What is Bankruptcy?

Financial difficulties can strike anyone—unexpected job loss, medical emergencies, or failed business ventures can quickly lead to mounting debt. When the burden becomes unmanageable, bankruptcy can be a formal solution that offers a legal pathway to reset your financial life.

In Australia, bankruptcy is a legal process under the Bankruptcy Act 1966, offering protection from creditors while also placing clear obligations on the individual. It aims to balance the need to give people a second chance while ensuring fairness to those they owe money.

This article outlines what bankruptcy means in Australia, how it works, who is eligible, and what you should consider before applying. It’s essential reading for anyone considering this serious but sometimes necessary step.

What is Bankruptcy in Australia?

Bankruptcy in Australia is a formal declaration that a person is insolvent, meaning they cannot pay their debts when they are due. Once bankrupt, most of an individual’s unsecured debts are legally wiped out, allowing them to start afresh.

Bankruptcy may be:

• Voluntary – where the individual applies for bankruptcy themselves.
• Involuntary – where a creditor (someone owed money) applies to the court to have the individual declared bankrupt, known as a sequestration order.

This process is managed by the Australian Financial Security Authority (AFSA) and involves the appointment of a trustee, who takes control of the bankrupt person’s finances and assets.

It’s important to understand that bankruptcy is personal—it applies to individuals, not companies. If you’re looking for help with a company in financial trouble, you’ll need to contact the Australian Securities and Investments Commission (ASIC).

How Bankruptcy Works in Australia

Once declared bankrupt, your financial affairs are handed over to a trustee—either the Official Trustee (via AFSA) or a registered private trustee. Their job is to:

• Investigate your financial affairs.
• Communicate with your creditors.
• Sell certain assets to pay off debts.
• Collect part of your income if you earn over a set threshold.
• Make decisions about your legal and financial rights during the bankruptcy period.

During bankruptcy:

• You are released from most unsecured debts, such as personal loans, unpaid utility bills, and credit cards.
• Some debts remain, including court-imposed penalties, child support, and HECS/HELP debts.
• You must disclose all income, assets, and liabilities.
• You must seek permission to travel overseas.
• You may be restricted from certain jobs or from running a company.

Bankruptcy usually lasts for three years and one day, starting from the day your application is accepted by AFSA or from the date you file your statement of affairs after a court-ordered bankruptcy.

However, your trustee may extend your bankruptcy to five or even eight years if you fail to cooperate or provide false or incomplete information.

Eligibility for Bankruptcy in Australia

Bankruptcy is open to anyone who meets the following criteria:

• You are insolvent—unable to pay your debts as they fall due.
• You have a residential or business connection to Australia.
• You are not currently bankrupt or under a personal insolvency agreement.

Notably:

• There is no minimum or maximum debt amount required to declare bankruptcy.
• There is no application fee.
• You cannot be in a current debt agreement or personal insolvency agreement unless it is terminated before applying.

If you’re unsure about your eligibility, AFSA provides a simple online tool to help assess your situation.

Pros and Cons of Bankruptcy

Pros of Bankruptcy

• Debt relief: Most unsecured debts are legally erased.
• Creditor protection: Creditors are prohibited from pursuing you directly.
• Fresh start: Bankruptcy gives you a clean slate and freedom from overwhelming financial pressure.
• No minimum threshold: Anyone in financial difficulty can apply, regardless of the amount owed.

Cons of Bankruptcy

• Loss of assets: Some possessions may be sold to repay debts, including your home or valuable items.
• Income contributions: If your income exceeds a threshold, you may be required to make payments.
• Credit impact: Bankruptcy stays on your credit report for at least five years and affects your ability to borrow.
• Employment restrictions: Some professions (e.g., financial services) and directorships are off-limits.
• Travel restrictions: You need written permission from your trustee to leave Australia.
• Public record: Your bankruptcy is listed on the National Personal Insolvency Index (NPII), a searchable online database.

Things to Consider Before Entering Bankruptcy

Bankruptcy should not be the first step in managing financial difficulty—it’s a last resort. Here are crucial points to weigh:

Speak to a Financial Counsellor

A professional financial counsellor can help assess your circumstances and outline all available options. Their advice is free, confidential, and independent. You can contact the National Debt Helpline at 1800 007 007 to get started.

Explore Alternatives

Bankruptcy is one of several formal debt solutions in Australia:

• Debt Agreement – a legally binding compromise with creditors to pay a portion of what you owe.
• Personal Insolvency Agreement – a more flexible arrangement for larger debts.
• Temporary Debt Protection (TDP) – provides 21 days of relief from creditor action to consider your options.

Each alternative has different eligibility rules and consequences, and may be more suitable depending on your situation.

Understand the Long-Term Consequences

Bankruptcy can affect many aspects of your life long after the formal period ends. For example:

• You may have difficulty securing rental accommodation or utilities contracts.
• Your bank accounts may be monitored or closed.
• You may face emotional stress, particularly if assets are repossessed.

Use AFSA’s “How Bankruptcy May Affect Me” tool for a clearer idea of personal consequences.

How to Apply for Bankruptcy

The bankruptcy application process in Australia is designed to be accessible and free of charge. Step-by-Step Guide:

1. Complete the Bankruptcy Form

The form includes a Statement of Affairs, which requires detailed information about:

• Your income and expenses
• Your debts and assets
• Any recent asset transfers

Being honest and thorough is essential. Failing to disclose information can lead to penalties or an extension of your bankruptcy period.

2. Choose a Trustee

You may nominate a registered trustee to handle your bankruptcy. If you don’t, the Official Trustee (AFSA) will usually manage your case or appoint a trustee on your behalf.

3. Submit Your Application

Apply through AFSA’s Online Services portal. Once submitted and accepted, your bankruptcy officially begins.

4. Comply With Your Trustee

After bankruptcy is declared, your trustee will:

• Notify your creditors.
• Manage any assets that must be sold.
• Assess whether you’re required to make income contributions.

You must cooperate fully and notify your trustee of any changes to your situation (e.g., receiving an inheritance or a new job).

Conclusion

Bankruptcy in Australia is a powerful legal tool that can free you from overwhelming debt and help you rebuild your financial life. It offers protection from creditors, erases many debts, and provides a fresh start. However, it also comes with serious consequences that can affect your employment, credit, assets, and freedom to travel.

Before applying for bankruptcy, it’s vital to understand the process and explore all other available debt solutions. Free and confidential help is available from financial counsellors who can help you make an informed decision.

If bankruptcy is the right path for your situation, knowing what to expect can ease the transition and help you make the most of your fresh start.

Ultimately, bankruptcy is not the end—it’s the beginning of a new chapter.