How Does Bankruptcy Work?

Unmanageable personal debt can cause untold stress, leading people to consider filing for bankruptcy.

If you find yourself in this position, it is important to understand exactly how bankruptcy works, so that you can make the best decision for your situation. Here, we’ve answered some of the most common questions surrounding bankruptcy.

What is bankruptcy?

Bankruptcy is a legal process where you are declared unable to repay your debts. It releases a person from most types of debt, and can allow you to make a fresh start.

You can enter into voluntary bankruptcy if you cannot pay a debt of any amount. When you are a voluntarily bankrupt, the Australian Financial Security Authority (AFSA) will appoint a trustee to manage your finances. Bankruptcy lasts from three years from the day it is declared.

What can bankruptcy do?

When you file for bankruptcy, you can wipe the slate clean of most of your unsecured debts. This includes credit and store cards, unsecured personal loans, utility bills and medical bills.

Filing for bankruptcy will stop creditor harassment and collection activities. You can also keep a number of possessions under bankruptcy, including household goods and personal effects of a reasonable value.

At the same time, it is important to understand that bankruptcy isn’t a financial cure-all. Bankruptcy cannot prevent a secured creditor from repossessing property. It doesn’t cover secured debts such as mortgages, car loans or furniture and equipment rental. You will probably lose assets such as real estate, antiques and luxury electronic items, artworks and some jewellery, any inheritance, tax refund or winnings, and money in your bank accounts in excess of $1,000.

What are my obligations under bankruptcy?

When you file for bankruptcy, and for the duration of your bankruptcy, you must declare accurate details of your debts, income and assets to your trustee, including if your situation changes. You may need to make compulsory payments if your income exceeds a set amount (which is determined by the number of dependants you have).

Being bankrupt does not absolve you of your child support and maintenance, Centrelink and Higher Education debts, nor any court fines. You would be required to continue paying these debts.

What limitations may be placed on me?

There are a number of restrictions which apply to individuals who are bankrupt. Details of your bankruptcy will be listed on your credit file for 5 years from the date you become bankrupt, or 2 years from when your bankruptcy ends, whichever is later. This will affect your ability to obtain future credit, and you must also inform potential creditors of your bankruptcy if you apply for credit over a set amount. Information about your bankruptcy will also be listed on the publicly searchable National Personal Insolvency Index, permanently.

While you are bankrupt, you cannot be a director of a company, or be involved in its management without the permission of the Court. You may lose the right to take or continue legal action, and you cannot travel internationally without receiving written permission from your trustee.

How do I file for bankruptcy?

Once you have considered all of the potential implications of applying for voluntary bankruptcy, you should seek financial advice to ensure that bankruptcy is the best debt solution for your situation. Application forms for bankruptcy can be found on the AFSA website.


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