, your creditors (for debts included in the bankruptcy) must stop chasing you.

Fact 3: Most debts may be included in bankruptcy, but some are not.

Fact 4: The bankruptcy period is usually three years and one day, but it appears on your credit file for up to five years or longer.

Fact 5: At the end of the bankruptcy period, you are released from your included debts.

Fact 6: Bankruptcy is an opportunity to reduce financial stress and start afresh, but it comes with serious consequences that should not be taken lightly.

Fact 7: Bankruptcy is not a magic bullet. The key to your financial recovery is getting financially fit and saying goodbye to your money worries forever.​

To find out more about personal budgeting or bankruptcy administration, get in touch to book a FREE, no-obligation appointment with a debt strategy specialist.

How does the bankruptcy process work?

When a bankruptcy petition is accepted, a trustee is appointed by the Australian Financial Services Authority (AFSA) to oversee the process. AFSA is the government agency that regulates and administers bankruptcy in Australia. While you are in bankruptcy, the trustee will manage your financial affairs.

This may include:

  • Investigating your financial situation and trying to recover assets that you may have sold or transferred prior to bankruptcy
  • Selling your assets, such as property or vehicles you own
  • Communicating with your creditors and assessing their claims
  • Claiming part of your income to repay your creditors

The duration of bankruptcy is usually three years and one day, however the consequences of bankruptcy in Australia last longer. When you are discharged from bankruptcy, you are released from your debts.

Bankruptcy will appear on your credit file for up to five years or longer and is permanently recorded on the National Personal Insolvency Index, a public record of people who have been bankrupt or entered into a formal debt agreement.

What sorts of debts can be included in bankruptcy?

Most debts are included in bankruptcy. These include unsecured debts, such as utility bills, outstanding rent, medical and legal bills, credit cards, store charge cards, personal lines of credit, unsecured personal loans and payday loans.

Some debts are not included: outstanding child support payments, government education debts and debts incurred by fraud or your wrongdoing. In addition, there is a grey area relating to outstanding debts with Centrelink, the Australian Tax Office and some tolls or fines.

In the case of secured loans — such as loans for real estate property, vehicles or hire purchases — the lender has a right to repossess the asset to recover monies owed to them. If there is a shortfall between the value of the monies recovered and the outstanding loan balance, the shortfall may be included in the bankruptcy.

When it comes to joint debts, a person petitioning for bankruptcy may include their share, in which case the joint lender will become solely responsible for the debt. Likewise, guarantors assume responsibility for any debts included in a bankruptcy.

What is involved in declaring bankruptcy?

What assets can you keep during bankruptcy?

During the period of your bankruptcy, the trustee will take control over any share of ownership you have in assets, such as real estate, vehicles and other investments. They will decide which assets you can keep and which must be sold to help repay your creditors. They may also investigate assets that you owned before petitioning for bankruptcy and potentially attempt to recover them. For instance, the trustee may find that you have an interest in a property, even though you are not listed on the title, and may take legal action to possess your share. You will be allowed to keep your everyday household belongings, vehicles (up to a certain value), tools of trade (up to a certain value), as well as some other asset and income types.

Can you work during bankruptcy?

In most cases, your ability to work and earn income would not be affected by bankruptcy, and the trustee would not inform your employer about your bankruptcy. Should your earnings exceed a set amount the trustee will claim part of your income to help repay your creditors. For this reason, you are required to keep the trustee updated about any changes to your employment and how much you earn.

Some professional associations or licensing bodies restrict bankrupts from working in certain jobs. Some of the commonly restricted professions include accountants, tax agents, finance brokers, trustees, solicitors, real estate agents, gaming room attendants, builders, plumbers, electricians, gas fitters, elected politicians and councilors. If you work in a role that may be affected, we recommend that you speak with your licensing body or employer to find out if restrictions apply.

You are not allowed to be a company manager or director during bankruptcy, but in most cases you may continue to operate a business. Sole traders are required to tell their customers that they are bankrupt unless their business name specifically includes their full legal name (eg. John Smith Landscape Supplies).

What are the consequences of bankruptcy in Australia?

The idea of being released from your debts and starting afresh can be attractive, but the reality of bankruptcy is never so simple. While bringing relief from harassing communications from creditors and easing your cash flow, bankruptcy may not resolve all of your issues. In fact, for some people, the consequences of bankruptcy in Australia can add more stress to an already stressful situation.

So how does the bankruptcy process work and what are the consequences?

The trustee will take control of your assets

Rather than being able to sell your assets and distribute the funds yourself, the trustee will take control of your property, vehicles and potential other assets, sell them and distribute the funds to your creditors, as they deem appropriate. In some circumstances, they may investigate and claim your share of ownership in assets that are not formally listed in your name.


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Your work and income may be affected

You may be excluded from working in certain professions or from running a business. You may be obliged to let your customers, professional association or licensing body know that you are bankrupt. The trustee may also seize part of your income.

Your ability to travel overseas will be affected

Bankrupts are not able to travel overseas without written permission from the trustee. In some instances, you may be asked to surrender your passport.

Your name will appear on the National Personal Insolvency Index

Your name and details will be permanently listed on the National Personal Insolvency Index, a searchable public register. Credit reporting agencies will keep a record of your bankruptcy for up to five years, sometimes longer.

Your ability to buy things on credit will be affected

While bankruptcy appears on your credit file, your access to credit will be limited. You may find that landlords require a higher rental bond and that utility and telephone companies will not extend credit to you without a bond deposit. You may be excluded from holding certain bank accounts and find it difficult to get affordable credit in the future.

The way back to financial health after bankruptcy can be difficult

The consequences of bankruptcy in Australia means that it impacts your career, relationships and, of course, future financial prospects. Some people don’t make the changes they need to and end up going bankrupt again. We can help you avoid this.

How does the bankruptcy process work? A man and a woman look over a white tablet and a black smartphone.

What are the alternatives to bankruptcy?

You may feel like bankruptcy is your only option, but that’s rarely the case. The only way to really know is to explore your situation from a variety of angles and model different scenarios using a detailed, long-range budget plan. Budgeting gives you the power to look at alternatives and analyse how they affect your short and long-term outlook.

Concerned about the consequences of bankruptcy in Australia? Possible alternatives to bankruptcy include:

Informal debt agreement

Before going down the path of bankruptcy, first speak to your creditors about informal payment arrangements that you can afford. Most creditors want to help, especially if you demonstrate that you’re earnest about meeting your obligations. You may be able to arrange a break from payments for a period of time, a payment plan or hardship arrangements.

Formal debt agreement

As well as bankruptcy, the Bankruptcy Act includes provision for formal debt agreements that allow you to propose a reduced settlement amount to your creditors that you can pay off over time (see section below).

Declaration of Intention to Present a Debtor’s Petition (DOI)

While you explore your options, you have the option of lodging a ‘Declaration of Intention to Present a Debtor’s Petition’ (DOI). A DOI won’t stop creditors from repossessing goods for secured debts, but it will provide a 21-day protection period where creditors of unsecured debts cannot take further action against you.

Affordably pay your way out of debt

By developing a detailed plan, you may be able to pay your way out of debt using your existing income and without needing new loans or damaging your credit rating.

In most cases, MyBudget can help people avoid bankruptcy

By working with us, you can develop a strategy to rebuild your credit rating, rather than compromise it for many years to come. We may be able to help you avoid bankruptcy and help you back on the road to financial freedom.

What’s the difference between bankruptcy and a formal debt agreement?

This is very important when trying to understand ‘how does the bankruptcy process work?’. Personal insolvency agreements (PIAs) and formal debt agreements, also known as Part IX debt agreements — so-called because they are Part IX of the Bankruptcy Act — are an alternative to bankruptcy. Like bankruptcies, formal debt agreements are administered by AFSA.

Whereas bankruptcy releases you from your debts, a Part IX debt agreement is an opportunity to negotiate a reduced sum payable to your creditors in instalments over a set amount of time. Should your creditors accept your proposal, your debts will no longer attract interest and your payments will be consolidated into a single, easier to manage repayment for a fixed period of time, usually up to five years.

It is important to recognise that entering into a debt agreement is considered an act of bankruptcy and that the consequences are not dissimilar. Applicants also face the possibility of being forced into bankruptcy by their creditors against their will.

Getting creditors off your back

Another option to get some breathing space from creditors is to provide authority for another party to speak to your creditors on your behalf, a service that MyBudget offers to clients. This may not stop creditors from contacting you, but it allows you to redirect them to us. As well as providing relief from the stress of dealing with creditors and collections agencies, it gives you time and space to consider your options more clearly. Please feel welcome to speak with us about this.

What if bankruptcy is the right option?

After learning ‘how does the bankruptcy process work’, should you decide that bankruptcy is the right option, having a workable budget in place is more important than ever. You will no longer be able to use your credit card to make ends meet and, without savings in the bank, you will have to be careful that your income stretches from payday to payday. Budgeting is also the key to addressing and fixing the issues that got you into financial difficulty in the first place.

While we aim to do everything we can to help you avoid bankruptcy, if it works out to be the best option, MyBudget can explain what is involved in declaring bankruptcy and help administer your bankruptcy petition for you. We’ll handle all the paperwork, liaise with your creditors and AFSA, and make sure that you have a workable budget in place that gets you on the path to lifelong financial fitness.

Further information

To find out more about what is involved in declaring bankruptcy or bankruptcy administration, call us or enquire online today to organise a FREE, no-obligation consultation with a debt strategy specialist.

Filing for bankruptcy in Australia

MyBudget can handle all the paperwork, and liaise with your creditors and AFSA. We’ll make sure that you have a workable budget in place that relieves your stress and gets you on the path to lifelong financial fitness.

Why is budgeting important in bankruptcy?

Without a budget in place, bankruptcy is potentially a short-term measure rather than a solution to your underlying money problems. The key is to address the root causes of your financial stress and to develop new money management habits. As well as providing a money map to your financial goals, budgeting protects you from the vulnerabilities that bankruptcy can bring.

Imagine this common bankruptcy scenario…

You’re wondering, ‘how does the bankruptcy process work?’

You declare bankruptcy with no savings to fall back on, and because your credit cards have been cancelled, only your wage to live on. It’s great that creditors are no longer hounding you and you have extra cash in your pocket, but you still have other financial commitments to meet — paying your rent and car loan, school fees for your children, or loans to pay back to family or friends — as well needing to cover everyday living expenses.

Have you imagined a life without savings or credit? You reach the end of your money before payday and there’s nowhere left to go. The dark side of bankruptcy – and one of the consequences of bankruptcy in Australia that people rarely talk about – is that bankrupts often become reliant on borrowing cash from friends and family or they take out expensive payday loans to make ends meet. And although the bankruptcy may be discharged after three years, the consequences of bankruptcy in Australia can linger much longer — for up to five years or longer on your credit file.

Imagine instead that you have the security of a long-range, detailed budget in place. Your bills are paid on time, you have savings growing in the bank and can see a clear path to your recovery. When your budget changes or unexpected bills come up, you have the support of a caring team of experts to work it out for you. Creditors are no longer chasing you and you’ve forgotten what it’s like to worry about money.

Case Study: Back on track after bankruptcy

This is based on a true story.

Maryanne’s business failed and, in the process, she racked up hundreds of thousands of dollars in personal debt. The stress was overwhelming. As well as owing large debts to multiple creditors, she owed money to her parents and had been involved in a costly lawsuit against her previous business partner.

She spent years juggling bills and loans and credit cards, as well as dealing with angry creditors and tense family relationships. With MyBudget’s help, Maryanne looked at her situation from every possible angle, got expert advice on what is involved in declaring bankruptcy, and decided that bankruptcy was the right option for her.

MyBudget administered Maryanne’s bankruptcy petition and helped to put a budget in place that made sure Maryanne could live comfortably on her wage and pay her parents back over time. Maryanne said that it provided nearly instant relief having a caring support team to handle her creditors and pay her bills for her. By the time Maryanne’s bankruptcy was discharged, her debt to her parents was paid off, she had savings in the bank and was excited about her future.

If you’ve ever thought ‘How does the bankruptcy process work?’ we hope this answered some of your questions

After reading all of this you might be wondering why you’d declare bankruptcy at all? Now you know what is involved in declaring bankruptcy and the consequences of bankruptcy in Australia, you might be more keen to avoid ending up in a situation where you have no option but to declare bankruptcy. If you’re concerned about your financial situation, or want to avoid bankruptcy, we’re happy to help.

Ready to find out more? Call 1300 300 922 to book your free budget consultation or enquire online.

Ready to find out more?

Call 1300 300 922 or get started today

This article has been prepared for information purposes only, and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this article you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.

All customised budgets and consultations with money experts are subject to MyBudget’s qualification criteria. We recommend that you read and consider our Product Disclosure Statement.

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