Bankruptcy in Australia: how it works, how long it lasts and what it means

Bankruptcy is a legal process in which a person is declared unable to pay their debts. It releases most debts and usually lasts 3 years and 1 day. A trustee, either the Official Trustee (part of AFSA) or a registered trustee in bankruptcy, takes control of the bankrupt’s property that is available to creditors. Bankruptcy applies to individuals, not to companies. An insolvent company goes into liquidation instead.

What is bankruptcy?

Bankruptcy is a formal process under the Bankruptcy Act 1966 for a person who can’t pay their debts as they fall due. The Australian Financial Security Authority (AFSA) manages the personal insolvency system. Each bankruptcy is administered by a trustee, who:

• collects information about the person’s debts, income and assets
• tells creditors about the bankruptcy, after which most creditors must stop contacting the person to recover their debts
• may sell assets that aren’t protected and use the money to pay creditors
• may require compulsory payments from income above a set threshold.

Bankruptcy is only for individuals. This includes sole traders and partners, who are personally liable for their business debts. A company can’t go bankrupt. When a company can’t pay its debts, the options include small business restructuring, voluntary administration and liquidation. See liquidation vs bankruptcy for how the two differ.

How does a person become bankrupt?

There are two ways:

1. Voluntary bankruptcy. The person lodges a Bankruptcy Form with AFSA. The bankruptcy starts on the day AFSA accepts the form.
2. Creditor’s petition. A creditor owed $10,000 or more can apply to the Federal Circuit and Family Court or the Federal Court for a sequestration order, which makes the person bankrupt. The person must have committed an act of bankruptcy in the six months before the application. The most common act of bankruptcy is failing to comply with a bankruptcy notice.

How long does bankruptcy last?

Bankruptcy usually lasts 3 years and 1 day. For a voluntary bankruptcy, this runs from the day AFSA accepts the Bankruptcy Form. The trustee can object to the bankruptcy ending, for example if the bankrupt doesn’t cooperate. An objection can extend the bankruptcy, up to 8 years in total. When the bankruptcy ends, the person is released from most of the debts they had at the start of the bankruptcy.

What happens when you go bankrupt?

• Assets: the trustee may sell your house, other property and assets that aren’t protected. You can generally keep ordinary household goods, tools you use to earn an income and a vehicle, up to value limits that AFSA sets and indexes.
• Income: if you earn more than a set amount, you may need to make compulsory payments to your trustee.
• Overseas travel: you need your trustee’s written permission before you travel overseas. Travelling without it is an offence.
• Credit: you must tell a credit provider that you are bankrupt if you apply for credit above a set amount. The bankruptcy stays on your credit report for 5 years from the date you became bankrupt, or 2 years from when it ends, whichever is later.
• Public record: your name appears permanently on the National Personal Insolvency Index, a public register.
• Company director: an undischarged bankrupt is automatically disqualified from managing a corporation. You can’t act as a director until the bankruptcy ends, unless the court grants leave.
• Secured debts: bankruptcy doesn’t stop a secured creditor, such as a mortgage lender, from enforcing its security.
• Debts that aren’t released: some debts continue after bankruptcy, for example court-imposed fines and child support debts.

Bankruptcy for company directors

Directors often come to bankruptcy through their company’s debts rather than their own. Although the company’s debts belong to the company, a director can become personally liable through:

• personal guarantees given to banks, landlords or suppliers
• director penalty notices from the ATO for unpaid PAYG withholding, GST or superannuation guarantee charge
• insolvent trading claims, where a company incurred debts while it was insolvent.

If you can’t pay those personal liabilities, a creditor may issue a bankruptcy notice. Dealing with the company’s position early, for example through a restructuring plan or a payment arrangement with the ATO, can reduce the risk to you personally. See our ATO debt help guide.

Alternatives to bankruptcy

The Bankruptcy Act offers other options, depending on your income, assets and debts:

• Temporary debt protection: a 21-day period in which unsecured creditors can’t take enforcement action, giving you time to consider your options.
• Debt agreement: a binding agreement with creditors to pay an affordable amount over time. It is available only if your debts, assets and after-tax income are below thresholds that AFSA sets.
• Personal insolvency agreement: a formal agreement with creditors, administered by a trustee, with no debt or income limits.

Free, independent financial counselling is available from the National Debt Helpline on 1800 007 007.

How Greengate helps

If you are considering bankruptcy, or a creditor is pressing you for payment, talk to us before you act. We can explain your options, including the alternatives to bankruptcy. Our registered liquidators also advise directors on the company side, including restructuring, liquidation and personal exposure through guarantees and director penalty notices. The first consultation is free and confidential, and we can explain the options in English, Mandarin or Korean.

Common questions

How long does bankruptcy last in Australia?

Usually 3 years and 1 day. The trustee can object to it ending, which can extend the bankruptcy up to 8 years in total.

Can a bankrupt be a company director?

No. An undischarged bankrupt is automatically disqualified from managing a corporation, unless the court grants leave. Once the bankruptcy ends, you can generally be a director again.

Can a company go bankrupt?

No. Bankruptcy applies only to individuals. An insolvent company may be restructured, placed into voluntary administration or liquidated.

Will I lose my house if I go bankrupt?

The trustee may sell your house and other property that isn’t protected, and a secured lender can still enforce its mortgage. Get advice before you apply.

Who administers a bankruptcy?

A trustee: either the Official Trustee, which is part of AFSA, or a registered trustee in bankruptcy.

What are the alternatives to bankruptcy?

Temporary debt protection, a debt agreement or a personal insolvency agreement, depending on your income, assets and debts.

This page is general information, not advice about your situation. Sources: AFSA What is bankruptcy?, Consequences of bankruptcy and Compare your insolvency options; ASIC Bankruptcy and personal insolvency agreements.