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 the Insolvency and Trustee Service Australia (ITSA), see Contacts. ITSA 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. No fee is payable and there is no need to go before a court. In certain circumstances, for example where a debtor has acted dishonestly, court proceedings may follow,see public examination.

Blank Debtor's Petitions and Statements of Affairs are available from the ITSA or their website at http://www.itsa.gov.au.

Involuntary (creditor's petition)

A creditor may make a debtor bankrupt only if the amount owed to that creditor exceeds $2000. A combination of creditors to whom debts totalling $2000 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 first obtains a judgment(s) or order(s) for the debt from a court (see debt) and then applies 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 ]. 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 Magistrates Court seeking a creditor's petition to declare the debtor bankrupt. The creditor must pay a filing fee of $606 if the creditor is a person or, if a corporation, $1453 when applying in the Federal Court and $288 if the creditor is a person or, if a corporation, $576 when applying through the Federal Magistrates Court.

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, on the making of which all the bankrupt's property comes under the control of the trustee.

Once a debtor becomes bankrupt, the creditors can take no further action against the bankrupt in respect of the bankrupt's debts which were owing at the date of bankruptcy [s 58(3)]. 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 $2000 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.

Who can become bankrupt?

Only people can be made bankrupt (not companies). Companies cannot become bankrupt under the Act; they are wound up (or liquidated) under the Corporations Law (Cth).

Where there is a partnership, all or a majority of the partners in a business file for bankruptcy. If a majority of the partners apply for bankruptcy, any other partners will have to take action to avoid also being declared bankrupt.

A married person who has debts that he or she cannot pay can be made, or can become, bankrupt. Normally this will have no effect upon the person's spouse, provided they are not a guarantor or jointly liable for the debt (in which case the creditor will normally require that he or she pay the total debt).

A child (a person under 18) can only be made bankrupt if there is an enforceable debt (in most cases, only contracts for necessary goods or services are enforceable against children), although children can enter bankruptcy voluntarily. The legal definition of necessary goods and services (called necessaries) is complex (see consumer contracts), although it appears in practice that the trustee decides whether goods or services are necessary and is generally sympathetic to a child in these circumstances. A trustee might consider food, clothing and accommodation to be necessaries, but other items, such as cars or even trade debts, may not be.

People who are not Australian citizens can be made, or become, bankrupt and have their assets in Australia made available to their Australian creditors [Bankruptcy Act 1966 s 43].

Sometimes people who are not insolvent (that is, who have enough money or property to pay their debts) are made bankrupt because they do not take action when a bankruptcy notice or petition is issued against them. Although, after bankruptcy, they might pay the debts and obtain a discharge or annulment (cancellation) of the bankruptcy, the disadvantages of having been made bankrupt continue, including having their name remain on a national register called the National Personal Insolvency Index (NPII) as a permanent record.

People who become bankrupt while already bankrupt are discharged from each bankruptcy (unless an objection is lodged) three years and one day from the date the statement of affairs is filed for that bankruptcy [Bankruptcy Act 1966 s 149].

A person acting on behalf of an intellectually disabled or mentally ill person may place that person's affairs in bankruptcy [s 308(c)]. It is not possible for a creditor to bankrupt an intellectually disabled or mentally ill person, as such a person cannot commit an act of bankruptcy.