Post By: Linkhouse
Bankruptcy is a complex and often misunderstood process that affects thousands of Australians each year. As a form of debt relief, it offers individuals a chance to start anew financially, but it also comes with significant consequences. Understanding the duration of bankruptcy in Australia is crucial for those considering this path or already navigating its challenges.
The timeline of bankruptcy in Australia can vary depending on several factors. This article will explore the different types of bankruptcy, and how long is bankruptcy in Australia. It will also shed light on the steps individuals can take to manage their financial situation and work towards a more stable future.
Types of Bankruptcy in Australia
In Australia, there are several types of bankruptcy options available to individuals facing financial difficulties. These options are governed by the Bankruptcy Act 1966 and administered by the Australian Financial Security Authority (AFSA). Each type of bankruptcy has its own set of rules and requirements, making it crucial to understand their differences to determine the best solution for one’s financial situation.
Voluntary Bankruptcy
Voluntary bankruptcy is the most common type of bankruptcy in Australia. It occurs when an individual voluntarily applies to be declared bankrupt by filing a debtor’s petition with AFSA. This option is typically recommended for people who cannot repay their debts and have no other means to resolve their financial difficulties. For example, individuals who aren’t earning an income and are unable to repay their debts, with circumstances unlikely to change, may consider this option.
The bankruptcy period usually lasts for three years and one day, after which the bankrupt is released from most of their debts. However, it’s important to note that some debts, such as child maintenance, survive bankruptcy.
Creditor’s Petition
A creditor’s petition is another way an individual can become bankrupt. In this case, a creditor can force someone into bankruptcy if the debt is more than $5,000 and they have a court judgment against the debtor. The creditor files an application with the court, known as a creditor’s petition, to make the debtor bankrupt. If successful, the court issues a sequestration order, which effectively declares the debtor bankrupt.
Before presenting a creditor’s petition, the applicant creditor may conduct a search of the National Personal Insolvency Index (NPII) to ensure the debtor is not already bankrupt. The most common act of bankruptcy relied upon by a creditor is a debtor’s non-compliance with a bankruptcy notice that has not been set aside by the Court.
Business Bankruptcy
For individuals operating a business as a sole trader or in a partnership, bankruptcy can affect their business operations. It’s important to note that the business itself doesn’t become bankrupt; rather, the individual or partners can become bankrupt as individuals. This distinction is crucial for understanding the implications of bankruptcy on business operations.
When a business owner becomes bankrupt, a trustee is appointed to administer their bankruptcy. The trustee’s role involves selling assets, recovering income over a certain limit, and investigating financial affairs to recover property that may have been transferred before bankruptcy.
The Timeline of Bankruptcy
Filing for Bankruptcy
The bankruptcy process in Australia begins when an individual submits a Bankruptcy Form to the Australian Financial Security Authority (AFSA). This form can be submitted by the individual themselves or on their behalf by a registered Trustee. It’s crucial to ensure that all information provided is accurate and complete, including details of all debts. If any debts are inadvertently omitted, it’s important to notify the trustee immediately.
The Standard 3-Year Period
Typically, bankruptcy in Australia lasts for 3 years and 1 day. This period commences from the day AFSA accepts the Bankruptcy Form. However, if a creditor initiates the bankruptcy, the period starts from the date when the Statement of Affairs is accepted. During this time, the bankrupt individual must comply with certain obligations, including:
- Providing details of debts, income, and assets to the trustee
- Allowing the trustee to notify creditors about the bankruptcy
- Permitting the trustee to sell certain assets to help pay debts
- Making compulsory payments if income exceeds a set amount
At the end of this period, the individual is discharged from bankruptcy and released from most remaining debts. However, some debts survive bankruptcy, including fines, penalties, HECS/HELP debt, child support, and debts incurred after the bankruptcy started.
Possible Extensions
In some cases, the bankruptcy period can be extended beyond the standard 3 years and 1 day. The trustee has the authority to extend the bankruptcy period to 5 or even 8 years if the bankrupt individual is unresponsive or fails to fulfill their obligations. This decision is made by the trustee based on the individual’s compliance with bankruptcy requirements.
It’s important to note that throughout the bankruptcy period, individuals must adhere to certain restrictions and obligations. These may include limitations on borrowing money, restrictions on overseas travel, and the requirement to disclose bankruptcy status when applying for credit above a certain amount.
Life During Bankruptcy
Financial Restrictions
During bankruptcy, individuals face several financial limitations. If their annual income exceeds USD 70,006.30 (after tax), they may have to make contributions towards their debts. This threshold is subject to change and was last updated in March 2024. The trustee calculates the liability for each year of bankruptcy and sends a notice of assessment outlining the total amount due, installments, and payment methods.
The Bankruptcy Act 1966 defines what trustees should include when assessing income, which differs from the Australian Taxation Office’s assessment of taxable income. This includes wages, tax refunds, fringe benefits, salary sacrifices, superannuation receipts, business profits, and income earned overseas. Individuals must disclose all income and benefits to the trustee and report any changes immediately.
Travel Limitations
Contrary to popular belief, bankruptcy does not entirely prohibit overseas travel. However, individuals must obtain written permission from their bankruptcy trustee before leaving the country. This process typically involves completing a form and submitting details of the proposed itinerary for review.
The trustee considers several factors when deciding whether to grant permission, including:
- The source of funds for the trip
- Travel destination and duration
- Reason for travel (employment, compassionate reasons, or holiday)
- Compliance with bankruptcy obligations
While trustees can request the surrender of passports, this is discretionary and rarely occurs for most individuals.
Employment Implications
Bankruptcy does not restrict individuals from being employed or earning an income. However, certain professions and licensed trades may have restrictions or ‘show cause’ requirements for those who are or have been bankrupt. For example, accountants, lawyers, real estate agents, and some government and managerial positions may be affected.
It’s important to note that the Bankruptcy Act 1966 does not require individuals to disclose their bankruptcy when applying for employment. However, prospective employers may ask for this information or conduct a search to find out. Professional associations and licensing authorities often have their own conditions regarding bankruptcy, which are not regulated by the Bankruptcy Act 1966.
FAQs
1. How long does bankruptcy remain on your credit report?
In most scenarios, a Chapter 13 bankruptcy will appear on your credit report for up to seven years from the date it was filed. After this period, it should automatically be removed from your credit reports.
2. Is it possible to purchase a home after being bankrupt in Australia?
Yes, you can apply for a home loan immediately after being discharged from bankruptcy through certain specialist lenders. However, most major lenders require that you have been discharged from bankruptcy for at least two years and have maintained a record of no missed repayments during that time before they will consider your loan application.
3. What occurs three years post-bankruptcy?
During the three to four years following your bankruptcy, you are required to make payments, which begin in the 12 months prior to your discharge. The final payment is made between the third and fourth year after declaring bankruptcy. It’s important to note that you can still be pursued for any payments missed during this period.
4. Will bankruptcy still show on my credit file after six years?
Yes, bankruptcy remains on your credit file for six years following the bankruptcy order. If you wish to have your credit record updated to show that you have been discharged, you should send confirmation to each of the credit reference agencies and request that they update your file accordingly.
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