Bankruptcy is a reference to the legal process by which a person is declared unable to pay their debts, of which is regulated in Australia by the Commonwealth Government (see section 51(xvii) of the Commonwealth Constitution pursuant to the Bankruptcy Act 1966 (Cth).

A person who is unable to pay their debts is declared bankrupt through either a debtor or creditor petition. A trustee in bankruptcy (a nominated registered trustee chosen by a debtor or the Official Trustee) is appointed to administer a bankrupt’s estate and has the job of realising the assets of a bankrupt and collecting debts that may be owed, for the benefit of the bankrupt’s creditors.
One of the advantages of entering bankruptcy is that a bankrupt is released from most of their debts. This means that a bankrupt will not have to pay their creditors (unless the trustee sells your assets or you make compulsory income contributions). Some examples of debts that a bankrupt is released from include:

  • Credit cards;
  • Phone bills;
  • Overdrawn bank accounts;
  • Unpaid rent;
  • Professional fees.

Although a bankrupt is released from the above debts, there are some debts that are “locked down”, which include:

  • Child support payments;
  • HECS and Help debts;
  • Debts incurred after bankruptcy;
  • Court imposed penalties and fines.

If a bankrupt owes a secured debt, for example a mortgage, the secured creditor will almost always demand that the secured property be sold so that the debt can be satisfied. If the secured property is sold and there is a shortfall (i.e. an amount still owed despite the property being sold), a bankrupt can list this amount as a debt in their bankruptcy, of which a secured creditor can not pursue.
By becoming bankrupt a person is not prevented from working, however, the amount that you earn is capped and 50% of the amount you earn above the income threshold must be paid to the trustee. The income contribution amounts are indexed and can be found on the AFSA website.

Currently in Australia bankruptcy usually lasts for 3 years and 1 day, however, the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 proposes to change this to 1 year, a consequence of the goal of the current Commonwealth Government to foster entrepreneurship and the reduce the stigma that is often associated with bankruptcy.