Your Complete Guide

to Bankruptcy in Australia

What is it and how bankruptcy could effect you

This information page aims to provide everything you need to know about bankruptcy in Australia.

When you finish reading this information, you will understand:

1. The definition of bankruptcy
2. The consequences of bankruptcy
3. How to file for bankruptcy
4. How bankruptcy is administered
5. Alternatives to bankruptcy
6. The importance of budgeting during bankruptcy
7. They key to becoming free from money worries

What brings you here?

If you’re reading this page, chances are you’re experiencing extreme financial stress. You may feel overwhelmed by debt or so far behind in your bills that you can’t see any other option than going bankrupt. 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 bankruptcy works, 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 Personal Budgeting Specialist about a tailored money solution, please contact us to arrange a free, no obligation discussion.


What is bankruptcy?

Bankruptcy is a legal process where you are declared unable to repay your debts. It can release you from most debts in the event that you cannot afford tore 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

Fact 1: In exchange for giving up certain assets, you receive the protection of the Bankruptcy Act which prohibits creditors taking further action.

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

Fact 3: Most unsecured 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 five years.

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 does come with consequences that vary from person to person depending on their individual situation.


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.


How does the bankruptcy process work?

When a bankruptcy petition is submitted to and accepted by the Australian Financial Security Authority (AFSA), they become your trustee. AFSA is the government agency that regulates and administers bankruptcy within Australia. While you are in bankruptcy, the trustee will work with you to administer your financial affairs.

This may include:

The duration of bankruptcy is usually three years and one day. When you are discharged from bankruptcy, you are released from the debts included in your bankruptcy.

Bankruptcy will appear on your credit file for five years and is permanently recorded on the National Personal Insolvency Index (NPII), a public record of people who have been bankrupt, entered into a formal Debt Agreement or Personal Insolvency 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, penalties, fines and debts incurred by fraud or your wrongdoing.

In the case of secured loans —such as loans for real estate property, vehicles or hire purchases — if you are in arrears, 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 will be included in the bankruptcy.

When it comes to joint debts, a person applying 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 assets can you keep during bankruptcy?

During the period of your bankruptcy, you will be allowed to keep your everyday household belongings, vehicles (up to a certain value) and tools of trade used to earn income (up to a certain value).

Whilst you are bankrupt, the trustee will take control over any share of ownership you have in assets, such as real estate. 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 applying 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 can take action to possess your share.


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 if you are a sole trader. 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?

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, it can add more stress to an already stressful situation.

The consequences of bankruptcy include:

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 (valued over a threshold) and potentially 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.

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. You may be required to pay contributions from your income if you earn over the threshold amount.

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 (NPII), a searchable public register. Credit reporting agencies will keep a record of your bankruptcy for up to five years.

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 is often long and difficult.

It can impact your career, relationships and, of course, future financial prospects. Some people never fully recover and some end up going bankrupt again.


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.

Possible alternatives to bankruptcy include:

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. See our ‘Everything You Need to Know About Budgeting’ guide.
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.


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

Debt Agreements (Part XI) and Personal Insolvency Agreements (PIA's), are both legally binding agreements between you and your creditors and a possible alternative to bankruptcy. Like bankruptcies, formal debt agreements and PIA's 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 combined 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 if the creditors vote against the proposal or the payments are not maintained.


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?

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 how to declare bankruptcy and help you to better understand the application process. We will assist you with all the paperwork, liaise with your creditors and AFSA, and most importantly, make sure that you have a workable budget in place that gets you on the path to lifelong financial fitness.


Filing for bankruptcy in Australia

MyBudget will assist you with all the paperwork, liaise with your creditors and AFSA while you are lodging your bankruptcy, and make sure that you have a workable budget in place that relieves your stress and gets you on the path to lifelong financial fitness once and for all.


Why is budgeting important in bankruptcy?

Without a budget in place, bankruptcy is potentially a Band-Aid measure rather than a solution to your money problems. The key is to address the underlying cause 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 enter into 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 — such as paying your rent and car loans or school fees for your children — 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. Unfortunately, bankrupts often become reliant on borrowing cash from friends and family to make ends meet. And although the bankruptcy may be discharged after three years, the consequences can linger much longer — for up to five years 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 long chasing you and you’ve forgotten what it’s like to worry about money.


Case Study: Back on track after bankruptcy

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 law suit 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 and decided that bankruptcy was the right option for her. MyBudget assisted Maryanne in filling out her Debtors Petition and Statement of Affairs and helped to put a budget in place that made sure Maryanne could live comfortably on her wage. 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, she had savings in the bank and was excited about her future. *Names have been changed.


Further information

To find out more about personal budgeting or bankruptcy administration, call 08 8214 4256 to make a free, no-obligation appointment with a Personal Budgeting Specialists.