Introduction

Contributed by Ian Macdonald and current to 1 September 2005

TERMS USED
There are some terms used in bankruptcy which it is useful to be familiar with. These are:

Bankruptcy – a legal state in which a person is separated from most of their financial affairs.
Creditor – a person or organization to whom money is owed.
Debtor – a person who owes money.
Estate – the part of a person’s financial affairs that is under the control of a trustee during the period of time a bankruptcy continues.
ITSA – Insolvency Trustee Service Australia: the Commonwealth department that administers bankruptcy law.
Secured Debt – a debt where the creditor has a mortgage, charge or lien over property to ensure payment of the debt.
Trustee – the person who looks after the affairs of a particular person who is bankrupt. The trustee is normally a person who works in ITSA; however, there are private individuals called registered trustees who are also able to do this work.
Unsecured debt – a debt where the creditor has no security over any property of the debtor.

WHO CAN FILE FOR BANKRUPTCY?

There is no upper or downward monetary limit on a person who wishes to become bankrupt on their own petition. However, ITSA can reject a debtor’s petition if it appears that the debtor, now or within a reasonable time, could pay their debts, and either:

• the debtor appears to be unwilling to pay some or all of their creditors; or

• the debtor has previously been bankrupt on a debtor’s petition at least three times, or at least once in the past five years.

Debtors do not need to be citizens of Australia to become bankrupt, but they must have some connection with Australia. It is adequate if they meet any one of the following tests at the time of seeking to become bankrupt. They must:

• be personally present or ordinarily resident in Australia; or

• have a house or business here; or

• be carrying on a business here, directly or indirectly, either alone or with other people.

There is no upper or lower age limit on a person becoming bankrupt, and a person under a mental disability can become bankrupt.

HOW DOES BANKRUPTCY COME ABOUT?

People who are overwhelmed by their debts, and who are having a difficult time being harassed by their creditors, might decide to become bankrupt. They can do this by filing a debtor’s petition in the ITSA office. This does not cost anything at the present time, however the Commonwealth Government has suggested a fee may be introduced.

People may also become bankrupt by their creditors taking action in Court, called a creditor’s petition. This course of action is open to creditors or a group of creditors who are owed $2,000 or more. It is quite expensive for the creditor to do, usually costing the creditor several thousand dollars. Creditors may do this so they can explore the debtor’s financial affairs very thoroughly. Sometimes creditors petition to bring about a person’s bankruptcy so they can get hold of property that is not otherwise available to them.

Bankruptcy is a term that applies to people. If a company gets into financial difficulty it may go into liquidation. A partnership or a registered business name is not a legal person, other than the individuals involved. Neither a partnership nor a business name can become bankrupt. The people behind them may. When people become bankrupt, two important things happen to their financial affairs. Creditors can no longer go on with Court actions against them for unsecured debts. At the same time, the luxury goods of the debtors cease to belong to them. From the time of becoming bankrupt, their luxury goods are owned by the trustee managing their bankrupt estate.