How to Claim Bankruptcy in Australia
Australian bankruptcy laws are primarily governed by the Bankruptcy Act of Australia (passed by the Commonwealth in 1966).
If you're planning on declaring yourself insolvent, then any process you follow needs to be compliant with legislation in accordance with this act.
This article explores the options available to a debtor should he/she be considering filing for personal insolvency.
I do wish to state that I'm not a financial advisor and any advice provided below is purely of a generic nature.
It is best to seek the advice of a reputed bankruptcy attorney or a financial counsellor should you be seriously considering declaring yourself bankrupt.
Options to Consider Prior to Claiming Bankruptcy
While declaring yourself bankrupt may relieve the stress of repaying mounting debt, its implications in have almost the same effect on your credit-file as would a payment default. A bankruptcy is listed for 7 years on a consumer's credit file during which time they are unable to hold any assets under their name. It is a wise idea to check other options before making a decision.
List of options apart from personal insolvency include (but are not limited to):
- Consolidate your debt instead at a lower interest rate (such as taking out a low-interest loan to pay off your credit-cards)
- Seek help from friends or family able to lend you money if possible and if necessary, draw up a contract which clearly establishes terms of repayments
- Apply for a reasonable payment arrangement or hardship assistance with your creditors?
- Have you thought of an early withdrawal of your superannuation fund? If you are severely behind on mortgage repayments or suffer from a life-threatning medical condition draining all your resources, the law allows for an early release of money accumulated in your superannuation (A super fund is similar to the American 401k plan).
- If you are in financial dire straits due to loss of employment, you could also look at utilizing any income-protection insurance you may have.
Remember that due to the recent change in consumer credit laws within Australia, creditors must use every possible measure to help you before even suggesting a course of insolvency or an official debt-agreement.
Types of Personal Insolvency/Bankruptcy Applications in Australia
Interim Relief/ Debtor's Petition
A debtor's petition involves the consumer signing an 'intention' which requests that creditors hold off any further enforcement action for a period of 21 days.
Key points about a Debtor's Petition are as follows:
- A debtor's petition is not recorded on Australia's National Personal Insolvency Index hence it buys some reasonable time for the debtor to weigh all measures without the risk of an adverse credit-rating.
- The 3 week period also allows debtors to make arrangements with creditors before they decide to pursue further recoveries action (such as garnishing wages)
- Not all creditors (such as secured creditors) are bound by a debtor's petition and collections of any outstanding statutory debt (ex: Child support, fines and tax debts) may most likely continue.
Part IX Agreement
This is by far the most common insolvency agreements that consumers apply for in Australia.
As the term suggests, the arrangement is regulated under Part IX of the Bankruptcy Act. It typically involves the consumer paying off a proportion of their total debts in a pro-rata way to all their creditors with the estate being controlled by a formally appointed trustee.
Key points to note re a Part IX Debt Agreement are as follows:
- To lodge a Part-IX debt agreement, the debtor should not have unsecured debts in excess of $100,000.00 AUD and their pre-tax income must fall under $75,000.00 AUD per annum.
- Under a Part IX, the debtor's required to pay a proportionate amount of money each month into their estate which is then split in a pro-rata way across all creditors. The correct distribution of funds is managed by the estate's administrator or trustee.
- If the biggest creditor rejects the first proposal and all other creditors accept it, then the proposal's automatically rejected and needs to be resubmitted with a payment arrangement which would be accepted by the biggest creditor involved.
- A part-IX debt agreement is logged on Australia's National Personal Insolvency Index and is considered as an act of bankruptcy.
- If the debtor fully complies with and maintains repayments as required during the term of the arrangement, they're released from the debts upon its completion.
- Secured creditors are permitted to repossess and sell off any assets and redeem any equity
Personal Insolvency Agreement (PIA) or Part X Debt Agreement
In principle, a PIA is like a Part IX arrangement but its workings and fine print are slightly different.
Key points to note about Part X agreements are as follows:
- To lodge a Part X agreement, the debtor's debts must exceed $100,000.00 and their pre-tax income ordinarily be in excess of $75,000.00 per year.
- Upon lodging the proposal, the estate's trustee holds a meeting with the debtor's creditors (as listed on the debtor's 'statement of affairs') within a month from the date the proposal was lodged.
- 75% of all creditors listed on the debtor's statement of affairs must accept the proposal for it to be approved.
- If the biggest creditor rejects the first proposal (even if 75% of total creditors accept it), then the proposal's automatically rejected and a new one which may be accepted by the biggest creditor needs to be lodged.
- Like a Part IX arrangement, a PIA is logged on the National Personal Insolvency Index (NPII) and is considered an act of bankruptcy.
If all other options for the debtor have been exhausted then this is the path to take.
Debtors who go fully bankrupt either do so voluntarily or have it forced upon them by their creditors via a court-order (i.e. Sequestration order).
Key points to note about a full bankruptcy are follows:
- The administrator practically has full control over the debtor's financial affairs
- Any income the debtor earns can be claimed by the trustee and majority of the funds are placed in the bankruptcy-estate.
- The debtor is also not allowed to leave Australia without the trustee's written consent and if the debtor's called back into the country during a trip overseas, they're required to return as soon as practicable else they could be held in breach of the Bankruptcy Act.
- The debtor's secured creditors are freely allowed to sell off any assets (Any equity is redeemed by creditor or placed in the bankruptcy-estate).
- The debtor is usually not allowed to keep his/her car (if its market value exceeds $7,200.00) or tools of trade (if their value exceeds $3,200.00)
- The bankruptcy is listed against the debtor for at least 7 years on commercial credit-files like Veda and Dun & Bradstreet.
- Lastly, a debtor's who's fully bankrupt is no longer able to serve within company directorships or run a business for at least 5 years from the date they were declared insolvent.