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 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 creditor 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.

Probably the best way to understand bankruptcy is to see it as a swap. In return for protection from further legal action by creditors and for a total release from debts at the end of the bankruptcy period, the debtor agrees to give up to the trustee certain assets and (for a while) a large degree of control over his or her financial affairs. However, for people who do not have any valuable assets and who have a low income, there is no real change in their control over their financial affairs because there is nothing for the trustee to take.

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 of more than $3000 (indexed) without informing the potential creditor of his or her bankruptcy. 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). A bankrupt can apply for early discharge six months after filing their statement of affairs with the Official Receiver [s.149T-ZE] but only where their bankruptcy occurred prior to 5 May 2003. The legislation has since been amended so that an early discharge is no longer available for any bankruptcy entered into as of 5 May 2003. 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.

Who is involved?

The Inspector-General in Bankruptcy has the power to inquire into, and investigate, bankruptcy procedures [Bankruptcy Act 1966 s 12]. The Inspector-General who is also the Chief Executive of the Insolvency and Trustee Service, Australia is responsible for the overall operation of the Insolvency and Trustee Service, Australia and the administration of the Bankruptcy Act. The Insolvency and Trustee Service, Australia offers a 'one stop service ' on bankruptcy matters where forms can be completed, lodged and information obtained on options of bankruptcy and the alternatives.

When people become bankrupt, control of their property is taken over by either a registered trustee or the Official Trustee, who can sell their property, carry on their business, sue for any debts owed to them and generally take over their financial affairs in order to pay creditor.

Registered trustees are accountants in private practice who are registered by the Inspector-General to act as trustees of bankrupt estates. A person wishing to appoint a registered trustee will first have to obtain that trustee's written consent and file it with the Official Receiver at the same time as lodging their petition in bankruptcy. A registered trustee will generally only act if there is sufficient money or assets to ensure payment of his or her fees. A list of registered trustees is available from the ITSA or their website.

The Official Trustee in Bankruptcy is the trustee of bankrupt estates and is part of the Commonwealth Attorney General's portfolio (Insolvency and Trustee Service, Australia). Where a person does not nominate a private trustee the Official Trustee will automatically become that person's trustee. If payments are made by the bankrupt towards his or her debts, the Official Trustee will first take its fees and charges and the balance will be paid to creditors. Upon release from bankruptcy, even where no payments have been made, the bankrupt does not owe any fees. Where a private trustee is appointed, $1305 (indexed) can be recovered from the bankrupt where no realisations have been made [s 161B].

The Official Receiver heads the Insolvency and Trustee Service, Australia in each State acting in the name, and on behalf of, the Official Trustee.

Bankrupts are people who are unable to pay their debts and have either made themselves bankrupt (voluntary bankruptcy) or been made bankrupt upon the petition of a creditor (forced bankruptcy).

Where money is owed for services provided, goods purchased or work done, the person or business owing the money is a debtor. A person, business or government department to whom money is owed is a creditor. A creditor is one who gives, and not one who receives, credit.