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Types of bankruptcy

Voluntary (debtor's petition)

Anyone who owes a debt of any amount to another person can enter bankruptcy voluntarily by filing a debtor's petition with the Official Receiver at Australian Financial Security Authority (formerly ITSA). AFSA provides a 'one stop service' where forms can be completed, lodged and general information provided on bankruptcy and the alternatives. When the petition is accepted, the debtor is automatically declared bankrupt. In certain circumstances, for example where a debtor has acted dishonestly, court proceedings may follow, see public examination.

AFSA has the discretion to reject a debtor's petition if it appears that the debtor is solvent (able to pay debts as and when they fall due) or the amount owed is relatively small.

Blank Debtor's Petitions and Statements of Affairs are available from Australian Financial Security Authority (formerly ITSA).

No fees are payable to lodge a Debtor's Petition.

Involuntary (creditor's petition)

A creditor may make a debtor bankrupt only if the amount owed to that creditor exceeds $5000 following a Court judgment ((see debt). A combination of creditors to whom debts totalling $5000 or more are owed may join together to make the debtor bankrupt.

Although a creditor may threaten to make a debtor bankrupt, the threat is not often carried out against non-business debtors, as it is an expensive process. Most non-business debtors who become bankrupt do so voluntarily.

To make a debtor bankrupt, a creditor must first obtain a judgment(s) or order(s) for the debt from a court (see debt). The creditor then must apply to the Official Receiver to issue a Bankruptcy Notice requiring the debtor to pay the debt within a set time (usually twenty-one days unless in accordance with s 40(1)(g)(ii) [Bankruptcy Act 1966 (Cth)]. The Bankruptcy Notice must be served personally on the debtor.

A debtor who is not able to pay the debt within that time commits an 'act of bankruptcy' [Bankruptcy Act 1966 s 40], which gives the creditor the right to apply to the Federal Court or the Federal Circuit Court for an order making the person bankrupt. The application is called a creditor's petition.

To lodge a creditor's petition, the creditor needs to pay a filing fee (see Federal Circuit Court website for the list of fees), as well as file documents proving that the documents have been served, that the debt remains unpaid, and that the person is not otherwise bankrupt. Any costs associated with making a person bankrupt are added on to the debt owing by the bankrupt. The creditor's petition must be served personally, although it is possible to obtain an order for substituted service.

If the debtor can satisfy the court that he is solvent and, given a reasonable time (say one to two months), all debts can be paid, the hearing will be adjourned; if not, the debtor may be made bankrupt.

The court order declaring a debtor bankrupt is called a sequestration order, and once it is made, all property owned by the bankrupt comes under the control of the trustee.

Following bankruptcy (whether as a result of a debtor or creditor's petition), any creditor owed money by the bankrupt for debts incurred before the commencement of bankruptcy are barred from taking further action against the bankrupt[s 58(3)]. In other words, all enforcement or Court action stops.

Instead a creditor has the right to lodge a proof of debt with the trustee and may then receive a share of the bankrupt's property. To lodge a proof of debt the debt must be provable to the satisfaction of the trustee. Debts incurred after bankruptcy can be sued for in the normal manner.

If a debtor dies leaving insufficient assets to pay his or her debts, a creditor who is owed $5000 or more may apply for an order of administration [Bankruptcy Act 1966 s 244]. This requires the trustee to distribute the deceased's assets to pay part, or all, of the debt in accordance with the Act. The person administering the estate of a deceased person may also seek an Administration Order of the estate in bankruptcy.

Types of bankruptcy  :  Last Revised: Tue Jun 24th 2014
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.