ch7_bankruptcy_3.pdf

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The Law HandbookYOUR PRACTICAL GUIDE TO THE LAW IN NEW SOUTH WALES

12th EDITION

REDFERN LEGAL CENTRE PUBLISHING


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Published in Sydney byThomson Reuters (Proessional) Australia LimitedABN 64 058 914 668100 Harris Street, Pyrmont, NSW

First edition published by Redern Legal Centre as The Legal Resources Book (NSW) in 1978.

First published as The Law Handbook in 1983Second edition 1986Third edition 1988Fourth edition 1991Fith edition 1995Sixth edition 1997Seventh edition 1999Eighth edition 2002Ninth edition 2004Tenth edition 2007Eleventh edition 2009Twelth edition 2012

Note to readers: While every eort has been made to ensure the inormation in this book is as up to date and as accurate aspossible, the law is complex and constantly changing and readers are advised to seek expert advice when aced with specifc

problems. The Law Handbook is intended as a guide to the law and should not be used as a substitute or legal advice.

National Library o AustraliaCataloguing-in-Publication entry

The law handbook: your practical guide to the law in NSW/edited by Helen Sheridan.12th ed.Includes indexISBN 9780455229393Law New South Wales Handbooks, manuals, etc.Legislation New South WalesJurisprudence New South Wales Handbooks, manuals, etc.Civil rights New South Wales.Sheridan, Helen

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[7.200] Obligations, restrictions and

rights[7.220] Ending bankruptcy

[7.20] Alternatives to bankruptcy

[7.60] Entering bankruptcy[7.120] Eects o bankruptcy on property[7.180] Eects o bankruptcy on income

7

Bankruptcy

Robert Cruickshanks Consultant

Contents


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168 The Law Handbook

An insolventperson (a person who cannot paytheir debts as they all due) need not alwaysbecome bankrupt. The alternatives or debtorswho, i given some breathing space, can worktheir way out o insolvency, are: informalarrangements debtagreementsunderPartIXoftheAct personal insolvency agreements under

PartXoftheAct.These options should be thoroughly explored

with a solicitor, accountant or nancial adviserbeore a person voluntarily enters bankruptcy.

[7.30] Inormal arrangementsThe rst alternative is an inormal arrangementwith creditors, usually organised by a nan-cial counsellor or, perhaps, an accountant orsolicitor.

An inormal arrangement costs less toadminister than a ormal arrangement, but itwontworkunlessallthecreditorsagree.Ifone

creditor takes recovery action, the proposal willbe unworkable. So it must be realistic, and itshould be done as soon as the debtor nds theycannotmeettheirmonthlycommitments.Itisusually too late when one or more o the credi-tors has commenced recovery proceedings.

[7.40] Part IX debt agreementsDebt agreements are available only to peoplewith airly small debts, ew assets and lowincomes. They are organised by the OfcialReceiver (see Whos who in bankruptcy at

[7.20] Alternatives to bankruptcy

[7.70]), and are generally administered by debtagreement administrators. They can also beadministered by: theOfcialTrustee,or aregisteredtrustee.

FeesTheOfcialReceiverdoesnotchargeforsettingup a debt agreement, but ees are payable oradministering it. Consultants and debt agree-ment administrators who help debtors toormulate proposals and lodge them with theOfcialReceiveralsochargeafee.

What the agreement should be aboutThe agreement deals with any aspect o adebtors nancial aairs; or example, it couldprovide or a compromise o their debts, amoratorium or a sale o property, or be limitedto the debtors undertaking to obtain nancialadvice.

Creditors want to be paid, i only in part.

They are likely to be interested in proposalsthat involve payment o at least part o thedebt, not moratoriums or undertakings toobtain advice.

Limitations on Part IX agreementsApersoncannotmakeaPartIXagreementif: the value of either their unsecured debts

or their divisible property (see Divis-ible property at [7.120]) is over a set limit($94,530.80 in September 2011)

theirafter-taxincomeislikelytobeovera

set limit ($70,898.10 in September 2011)

[7.10] Bankruptcy was originally designedto keep people out o jail when they could notpay their debts. It relieves people ofmost oftheir liabilities to their unsecured creditors, andenables them to make a resh start in their nan-

cialaffairs.Itisalsoameansofdebtrecoveryor some creditors.When someone becomes bankrupt, a

trustee takes over their nancial aairs. Amongother things, the trustee can sell some o theirproperty, carry on their business or a time, andsue or debts owed to them.

Probablythebestwaytounderstandbank-ruptcyistoseeitasanexchange.Inreturnforprotection rom urther legal action by credi-tors and, usually, a total release rom debtsat the end o the bankruptcy, the debtor givescertain assets and (temporarily) a large degreeo control over their nancial aairs to thetrustee.

The law on bankruptcy is ound in theederal Bankruptcy Act 1966, which appliesthroughout Australia.


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7 Bankruptcy 169

theyhaveatanytimeinthepasttenyears: been bankrupt, or enteredintoaPartIXagreement,or given an authority to appoint a control-

ling trustee under Part X (see Part Xpersonal insolvency agreement propos-als at [7.50]).

Proposing an agreementThe proposal should be made as soon as possible,while creditors are still prepared to listen. The mainselling point is that they will get a better return roma debt agreement than rom the alternatives (in mostcases, at least some return) because administrationcosts are much less than or a bankruptcy or a Part Xproposal.

[7.50] Part X personal insolvencyagreement proposalsThe third alternative to bankruptcy is aproposal under Part X of the Act. This canbe administered by a registered trustee or theOfcialTrustee.

Since December 2004, the three previousforms of Part X proposals (assignment,arrangement and composition) have beenmerged into a single orm:personal insolvency

agreements.Section 188A o the Act prescribes therequired contents o personal insolvency agree-ments, which may also have optional contents.The proposal can be fexible and can oercertain creditors a larger or smaller dividendthan other creditors.

The proposal must be achievable andrealistic. It should be made before creditorscommence recovery action, while debtor andcreditors are still on speaking terms.

ProcedureThe section 188 authority

The debtor completes a s.188 authority, whichauthorises a solicitor, a registered trustee or theOfcialTrusteetotakecontroloftheirpropertyand call a meeting o creditors to consider theirproposal or a personal insolvency agreement.

The authority must be accompanied by: a statement o aairs completed by the

debtor adraftpersonalinsolvencyagreement.

The authority becomes eective when it is signedby the solicitor, registered trustee orOfcialTrustee, who thereby consents to become thecontrolling trustee.

The controlling trustee

The controlling trustee is required to: investigatethedebtorsnancialaffairs prepareareporttocreditorsinformingthem

o what they can expect to receive rom theproposed agreement, and the trustees eesto administer it, compared with what theycould expect to receive i the debtor insteadbecame bankrupt.

The creditors meeting

Creditors are invited to a meeting to vote on theproposal. A special resolution must be passed

(by at least 51% o creditors having at least75% o the value o the debts, voting in personor by proxy) or it to be accepted.

Oncetheresultingdeedisexecutedbythedebtor, it is binding on all creditors.

Creditors should attend the meeting, eitherin person or by proxy, and seek urther inor-mation about the proposal particularly thetrustees ees, which are paid beore the credi-tors receive any payment.

Trustees eesThe ees or administering a personal insolvencyagreement are usually charged on an hourly rate ithe proposal will operate or some time (or example,three years) they could be substantial. Creditors canset a limit or the trustees ees by resolution. TheOfcial Trustees ees are set by the Bankruptcy ActandRegulations.

A solicitor cannot be a trustee

While a solicitor can act as a controlling trustee to setup the personal insolvency agreement, a solicitor cannot act as the trustee o the agreement.

When a proposal has been acceptedThe debtor is required to execute the personalinsolvency agreement by way o a deed within21 days o creditors resolving to accept theirproposal. The debtor will be released rom theirdebts in accordance with the terms o the agree-ment (one o the essential terms).

A personal insolvency agreement cannotrelease the debtor rom debts they would notbe released rom by becoming bankrupt.


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[7.60] Who can becomebankrupt?Only individuals can become bankrupt andthey must have a connection with Australia byway o residence or business.

SpousesA married persons bankruptcy has no eect ontheir spouse unless the spouse: hasguaranteedadebtofthebankrupt,or is jointly liable for a debt and/or jointly

owns divisible property with the bankrupt.Insuchcases,thecreditorcannormallyrequirethe spouse to pay the total debt.

ChildrenA child (a person under 18) can enter bank-ruptcy voluntarily, but can be made bankruptonly i there is an enorceable debt (in mostcases, only contracts or necessary goods orservices are enorceable against children).

Necessaries

The legal defnition o necessary goods and services(necessaries) is complex. It appears in practice thattrustees decide whether goods or services are necessary,and are generally sympathetic to children in thesecircumstances. A trustee might regard ood, clothingand accommodation as necessaries, but not items suchas cars, electrical goods or even trade debts.

Non-citizensPeople who are not Australian citizens canbecome or be made bankrupt, and have theirassets in Australia made available to their

Australian creditors (Bankruptcy Acts.43).

Entering bankruptcyAssets outside Australia may also be avail-

able to Australian creditors this depends onthe law o the country where the assets are.

People with a mental illnessor intellectual disabilityA person with a mental illness or intellectualdisability cannot commit an act o bankruptcy(see Declarations o intention above), and socannot be bankrupted by a creditor. However,the aairs o such a person may be placedin bankruptcy by someone acting or them

(s.308(c)).PartnershipsInthe caseof apartnership,ortwoormorepeople trading under a business name, it isnot the rm but the people who are madebankrupt.

CompaniesCompanies cannot become bankrupt underthe Bankruptcy Act they are wound up (orliquidated) under the ederal Corporations Act

2001.

People who are not insolventSometimes people who are not insolvent people withenough money or property to pay their debts aremade bankrupt because they take no action when abankruptcy notice or petition is issued against them.Though they might pay the debts and obtain a dischargeor annulment (cancellation), the disadvantages ohaving been made bankrupt remain.

Declarations o intention

it is better to reach a compromise and let the debtorcontinue without being declared bankrupt.

These arrangements do not aect the rights osecured creditors to deal with their security, and arenot available to business partners. A declaration o

intention can be fled only once in any 12-monthperiod.Filing a declaration does not mean the debtor must

present a debtors petition and become bankrupt. It is,however, an act o bankruptcy(that is, an act showingthat the person may not be able to pay their debts).

Subject to certain exceptions, a debtor may give theOfcial Receiver (see Whos who in bankruptcy at[7.70]) a declaration o their intention to presenta debtors petition (Bankruptcy Act s.54A). Onceaccepted, this has the eect o reezing legal action

(such as writs o execution and garnishee orders) ortwenty one days, which may give the debtor time to seekadvice or make arrangements with creditors, and avoidbankruptcy. Alternatively, present a debtors petitionwhich will stop the writ o execution or garnisheepermanently. Creditors can oten be persuaded that


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7 Bankruptcy 171

FormscanbeobtainedfromtheInsolvencyandTrustee Service Australia, its website or a legalstationer.

The orms can be led personally at theInsolvencyandTrusteeServiceorsentbymailoremailtotheOfcialReceiver(seeWhoswhoin bankruptcy at [7.70] or who this is), whoaccepts the orms and allocates a bankruptcynumber. There is no ee.

The statement o aairs

All liabilities, provable or not, must be disclosedin the statement o aairs. The value o thedebtors interest in assets must also be shown;or example, the debtors interest in jointlyowned household urniture valued at $5000should be shown as a hal-share worth $2500.

[7.70] Becoming bankruptvoluntarilyDeciding to become bankruptAnyone who has a provable debt(seeReleaserom debts at [7.250]) o any amount can apply

to enter bankruptcy voluntarily. The decisionshould only be made ater getting the best avail-able advice, and considering the advantages anddisadvantages (see Advantages and disadvan-tages o bankruptcy at [7.90] or a summary owhat these are).

ProcedureHaving decided to go ahead, the debtor shouldcomplete: adebtorspetition,and

astatementofaffairs.

When the debtors petition may berejectedTheOfcialReceiverhasthediscretiontorejectthe petition i, rom the debtors inormation, itappears that the debtor would be able to pay

their debts within a reasonable time, and thateither: thedebtorisunwillingtopayoneormore

o the debts, or theyhavepreviouslybecomebankruptona

debtors petition: three or more times, or once in the past ve years.

TheOfcialReceivermayalsorejectthepetitioni the debtor does not have an association withAustralia that is, they are not present or donot live in Australia, do not have a house in

Australia, or carry on business in Australia.

Joint debtsFor a couple (married or not) who have jointdebts and wish to become bankrupt, it issimpler to lodge separate debtors petitionsand statements o aairs. Joint debts should be

shown in ull in each statement, because eachjoint debtor is ully liable or payment and theliability cannot be divided (or example, a jointdebt o $6000 should be shown on each indi-vidual statement as $6000).

For joint secured debts, the total amount othe debt less the value o the security is usedto calculate the amount owing. Each debtor isresponsible or the total debt, and should showit in ull. Their equity in the asset, i any, isshared, and the value o the equity should behalved to show each persons share.

Who might consider bankruptcy

low wage earners, especially if they have alarge amily, pressing debt problems and heavyadditional expenses, such as a child with a disability

people whose business venture has failed andcannot be salvaged, and who do not have the meansto pay their debts.

A debtor who would not beneft rom bankruptcy maybe able to arrange with creditors to pay all, or part,o the debts by instalments. However, this does not

prevent a creditor rom taking bankruptcy action. Ithe debtor does become bankrupt, any money paid toa creditor may be recovered later by the trustee (seeEects o bankruptcy on property at [7.120]).

People or whom bankruptcy may be a good ideainclude: pensionerswhodonotownahome,havehousehold

goods on credit (but not subject to a consumermortgage or under a bill o sale), are unlikely toearn other substantial income in the near uture,and are being harassed by creditors

peoplewhosespouseshavediedordesertedthem,who have debts o their own and who are otherwise

in the same position as someone on social securitybenefts (however, i the debts are the responsibilityo the other spouse, whether living or dead,bankruptcy may not be necessary)


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Whos who in bankruptcy

Registered (private) trustees

Private trustees are accountants in private practiceregistered with the Insolvency and Trustee ServiceAustralia to act as trustees o bankrupt estates.

A person wishing to appoint a private trustee mustfrst obtain the trustees written consent. Trustees willgenerally only act i there is enough money or assetsto pay their ees. They are entitled to a minimum ee(currently $5000 plus GST) payable rom moneys inthe bankrupt estate.

A list o registered trustees is available rom theOfcial Receiver and the Insolvency and TrusteeService Australia website.

The Ofcial Trustee in Bankruptcy

The Ofcial Trustee in Bankruptcy is part o theInsolvency and Trustee Service Australia, an executiveagency in the ederal Attorney-Generals portolio.

I there is no private trustee, the Ofcial Trusteeautomatically becomes the trustee. I assets are sold orpayments made by the bankrupt towards their debts,the Ofcial Trustees ees, which are calculated on apercentage o the unds received into the estate, arepaid frst. However, on release rom bankruptcy theperson does not owe ees to the Ofcial Trustee, eveni no unds were received into the estate.

The Ofcial Receiver

Ofcial Receivers act in the name and on behal o theOfcial Trustee. Prior to August 2010 Ofcial Receiversadministered bankruptcy districts: each state o Australia

was a bankruptcy district or the purposes o theBankruptcy Act. However since that date, there are nolonger bankruptcy districts and there are only two OfcialReceivers being located in Sydney and Brisbane.

Ofcial Receivers accept debtors petitions, issuebankruptcy notices and maintain the National PersonalInsolvency Index (NPII).

Ofcial Receivers also have powers to issue noticeson behal o all trustees to help them recover assets andobtain inormation.

The Inspector-General in Bankruptcy

The Inspector-General in Bankruptcy is the head o

bankruptcy administration in Australia, and can inquireinto, and investigate, bankruptcy procedures (s.12).

[7.80] Making someone bankruptA creditor, or group o creditors, can presenta creditors petition to the Federal Court orFederal Magistrates Court to have a personwho owes them over $5000 made bankrupt.

Why make someone bankrupt?Sometimes bankruptcy is the only eective wayor a creditor to collect all or part o their debt

or example, i the debtors property is subjectto a mortgage or is owned jointly with anotherperson who is not indebted to the creditor.

The threat o bankruptcyThough a creditor may threaten to make a debtorbankrupt, it is expensive, and the threat is rarelycarried out against non-business debtors. Most non-business debtors who become bankrupt do so on theirown application.

In any case, a debtor served with a bankruptcynotice (a ormal demand which is the frst step in theprocess o making the debtor bankrupt) oten eitherpays the debt or comes to an agreement with thecreditor to avoid the consequences o bankruptcy.

Procedure

To make someone bankrupt, a creditor must: rstobtainajudgmentforthedebtfromacourt (see chapter 17, Debt), then

prepare abankruptcy notice based on thejudgment, then

submitthenoticetotheOfcialReceiverforissue.

The bankruptcy notice is a ormal demand thatrequires the debtor to pay the debt within a settime (usually 21 days).

A debtor who does not either pay or havethe court set the bankruptcy notice aside withinthe time limit commits an act o bankruptcy,and the creditor can apply to the Federal Courtor Federal Magistrates Court to declare thembankrupt by presenting a creditors petitionbased on that act o bankruptcy.

Ifthedebtorcansatisfythecourtthattheycan pay all debts in a reasonable time (perhapsa month or two), the hearing may be adjourned.Ifnot,thedebtormaybemadebankrupt.

Sequestration orders

The court order declaring someone bankrupt iscalled a sequestration order. When it is made,the bankrupts divisible property comes underthe control o a private trustee (i nominated bythecreditor)ortheOfcialTrustee.

[7.90] Advantages anddisadvantages o bankruptcyBankruptcyisgenerallyalastresort.Ithasbothadvantages and quite serious disadvantages.


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7 Bankruptcy 173

Penalties or non-cooperation

Bankrupts who do not cooperate with trustees,or ull certain duties (such as notiyingearnings),maybepunishedbythecourtand/orhave the term o their bankruptcy extended tove or eight years (see Extension o bankruptcyat [7.240]).

Having money and assets taken

Money and valuable goods (with some excep-tions) owned or being paid o at the date obankruptcy, or acquired during bankruptcy,may be taken. For example, i a bankrupt hasequity in a house or boat etc but owes money onit through a mortgage, the trustee can sell it andpay the secured creditor under the mortgage.The surplus becomes available or the unse-

cured creditors.Restrictions on involvement with a company

Under the Corporations Act, a bankruptcannot be a director, promoter or manager o acompany without the permission o the court.

Restrictions in employment

There are restrictions on people in certain typeso employment and public oce who have beenbankrupt, including chartered accountants,barristers, solicitors, security licence holders,

tradespeople and justices o the peace.Restrictions on borrowing

A bankrupt must not borrow or incur a debt o$5040 or more without inorming the lender orcredit provider o their bankruptcy.

[7.100] When does bankruptcystart?A debtor is considered to have become bankrupton the rst moment o the day on which either

their debtors petition was accepted or a seques-tration order was made against them.

[7.110] Insolvent estate o adeceased debtor (Part XI)Ifaninsolventdebtordiesleavinginsufcientassets to pay their debts, a creditor owed $5000or more may apply or an order o administra-tion (Bankruptcy Acts.244). This requires thetrustee to distribute the deceased persons assetsto pay part, or all, o the debt in accordancewith the Act.

AdvantagesRelease rom debts

Oncedischarged,abankruptisreleasedfrommost provable debts incurred beore bank-ruptcy (see chapter 17, Debt).

Protection o some propertyMost o the persons personal property isprotected under the Bankruptcy Act(s.116(2))(seePropertyabankruptcankeepat[7.130]).

Return o some property

Ifabailiffhastakennecessaryhouseholditemsto be sold to pay creditors, it may be possible togetthemback.Iftheyhavebeensold,itmaybepossible to receive the proceeds.

No more harassment by creditors

Bankruptcy should stop harassment by unse-cured creditors all communication takes placebetween creditors and the bankrupts trustee(s.58).

Prevention o a garnishee on wages

Bankruptcy stops a garnishee on wages beingenorced (see chapter 17, Debt).

DisadvantagesPublic examination o aairs

Incomplexestatesthetrusteecanholdapublic

examination of the bankrupt and/or personsassociated with them beore a Federal Courtregistrar or ederal magistrate, requiring thebankrupt to produce any document that maybe relevant and answer the trustees or a credi-tors questions on oath, even i the answers areincriminating.

Eect on reputation

The bankruptcy is recorded on the nationalpersonal insolvency index (a permanent recordo every bankruptcy since 1928), and may bepublished in trade journals and local papers.

Need to make payments while bankrupt

A person who is bankrupt must make paymentsto the trustee rom their income while they arebankrupt i they earn over a certain amount.

Problems obtaining credit

Former bankrupts may have trouble obtainingunsecured credit. (Veda Advantage, previouslyBaycorp Advantage Ltd, keeps details o bank-ruptcies,debtagreementsandPartXagreementsor seven years.)


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administration o the estate in bankruptcy (seechapter 43, Wills, estates and unerals).

The person administering the estate o adeceased person may also seek an order or the

Eects o bankruptcy on property[7.120] Divisible propertyA trustee can take certain o a bankruptsproperty, in Australia or elsewhere (subject tothe law o the country where the property is)(Bankruptcy Acts.116).

Propertythetrusteecantaketopaycredi-tors includes: thebankruptsinterestinahouse cashinthebank

jewellery stocks,sharesanddebentures xturesandttings giftsandlegaciesreceivedunderawill crops certainotherthings.Certain money owed to the bankrupt can alsobe recovered by the trustee.

Propertyavailabletothetrusteetopaycred-itors is called divisible property.

Sale o assetsThe trustees decisions about what to do withthe assets available or sale and distributionamong creditors will depend on what they are.

Iftheassetshavelittlevalue,thetrusteemayask the bankrupt to nd a buyer rather thanincur the expense that might be involved i thetrustee had to nd one. The trustee may evenbe prepared to accept less than market valuewhere costswillbesaved bynot seizingandselling the goods.

Sale to relativesWhere the bankrupt wishes to retain use o thegoods, such as a car, a relative may be preparedto make the trustee an oer. Trustees usuallycooperate in these circumstances.

[7.130] Property a bankrupt cankeepProperty the trustee cannot take is listed inthe Bankruptcy Act (s.116(2)). Among otherthings (some o which are discussed below), itincludes:

ordinaryclothing necessary household goods (such as TV

and video, lounge and kitchen urniture, adomestic rerigerator and washing machine)

toolsoftradeiftheyaretobeusedtoearnincome, up to the value o $3500

mostpoliciesoflifeassurance,endowmentassurance, endowment or annuities or theproceeds rom such policies

amountspaidtothebankruptundercertainrural assistance agreements between theCommonwealth and the states.

The separate property o a non-bankrupt spouseis not aected by the bankruptcy.

Motor vehiclesA bankrupt can keep a vehicle used or personaltransport in which they have a net equity o upto$7050.Iftheequityismorethetrusteecansellthe vehicle, but must give $7050 to the bankruptrom the proceeds so they can buy another.

Sometimes where the equity is over $7050a vehicle is sold by the trustee to a relative orfriend of the bankrupt. If it is security for anance contract and payments are not kept up,however,thenancecompanymaystillseizeit.

Money rom damages or compensationThe trustee may not take: money received as damages or compen-

sation or personal injury or death to thebankrupt or their amily, or

defamationpayments,or anyproperty(suchasahouseorcar)boughtwith, or mostly with, that money.

Where property has been paid or partly, butnot substantially, with the compensation money(or example, 10% o the price), the bankruptis entitled to receive that percentage rom theproceeds o the sale o that property.

SuperannuationThe trustee may not take: superannuationpolicies thepersonsinterestinasuperannuationfund


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7 Bankruptcy 175

Where the joint owner will not cooperate

Ifthejointownerwillnotcooperate,thetrusteecan apply to the Federal Magistrates Courtor the Supreme Court or an order that theproperty be sold and the proceeds divided.

Where the joint owner claims more than 50%Ifthenon-bankruptpersonconsidersthattheyhave made a greater than 50% contributiontowards the acquisition o the property theyshould submit documentary evidence o theirclaim to the trustee or consideration. However,i the property is jointly owned by a marriedcouple the trustee will generally assert that theCummins Principleapplies; that is, irrespec-tive o unequal contributions to the acquisitionof matrimonial property and/or registration

inonespousesnameonlyand/orborrowingsbeneting only one spouse secured against theproperty, the property is benecially owned50/50 (see Trustees o the Property o JohnDaniel Cummins v Cummins [2006] HCA 6;(2006) 224 ALR 280; (2006) 80 ALJR 589(7 March 2006)).

Bankruptcy o one spouse does not stopthe other spouse rom starting or continu-ing property settlement and/or maintenanceproceedings in the Family Court which is nowempowered to order a bankruptcy trustee totranser property in the estate o the bankruptspouse to the non-bankrupt spouse to satisya liability determined by the Family Court insuch proceedings.

I the bankrupt has no equityIfthebankrupthasnoequityinthepropertythe trustee will not sell it and the bankruptcan live in it as long as the mortgage and ratesare paid. However, the trustee can sell it laterwhen there is equity, even ater discharge rom

bankruptcy.The trustee may give the bankrupt rstoption to buy back the equity in the propertyupon their discharge rom bankruptcy.

[7.150] Money and goodsreceivedAt any time during the bankruptcy the trusteemay take any money (excluding accumulatedincome) or other items the bankrupt receives,such as gits, lottery winnings or money receivedunder a will.

lump sum superannuation paymentsreceived ater the date o bankruptcy, or

propertyboughtwithsuchmoneyafterthedate o bankruptcy.

However, the trustee does have power underthe

Bankruptcy Actto recover rom a super-

annuation und out o character paymentsmade into the und prior to bankruptcy whereit can be shown that the payments were madewith the intention o putting those unds beyondthe reach o creditors.

[7.140] The bankrupts homeIfabankruptowns,orispurchasing,ahome,or a couple who are joint owners are both madebankrupt, the trustee normally sells the home i

there will be a surplus ater paying the mortgageand sale costs (unless it was bought wholly orsubstantially with compensation money or aninjury see Money rom damages or compen-sation at [7.130]).

Deence Service homesIfthehomeismortgagedtotheDefenceServiceHomes Division, it is protected under theDeence Service Homes Act 1918 (Cth), andthe director o the Deence Department will

rarely give permission or a sale.Joint ownership with a non-bankruptpersonIfthehomeisownedjointly(joint tenancy) bythe bankrupt and someone who is not bankrupt,the trustee either: becomesregisteredasatenant-in-common

o the home with the non-bankrupt person,or

lodges acaveat on the title to protect thebankrupts interest.

Rights o the mortgagee

This does not aect the rights o the mortgagee,and i mortgage payments all into arrears themortgagee can sell the property.

Selling the home

Non-bankrupt joint owners have rst option tobuy the bankrupts interest in the home romthetrustee.Iftheycannotaffordtodosotheymay agree with the trustee to sell the home, andreceive an equal share o any money let overater the mortgage and costs are paid.


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sellthegoods paythelenderwhatisowingonthem,and keepthebalancetopayothercreditors.This is only possible i: thelenderagrees,and thegoodsareworthmorethantheamount

still owing on them.Otherwise,thebankruptcankeepthemaslongas payments are made on time. When they arenally paid for, the trustee can seize and sellthem (s.58(1)).

[7.170] Property previouslydisposed oSome debtors, seeing the threat o bankruptcy,try to put their property beyond the reach o

creditors by transerring it to others, otenfamilymembers.Propertycanbereclaimedbythe trustee i it was: givenawayorsoldintheveyearsbefore

bankruptcy or less than its ull value, or given away or sold at any previous time

with the intention o deeating creditors(Bankruptcy Actss.120, 121).

Transer under a maintenance agreement

Transers o property under a maintenanceagreement beore bankruptcy are not aected,unless raud can be established.

Ifthebankruptdoessaveupandbuysitemsthat are not protected during bankruptcy, thesemay also be taken by the trustee in certaincircumstances (Bankruptcy Act s.58(1)).However a bankrupts accumulated incomeheld in a bank account is protected.

[7.160] Consumer mortgagesand bills o saleFinance companies and other lenders otensecure loans with a consumer mortgage or billo sale over a persons goods.

Ifapersonbecomesbankrupt,andpaymentsare in arrears, the lender can seizethe goodsand sell them. Money still owed to the lenderater the sale is added to the bankrupts list o

debts.Exempt goodsWhere the mortgage or bill o sale is over goodsexempt under the Act (such as household urni-ture or a motor vehicle worth less than $7050seePropertyabankruptcankeepat[7.130]),the exemption stops the trustee rom selling thegoods. However, they can still be taken by alender with a bill o sale or consumer mortgagei the borrower is behind in payments.

The goods cannot be taken by the lender andsold just because the debtor becomes bankrupt.There must be a deault under the agreement.

Non-exempt goodsWhere the mortgage or bill o sale is over goodsthat are not exempt under the Act, the trusteemay be able to:

[7.180] Eects o bankruptcy on incomeWhile a person is bankrupt they must makepayments to the trustee rom their income ithey earn over a certain amount.

This threshold income is linked to benetpayments under the Social Security Act 1991.For a person without dependants, the thresh-old is equal to the basic rate o pension or amarried pensioner ($13,504.40 per year as atSeptember 2011) multiplied by 3.5; that is,$47,265.40 per year. The threshold increases ithere are dependants.

[7.190] Income contributionIfthebankruptsassessedincome(seeCalculat-ing assessed income below) is above the thresholdamount, the bankrupt must pay 50 cents in eachdollar above the threshold (Bankruptcy Actss.139J139ZZ). That is, what the bankruptmust pay the trustee or the benet o creditors(the income contribution) is ound by subtract-ing the threshold amount rom the bankrupts

assessed income and halving the result.


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7 Bankruptcy 177

thebankruptoradependanthasanillnessor disability

the bankrupt has to pay for childcare toenable them to work

thebankruptisforcedtopayhighprivaterent (or example, because they live in aremote area), or

thebankrupthassubstantialtravellingcoststo get to work.

AppealAbankruptpersoncanappealtotheInspector-General in Bankruptcy i: they disagreewith thecalculationof their

assessed income contribution, or theyareunhappywiththetrusteesresponse

to a hardship application.

IfthepersonisnothappywiththeInspector-Generals decision they can appeal to theAdministrative Appeals Tribunal.

The assessed contribution must continue tobe paid until the appeal has been determined.

Penalty or ailing to give inormationThe maximum penalty or ailing to give the trusteeinormation and evidence about income is 12 months

jail.

Ifassessedincomeislessthanthethreshold,no contribution need be paid.

Frequency o paymentThe trustee decides how oten the contributionis to be paid (weekly, ortnightly, or whatever).

Bankrupts are encouraged to have thepayments directly credited to the trusteesaccount rom either their salary or bankaccount.

Calculating assessed incomeTo calculate assessed income, the trustee: adds upthe income the person is likely to earn (income

includes wages, the value o ringe benefts, rentalincome, business earnings less expenses, interest,dividends, and periodic payments received romsuperannuation unds, lie policies or trusts)

subtractsincome tax paid or likely to be paid subtracts child support or maintenance paid or

liable to be paid addsany amount received or likely to be received in

a tax reund.

I payments are missedIf payments are missed without satisfactoryexplanation, the trustee may arrange or thecontribution to be garnisheed directly romthe bankrupt persons wages.

HardshipA person suering hardship can apply in writingto the trustee to reduce the assessed amount.The trustee can reduce the amount i:

Obligations, restrictions and rights[7.200] Obligations and

restrictions on bankruptsKeeping the trustee inormedA bankrupt person is required to keep theirtrustee ully inormed o any change in their: name maritalstatus numberofdependants residentialaddress employment income.They must also disclose to the trustee any divis-

ible property they acquire or become entitled to

during bankruptcy; or example, an interest in

a relatives deceased estate.Restrictions on creditA bankrupt person cannot obtain credit orgoods or services with a value over $5040without telling the lender they are bankrupt.

Restrictions on overseas travelA bankrupt person: may have to hand over their passport to

their trustee i requested to do so cannottraveloverseaswithoutthetrustees

written permission.


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Also, a bankrupt person can continue orstart proceedings concerning their employment,such as unair dismissal or harassment in theworkplace.

Any other legal proceedings commenced

beore bankruptcy are automatically stopped,but i the trustee believes the proceedings havemerit, and creditors are willing to und theaction and indemniy the trustee or costs thenthe trustee can continue them.

Trustees must act reasonably, and they havea duty to consider whether the proceedingshave merit and should be continued.

Bank accountsThe person can have a savings account, but mostbanks need the trustees consent. There is nolimit on the amount o income that a bankruptcan accumulate in their bank account duringbankruptcy, however i the money is withdrawnrom the account and used to purchase an assetthat is not protected (eg shares) the trustee cantake such assets as ater-acquired property.

Travel in AustraliaThe person can travel reely in Australia, thoughthe trustee must be notied o changes in name,address or employment, including simply using

a dierent name or an additional name.

Right to examine fleThe person may examine the trustees le ontheirbankruptcy.Itwillprobablycontain: thetrusteesreports copiesofrelevantcourttranscripts alistofproos o debtlodged by creditors.Copies o all relevant documents can beobtained under the Freedom o InormationAct 1982 (Cth) (see chapter 27, Freedom o

inormation), though a cheaper option may beto simply ask to look through the le.

Trustees must ollow strict guidelines or autho-rising overseas travel, and a bankrupt shouldmake their request or the trustees permissionsooner rather than later, to enable the trusteeenough time to properly consider the request. Aperson considering bankruptcy who intends totravel overseas while bankrupt should discussthis with their solicitor, accountant or nancialcounsellor.

If the bankrupt person leaves Australiawithout the trustees permission the period obankruptcy can be extended to run or eightyears, starting rom when they re-enter Austra-lia. They can also be prosecuted.

[7.210] Rights o bankrupts

Review o decisionsA bankrupt can ask the Inspector-Generalto review the decisions o their trustee aboutincome contributions and discharge rom bank-ruptcy. The Administrative Appeals Tribunalcan review the decision of the Inspector-General.

The bankrupt can apply to the Federal Courtor Federal Magistrates Court or a review oany decision made by their trustee. However,the Courts will not consider any applications

concerning contributions or discharge until theAdministrative Appeals Tribunal has consid-ered the matter.

Legal proceedingsA bankrupt person can continue legal proceed-ings begun beore the bankruptcy or personalinjury to themselves, or death or personalinjury in relation to their spouse or other amilymembers, and also a wrong done to the personsuchasdefamation.Propertyboughtwhollyorsubstantially with compensation or damages

received in such proceedings is not available tocreditors.

Ending bankruptcy[7.220] Automatic dischargeA person is automatically discharged rom bank-ruptcy three years ater ling their statement oaairs, unless there is an objection by the trustee(see Extension o bankruptcy below).

Early dischargeEarly discharge provisions were repealed as rom5 May 2003.


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7 Bankruptcy 179

Extension to fve yearsThe period o bankruptcy will be extended tove years i the trustee makes an objection onthe grounds that the bankrupt ailed to: disclosealldebtsandcreditors

discloseallproperty attendaninterviewwiththetrustee attendanexaminationbythecourt signdocumentswhenaskedbythetrustee notifythetrusteeofachangeofaddress,or attendameetingofcreditors.

Extension to eight yearsThe period can be extended to eight yearsi the trustee objects on the grounds that thebankrupt: failedtopayincomecontributions

failed to provide details of property andincome to the trustee

failedtoexplaintothetrusteehowmoneywas spent or assets disposed o

borrowedmorethan$5040withoutdisclos-ing bankruptcy to the lender

leftAustraliawithoutpermission,or managedacompanywhilebankrupt.

[7.250] Release rom debtsAter discharge rom bankruptcy (usuallythree years ater ling the statement o aairs)the bankrupt is released rom most o theiroutstanding debts, calledprovable debts.

Victims compensation debtsOndischarge,thebankruptisrelievedofanydebtcreatedbyaprovisionalorderand/oranaldetermination by the Victims CompensationTribunal made beore the date o bankruptcy.

Charges or electricity and other services

Accounts or electricity, gas, telephone andso on unpaid at the date o bankruptcy areprovable debts rom which the bankrupt isreleased. However, the service will probablybe disconnected i the person does not pay thebill. A person who wants the service connectedat a new address and has a debt to the serviceprovider at the previous address may have topay a higher security deposit.

Legal advice should be sought i the serviceprovider will not reconnect the service unlessarrears incurred beore the bankruptcy arepaid.

[7.230] Annulment o bankruptcyThe bankruptcy is annulled when the trusteehas,fromthesaleofdivisiblepropertyand/orincome contributions: paidthecreditorsinfull,and

paidthetrusteesfeesandexpenses.No court order is needed.

Payment by contributionsA bankrupt who is not required to make incomecontributions to their trustee can arrangeto make payments to creditors that, whencompleted, will annul the bankruptcy.

The trustees ees must still be paid beorethe trustee will grant an annulment.

Part payment

The bankruptcy is annulled i creditors, byspecial resolution, accept an oer o composi-tion made via the trustee, such as 50 cents inthe dollar. There are mechanisms or proposingsuch arrangements without entering bankruptcy(see Part X personal insolvency agreementproposals at [7.50]).

Deects in processThe court may annul a bankruptcy where itcan be established that there was a deect in the

legal process that led to the person becomingbankrupt.

Going to courtUnder the Bankruptcy Act, both the Federal Court andthe Federal Magistrates Court can hear and decide bank-ruptcy cases, and either court may alter orders made by itunder the Act and may annul a persons bankruptcy.

Appeals rom a single judge o the Federal Courtare heard by the Full Court o the Federal Court.Appeals rom a magistrate are generally heard by asingle Federal Court judge.

Legal aid is not available in bankruptcy matters.

[7.240] Extension o bankruptcyDischarge may be delayed by a urther two orve years, making the period o bankruptcy veor eight years, i: thereareobjectionstoautomaticdischarge

ater three years, or the bankrupt has not complied with

the trustees directions and/or has failedto co-operate with the trustee in the admin-istration o the bankrupts estate.


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Income taxIncometaxunpaidatthedateofbankruptcy(whether or not returns have been lodged orassessmentsissued)isaprovabledebt.Ifanyreturns have not been lodged the bankrupt

should lodge them at once to avoid possibleprosecutionbytheAustralianTaxationOfce(ATO), which is notied of everyone whobecomes bankrupt.

TheATOcannottakelegalactiontorecoverprovable tax debts rom a bankrupt, but it hasthe right to retain reunds rom tax returnsduring the bankruptcy and apply them to taxdebts, Child Support debts and Centrelinkdebts.

[7.260] Debts rom which theperson is not releasedThere are some debts rom which the bankruptperson is notreleased.

Child support debtsThe creditor (either the bankrupts ormerpartner or the Child Support Agency) cancontinue recovery action or child maintenancedebts incurred beore and during bankruptcy.The bankrupt is only released rom liabilityor interest owing on such debts at the date obankruptcy.

Bail bonds and court fnesThe person is not released rom debts arisingfrom bail bonds and court nes. Penaltiesimposed by way o inringement notices (eg.parking and speeding tickets etc) are provabledebts because they have not been imposed bya court and the bankrupt will be released romthem on discharge. However, i they are notpaidtheStateDebtRecoveryOfce(SDRO)

will probably suspend the bankrupts driverslicence and/or vehicle registration until thepenaltyispaid.Ifthebankruptrequirestheirlicenceforworkorothernecessity,theSDROwill usually consider an application to lit thesuspension i the bankrupt has entered into arepaymentagreementwiththeSDRO.

Proceeds o crimeThe person remains liable or pecuniary penaltyorders under the ederal Proceeds o Crime Act1987.

Debts incurred through raudThe person is not released rom debts incurredthrough raud or a breach o trust, includingmoneyowedtoCentrelinkortheATOobtainedthrough raud or misrepresentation.

Unliquidated claimsThe person is not released rom debts arisingrom unliquidated claims (such as a claim arisingrom a car accident in which the bankruptwas at least partly at ault) which, althougharising rom something that happened beore

the bankruptcy, are not resolved at the date obankruptcy.A debtor should nalise such matters beore

becoming bankrupt.

Debts incurred since enteringbankruptcyThe person is liable or any debt incurred sincethe date o bankruptcy.

Student loans and higher educationcharges

Loans to students under either the Student andYouth Assistance Act 1973 or the youth allow-ance and Austudy schemes (Social Security Act)are not provable a debtor is not released romthem on discharge rom bankruptcy.

All higher education charges (HECS) debtsare provable since 7 June 2001, but the personis not released rom the HECS debt upondischarge rom bankruptcy.

Council rates

Local councils have a frst chargeon real estate whenrates are not paid. This means they have a right to takewhat is owed to them rom the proceeds o sale beoreunsecured creditors are paid.


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7 Bankruptcy 181

Ifyouaredeaforhaveahearingorspeechimpairmentand/oryouuseattyoracomputerwithamodem,youcanringanynumberthroughtheNationalRelayServicebyphoning133 677 (localand chargeable calls) or 1800 555 677 (ree calls) or 1300 555 727 (Speak and Listen calls). Formore inormation, see www.relayservice.com.au.

Non-EnglishspeakerscancontacttheTranslatingandInterpretingService(TIS)on 131 450 touse an interpreter over the telephone to ring any number. For more inormation or to book an inter-preteronlineseewww.immi.gov.au/living-in-australia/help-with-english/help_with_translating/.

[7.270] Contact points

Administrative Appeals Tribunalwww.aat.gov.auph: 1300 366 700 or 9391 2400

Australian Association oPermanent Building Societies

www.aapbs.com.auph: 6281 1588

Australian Commercial DisputesCentrewww.acdcltd.com.auph: 9239 0700

Australian Competition andConsumer Commissionwww.accc.gov.auph: 1300 302 502

Australian Finance Conerencewww.ac.asn.auph: 1800 231 587 or 9231 5877

Australian Prudential RegulationAuthoritywww.apra.gov.auph: 1300 558 849 or 9210 3480

Australian Securities andInvestments Commission (ASIC)www.asic.gov.auph: 1300 300 630

Banking and Financial ServicesIndustry Ombudsmanwww.bso.org.auph: 1300 780 808

Consumer Credit Legal Centrewww.cclcnsw.org.auph: 9212 4216Credit and debt hotline:

1800 007 007The Consumer Credit Legal

Centre deals with mattersconcerning credit, debt,bankruptcy and banking issues.Itdoesnotdealwithgeneralconsumer issues.

CPA Australiawww.cpaaustralia.com.auph: 1300 737 373

Credit Union ServicesCorporation o Australiawww.cuscal.com.au

ph: 1300 650 501 or 8299 9000

Fair Trading, Ofce o

Specialist Support Unitwww.airtrading.nsw.gov.auph: 132 220 or 9895 0111

Financial Counsellors Associationo NSWwww.can.com.auph: 1300 914 408

Financial Ombudsman Servicewww.os.org.auph: 1300 780 808

Financial Planning Association(FPA)www.pa.asn.auph:1800 626 393 or 9220 4500TheFPAhasaProfessional

Standards Department. Forcomplaints, see also theFinancialOmbudsmanService.

Insolvency and Trustee ServiceAustraliawww.itsa.gov.auph: 1300 364 785

Institute o Chartered

Accountants in Australiawww.charteredaccounts.com.auph: 1300 137 322

Vedawww.veda.com.auph: 1300 921 621Holds and distributes inormation

on credit ratings and histories.


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[7.280] Internet AustralasianLegalInformationInstitute(AustLII)www.austlii.edu.au AustralianSecuritiesandInvestmentsCommissionwww.asic.gov.au AustralianTaxationOfcewww.ato.gov.au

FinancialCounsellorsAssociationofNSW(includesalistofaccreditednancialcounsellorsinNSW) www.can.com.au FinancialOmbudsmanServicewww.os.org.au InsolvencyandTrusteeServiceAustraliawww.itsa.gov.au LawAccessNSWwww.lawaccess.nsw.gov.au LegalAidCommissionofNSWwww.legalaid.nsw.gov.au LocalCourts:Goingtothelocalcourtaboutadebtwww.lawlink.nsw.gov.au/lc.nsf/pages/

lc_money_issues Redfern Legal Centre Credit andDebt Factsheet www.rlc.org.au/our-services/credit-debt/

nancial-tidbits.html

ch7_bankruptcy_3.pdf

Documents