Recent statistics released by the Australian Financial Security Authority (AFSA) show that personal insolvencies across Australia are increasing, highlighting growing financial pressure on individuals and households.
Bankruptcy remains the most common form of personal insolvency in Australia, offering relief to individuals who are no longer able to manage their debts. While bankruptcy can provide a financial reset, it also carries strict legal obligations, loss of control over assets, and long-term personal and financial consequences.
Understanding how bankruptcy works, the statutory framework that applies, and its real-world impacts is essential before making this decision.
This article explains how bankruptcy operates in Australia, the key legal requirements, and the practical implications individuals should carefully consider.
How Bankruptcy Is Initiated in Australia
There are two primary ways an individual can become bankrupt in Australia: voluntary bankruptcy and creditor-initiated bankruptcy.
Voluntary Bankruptcy
An individual may choose to declare bankruptcy by lodging a Debtor’s Petition along with a Statement of Affairs with AFSA.
These documents provide a full disclosure of the individual’s financial position, including income, assets, liabilities and other relevant details. Once accepted, the bankruptcy period generally lasts three years and one day from the date the Statement of Affairs is lodged.
Voluntary bankruptcy allows individuals to proactively address unmanageable debt, but it should only be entered into after careful consideration of the consequences.
Creditor-Initiated Bankruptcy
Alternatively, a creditor may apply to the Court for a sequestration order if debts remain unpaid.
Once the Court grants the order, the individual is declared bankrupt and must lodge a Statement of Affairs. If accepted by AFSA, the bankruptcy period runs for three years and one day from the date the form is lodged.
Importantly, if the Statement of Affairs is not submitted, the bankruptcy can continue indefinitely, significantly extending restrictions and obligations.
The Statement of Affairs: A Critical Requirement
The Statement of Affairs is central to both voluntary and court-ordered bankruptcy. It enables the trustee to properly assess and administer the bankrupt estate under the Bankruptcy Act 1966.
The form requires full disclosure of:
- Income and employment details
- Assets and liabilities
- Business, company or trust involvement
- Legal proceedings and other financial information
Failure to disclose information accurately can result in extended bankruptcy periods and additional penalties.
How Debts Are Treated in Bankruptcy
Debts Typically Released
Most unsecured debts are released upon bankruptcy, including:
- Credit card debt
- Personal loans
- Unpaid rent
- Utility bills
- Professional fees
Debts That Remain Payable
Certain debts are not extinguished by bankruptcy, including:
- Court fines and penalties
- Child support and maintenance
- HECS-HELP and other government loans
- Debts incurred after bankruptcy begins
Secured Debts and Bankruptcy
Secured creditors, such as mortgage lenders or car finance providers, retain their rights over secured assets.
If repayments are not maintained, the secured creditor may repossess the asset. Any shortfall after sale becomes an unsecured debt in the bankrupt estate.
Joint and Overseas Debts
- For joint debts, the non-bankrupt party becomes responsible for the full amount unless they also enter bankruptcy.
- Overseas debts form part of the Australian bankruptcy; however, creditors may still pursue repayment if the individual returns to the originating country.
Income Contributions During Bankruptcy
Under section 139W of the Bankruptcy Act, bankrupt individuals may be required to make income contributions if their after-tax income exceeds the Base Income Threshold Amount (BITA).
The current BITA is $74,064.90, adjusted for dependants and indexed twice yearly on 20 March and 20 September.
Trustees reassess income annually, and any changes to employment or financial circumstances must be reported.
What Happens to Assets in Bankruptcy
Upon bankruptcy, most assets vest with the trustee, subject to limited exemptions, including:
- Ordinary household goods
- Tools of trade (within statutory limits)
- A vehicle with less than $9,600 in equity
Assets can continue to vest for six years following bankruptcy and up to twenty years if they were not disclosed. Trustees may sell assets where sufficient equity exists.
Practical Impacts of Bankruptcy
Travel Restrictions
Bankrupt individuals must surrender their passport and obtain written trustee approval before travelling overseas.
Public Record and Employment
Bankruptcy details are permanently recorded on the National Personal Insolvency Index (NPII) and may affect professional registrations and employment.
Examples include:
- Lawyers cannot manage trust accounts
- Bankrupt individuals cannot manage companies without Court approval
- Certain public offices are restricted
Operating a Business
A bankrupt individual may continue as a sole trader but must trade under their personal name or disclose their bankrupt status.
Access to Credit
Bankruptcy remains on a credit report for at least two years after discharge, limiting access to finance.
Company Directorship Restrictions
Under section 206B of the Corporations Act, bankrupt individuals are automatically disqualified from acting as company directors until discharged.
Bankruptcy Is a Serious Decision Requiring Careful Advice
Bankruptcy can provide meaningful relief for individuals facing overwhelming financial distress, but it comes with significant legal, financial and personal consequences.
Understanding how bankruptcy works, what happens to debts and assets, and how it affects income, employment, credit and business involvement is critical before proceeding.
Given the complexity of Australia’s insolvency regime, professional advice should always be sought to ensure all available options are considered and obligations are clearly understood before taking this step.
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General Advice Warning
The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
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