What is Bankruptcy?

Bankruptcy was originally designed to stop people who could not pay their debts being put in gaol. It is a method by which some control can be taken over a debtor's affairs, so that the entire financial disaster can be brought to an end and the debtor can make a fresh start.

When a debtor becomes bankrupt , the bankrupt's property and any property acquired during his or her bankruptcy comes under a trustee's control [Bankruptcy Act 1966 (Cth) s 58(1)]. A bankrupt is required to assist the trustee in the administration of his or her financial affairs [s 77]. The money received from the sale of a bankrupt's property is distributed by the trustee to creditors on a pro rata (or percentage of overall debts) basis. With some exceptions, from the date the bankruptcy begins, creditors are prevented from taking any further debt recovery action against the bankrupt or his or her property.

The trustee's role is to realise assets for the benefit of the unsecured creditors of the bankrupt. As a result, if a person has no assets, the trustee has very little to do during the bankruptcy. The benefit to a person declaring bankruptcy voluntarily is that certain debts are no longer recoverable from that person, but any debts incurred after the date of bankruptcy remain.

There are many restrictions on the bankrupt's life. A bankrupt may not be able to practise certain occupations and is unable to obtain credit over an indexed amount without informing the potential creditor of his or her bankruptcy. Further information about the indexed amount may be obtained from the website of the Australian Financial Security Authority (formerly ITSA).

A bankrupt may not be able to travel overseas, while business bankrupts must hand over all relevant books, documents and property as directed by the trustee and must supply any other relevant information that is requested.

Bankruptcy generally continues until discharge (whether the debts have been paid in full or not). Usually discharge occurs automatically after three years unless an objection has been lodged by the trustee [s 149D]. In certain circumstances it can last longer, see ending bankruptcy. After discharge all a bankrupt's remaining debts that were incurred before the bankruptcy are cancelled. For certain exceptions to this rule, see debts.

What is Bankruptcy?  :  Last Revised: Tue Apr 15th 2014
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