The process of going bankrupt
Debtor’s petition: Voluntary bankruptcy
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A debtor who wants to go bankrupt must complete:
a debtor’s petition for bankruptcy;
a statement of affairs; and
an acknowledgment that the debtor has read the ‘prescribed information’.
Debtors can obtain a Debtor’s Petition form containing these three documents from the AFSA office or website (www.afsa.gov.au).
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After completing the documents, the debtor needs to send them to AFSA. There is no minimum amount that has to be owed before a debtor files a petition for bankruptcy.
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When the Official Receiver (AFSA) accepts the debtor’s petition, and allocates a bankruptcy number, the debtor becomes bankrupt. The bankruptcy is deemed to take effect from midnight of the night before the debtor’s petition is accepted (Bankruptcy Act s 57A) – this extends the bankruptcy by one day. The Official Receiver (AFSA) generally accepts the petition on the day it is received or the day after. AFSA usually processes a debtor’s petition within 24–48 hours.
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Once the debtor is bankrupt, the trustee might ask the debtor to come in for an interview. However, consumer bankrupts with no assets are not usually required to attend a trustee’s office for an interview. The trustee might also sometimes ask for copies of contracts and documents relating to the debts and might require the bankrupt to hand over their passport. Again, this is unlikely to happen to a consumer bankrupt with no assets.
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The Bankruptcy Act provides for temporary debt protection under the name of a ‘declaration of intention to present debtor’s petition’ in Part IV division 2A. The Act provides a ‘stay period’ of 21 days so that debtors and their creditors can negotiate a payment agreement. (This was extended to six months during the COVID-19 pandemic.)
In the stay period, unsecured creditors cannot take enforcement action to recover money owing, cannot garnish the wages of the debtor with a garnishee order and cannot have the sheriff or bailiff seize a debtor’s goods. In this time, the debtor can seek advice from a financial counsellor, negotiate a payment plan with creditors and consider any of the formal insolvency options available.
The presentation of a declaration of intention to present a debtor’s petition is an ‘act of bankruptcy’ upon which a creditor can petition for bankruptcy if no agreement is reached (Bankruptcy Act s 40(1)(da)).
The 21-day stay will not stop:
a secured creditor repossessing secured property;
a creditor’s petition being filed; or
a sequestration order by a court, which makes a person bankrupt.
In many cases, the presentation of a declaration of intention to present a debtor’s petition may harm a debtor’s position. Therefore, it is recommended that advice be obtained before presenting such a declaration and careful thought be given to the debtor’s other options.
Creditor’s petition: Involuntary bankruptcy
If a debtor owes $10 000 or more to a creditor (the bankruptcy threshold or ‘statutory minimum’ defined in section 5 of the Bankruptcy Act; prescribed in regulation 10A of the Bankruptcy Regulations), the creditor can enforce the debt by taking bankruptcy proceedings against the debtor (Bankruptcy Act s 44). To do this, the creditor must file a creditor’s petition in either the Federal Court or the FCFCOA.
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At the hearing of the creditor’s petition, the creditor must establish that the debtor committed an ‘act of bankruptcy’ within the six months before the petition was filed in court. An act of bankruptcy is an action of a debtor that shows an inability to pay their creditors. Section 40 of the Bankruptcy Act lists over 30 actions that are considered to be acts of bankruptcy. Failure to comply with a bankruptcy notice (s 40(1)(g)) is the main act of bankruptcy used by creditors.
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A creditor who has obtained a court order against a debtor can apply to the Official Receiver (AFSA) for a bankruptcy notice. Part 4 division 1 of the Bankruptcy Regulations prescribes the form of the bankruptcy notice. Before a bankruptcy notice can be applied for, the final order(s) must be for at least $10 000 and be less than six years old (Bankruptcy Act s 41(3)(c)(i)). The bankruptcy notice is attached to a copy of the court order and demands payment of the debt within 21 days of service.
If the debtor does not pay within the time period, they will have committed an act of bankruptcy and the creditor will then be able to file a creditor’s petition.
Extending time for compliance
If a bankruptcy notice has been served on a debtor, the debtor can apply to the Federal Court or the FCFCOA to extend the time for compliance with the notice.
This can occur if the time for compliance has not expired and either:
proceedings to have the judgment or order set aside have been instituted bona fide (with an honest intention); or
an application to set aside the bankruptcy notice has been filed with the Federal Court or FCFCOA (s 41(6A)).
The court will not extend time if thinks that the proceedings to set aside the judgment or order:
have not been instituted bona fide (with an honest intention); or
are not being prosecuted with due diligence.
After the bankruptcy notice has expired
If the debtor fails to comply with the requirements of the bankruptcy notice, an act of bankruptcy has been committed and the creditor can then use this as grounds petition the court for the bankruptcy of the debtor. The creditor can then file a creditor’s petition and serve it on the debtor.
The petition will contain the date of the bankruptcy hearing. At the hearing of the petition, the Federal Court or FCFCOA may make a ‘sequestration order’ (an order giving the trustee control of the debtor’s property) and make the debtor bankrupt (s 43).
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A person who intends to oppose a creditor’s petition must file and serve a notice of appearance, a notice stating the grounds of opposition, and an affidavit in support of the grounds of opposition at least three days before the hearing date, or at the hearing with leave of the court (Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) r 2.06). Therefore, it is important to get advice quickly if you have been served with a creditor’s petition.
A debtor can sometimes avoid becoming bankrupt by arriving at court on the morning of the hearing for the sequestration order with the money in hand. In such circumstances, the debtor is usually required to prove to the court that they are solvent, for the petition to be withdrawn.
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Once the sequestration order is made, the debtor must file a statement of affairs with the Official Receiver (AFSA). This must be done in the prescribed form within 14 days of being notified of the bankruptcy and verified by affidavit. A copy must be given to the trustee (Bankruptcy Act s 54).
Examinations of the bankrupt and others
There are three ways a bankrupt can be examined under the Bankruptcy Act:
The court can summons the bankrupt, or an ‘examinable person’, to be examined in public in relation to the bankruptcy before or after the end of the bankruptcy (s 81).
A bankrupt or any other person can be required by written notice to ‘give evidence’ to the Official Receiver (AFSA) (s 77C).
The trustee can require a bankrupt to attend a meeting of creditors (s 77(1)(c)).
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Section 77 of the Bankruptcy Act concerns ‘duties of the bankrupt as to discovery, etc. of property’. Questions should not be put merely for the purpose of showing that the person has committed offences against the Bankruptcy Act.
It is unlikely that a consumer debtor who has not transferred property within the five years before the commencement of bankruptcy would be examined.
If the trustee detects evidence that the bankrupt might have committed an offence under the Bankruptcy Act, the trustee might refer the matter to AFSA which may refer the matter to the Director of Public Prosecutions, which will then decide whether to proceed with the prosecution.
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The registrar or the court might summons the bankrupt or a person associated with the bankrupt for a public examination (s 81). There might, for example, be a suspicion that assets have been hidden or that an offence has been committed. Either a creditor, the trustee or the Official Receiver (AFSA) might apply to the court to summons the bankrupt for an examination.
At the public examination in court, the trustee, lawyer or representative questions the bankrupt. Creditors are allowed to ask the bankrupt questions if the registrar is satisfied the questions are relevant.
The examination might be held to obtain further details of the bankrupt’s assets, or of the bankrupt’s past and present affairs, or to ascertain whether the bankrupt has committed an offence.
The process of going bankrupt
Chapter: 5.3: Understanding bankruptcy
Contributor: Paul Latimer, Adjunct Professor, Swinburne Law School; Volunteer lawyer, Fitzroy Legal Service
Current as of: 1 September 2024
Law Handbook Page: 331
Next Section: When does bankruptcy end?
