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Bankruptcy

Information about bankruptcy for prisoners.

What is bankruptcy?

Bankruptcy is the legal status of a person who is unable to pay their debts to creditors. A person can apply to become bankrupt by lodging a debtors’ petition or the creditors who are owed money can apply to court to make someone bankrupt. Before they can do this the debtor must owe at least $5,000 to them. The same conditions apply to a bankrupt person regardless of who initiates the bankruptcy.

When a person becomes bankrupt a trustee will take over and manage their property and assets. The role of the trustee is to sell the assets to raise money to pay the creditors.

Bankruptcy is governed by the Bankruptcy Act 1966 (Cth)(opens in a new window) and administered by the Australian Financial Security Authority (AFSA)

Get advice from a financial counsellor

Bankruptcy has serious consequences and clients should always get advice from a financial counsellor before they decide to file for bankruptcy. There may be other ways that a person can deal with the debt to enable them to avoid bankruptcy.

If a prisoner decides that bankruptcy is the best option for them, they should enter bankruptcy as soon as possible while they are in prison. This is because the prisoner is not earning an income while in prison, but they may be earning an income after their release that is affected by the Bankruptcy Trustee.

Bankruptcy is a complex area of law, and the above is the barest summary of some of the implications of going bankrupt. Speak with a financial counsellor before making the decision.

See Financial counsellors.

Voluntary bankruptcy

Bankruptcy provides more extensive protection from enforcement action by creditors than the provisions of the Judgment Debt Recovery Act, the Supreme Court Act, and the civil procedure rules of courts in Victoria.

If a person cannot pay the debts that they owe or make arrangements to repay the debts, they can choose to become bankrupt. They can have 21 days to think about this before becoming bankrupt if they lodge a 'Declaration of intention' (DOI) to become bankrupt.

During this time most creditors cannot take any action to recover debts. (Exception creditors for child support payments, court-imposed fines, and mortgages where repossession proceedings have started are not affected by this stay.)

If a person owing money decides to choose bankruptcy, they will have to lodge a debtor’s petition and a statement of their financial affairs with the Australian Financial Security Authority (AFSA). Bankruptcy begins when AFSA have accepted the forms. They will send a letter with a bankruptcy number and a list of duties and obligations.

See Forms.

Length of bankruptcy

Bankruptcy usually lasts for 3 years. After this time the bankruptcy will be discharged. This means the person no longer has to repay any money.

The bankruptcy could be discharged earlier if the person has repaid all of their debts.

Even though bankruptcy has ended, a record of the bankruptcy will stay on the person’s record for 7 years.
In some circumstances the length of bankruptcy can be extended.

Consequences of bankruptcy

Bankruptcy does have some significant short to medium term consequences. For example:

  • assets may be sold (except for ordinary household goods, some tools and a cheap vehicle)
  • some of the bankrupt person's income may be taken to pay creditors
  • employment income (over $55,446.30 net – if no dependents, current at 18 May 2017) may be taken
  • the bankrupt person must seek permission to travel overseas, and
  • name to appear on the National Personal Insolvency Index forever (and credit reporting agencies will keep a record of bankruptcies for 7 years) so a person who has been bankrupt will have difficulty getting credit in future.

The client should always get advice from a financial counsellor before going bankrupt.

The amount of money a bankrupt can earn before some is paid to creditors, the value of a vehicle that a bankrupt is allowed to run and the value of tools that a bankrupt can keep are indexed each year.

For the current values see Australian Government—Australian Financial Security Authority—Indexed amounts(opens in a new window)

Some debts will remain

Debts resulting from fraud, or from compensation or restitution orders, will generally not be extinguished on discharge from bankruptcy. These include things such as payments of child support, penalties and fines. A person who is released from bankruptcy will still have to pay these.

Treatment of fines

Court imposed fines are specifically excluded under the Bankruptcy Act 1966 (Cth) and although infringement notices are not excluded under that Act, a 2003 Full Federal Court case held that a parking infringement that had been issued by a local council was not provable in bankruptcy and therefore was not extinguished by the person becoming bankrupt.

See:

There is more detailed information about bankruptcy on the AFSA website.

Creditors’ obligations

There are various obligations under the National Consumer Credit Code. These include formal requirements in relation to the collection of credit-related debts.

Consider carefully whether the creditor has obligations and has complied with them.

See National Credit Code in National Consumer Credit Protection Act 2009 (Cth)—Schedule 1—National Credit Code(opens in a new window).

More information

Legislation

Bankruptcy Act 1966 (Cth)

  • s. 54A—declaration of intention to become bankrupt

See Bankruptcy Act 1966 (Cth)(opens in a new window).

Supreme Court Act 1986 (Vic)

See Supreme Court Act 1986 (Vic)(opens in a new window).

Bankruptcy Regulations 2021 (Cth)

  • Part 6, Division 3 Property available for payment of debts

See Bankruptcy Regulations 2021 (Cth)(opens in a new window).

National Consumer Credit Protection Act 2009 (Cth)

Schedule 1— National Consumer Credit Protection Act 2009 (Cth)

See National Consumer Credit Protection Act 2009 (Cth)—Schedule 1—National Credit Code(opens in a new window).

Case law

State of Victoria v Mansfield [2003] FCAFC 154 (18 July 2003)

In this full court decision of the Federal Court it was held that a parking fine imposed by a local council was not provable in bankruptcy and therefore the fine was still payable despite a person becoming bankrupt.

See State of Victoria v Mansfield [2003] FCAFC 154 (18 July 2003)(opens in a new window).

References

Australian Financial Security Authority (AFSA)

The authority aims to provide fair outcomes for consumers and business by applying bankruptcy and personal property securities laws. They also regulate personal insolvency practitioners and trustee services.

See:

Fitzroy law Handbook

Fitzroy Legal Service's law handbook has information about bankruptcy.

See Are you in debt?(opens in a new window)

Financial counsellors

National Debt Helpline

This not-for-profit service helps people tackle their debt problems. The lines are staffed by professional financial counsellors. The website has information to support people with particular debt problems, such as: electricity, gas or water, phone or internet bills, housing or cars.

The helpline operates from 9.30 until 4.30 Monday to Friday.

See National Debt Helpline (opens in a new window)

Australian Securities and Investments Commission (ASIC)

ASIC regulates Australia’s corporate, markets and financial services sectors. It aims to make sure that Australia’s financial markets are fair and transparent, supported by confident and informed investors and consumers.

Their website, Money smart, has information to help consumers find a financial counsellor.

See ASIC—Money smart—Financial counselling(opens in a new window).

Related pages

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