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© Financial Rights Legal Centre | Lismore and District Financial Counselling 2014
ABN 40 506 635 273
This toolkit is copyright. Non-profit community groups have permission to reproduce parts of
this book as long as the original meaning is retained and proper acknowledgement is given. All
other persons and organisations wanting to reproduce material from this book should obtain
permission from the above organisations.
This publication has been written by Karen Cox of Financial Rights Legal Centre and Steve
Snelgrove of Lismore and District Financial Counselling, with input from Bob Cruickshanks,
formerly of the Insolvency Trustee Service of Australia, as it was then known.
Acknowledgements
The authors of this toolkit would like to thank the following financial counsellors for their valuable
feedback in the course of producing this publication: Heather Brown; Malcolm Buchanan; David
Lawson; Ian McDonald; Phillip Powell; Gary Rothman, and last but far from least, Betty Weule,
who provided timely and detailed feedback on every chapter. Thanks also to Financial Rights
Legal Centre staff, Greg Russell, Katherine Lane and Alexandra Kelly for their comments and
assistance. The following people also provided comment on specific sections: Chris Deeble
of the Credit Ombudsman Service, Philip Field of the Financial Ombudsman Service, Jennifer
Hedge (then Registrar of the Federal Magistrates Court); Registrar Rupert Burns; and John
Burke (then CCLC Management Committee member).
The Australian Financial Security Authority also provided very useful feedback but naturally
does not warrant or guarantee any advice or other content included in this toolkit.
Disclaimer
The Financial Rights Legal Centre and Lismore and District Financial Counselling disclaim all
liability for errors or omissions of any kind whatsoever, or for any loss or damage in whole or
in part, arising from any person relying on any information in this handbook. Bankruptcy law
is a dynamic area with frequent developments. Readers should make their own enquiries to
ensure information is up-to-date.
CONTENTS
1INTRODUCTION
1
Financial counsellors and bankruptcy
1
About this toolkit
2
2
HOW DID I GET HERE?
5
3
BANKRUPTCY IN A NUTSHELL
7
4
IS IT FOR ME?
13
Should my client consider bankruptcy? 13
The A – Z of bankruptcy
14
ARE THERE OTHER OPTIONS?
27
Part 1:Declaration of Intention to Present a Debtor’s Petition
27
Part 2:Debt agreements
29
Part 3:Personal Insolvency Agreements
43
THE CONSEQUENCES OF BANKRUPTCY
47
Part 1:Debts – will I still have to pay my debts?
48
Part 2:Protected property – what can I keep?
61
Part 3:Divisible Assets – What will the trustee take and sell?
74
Part 4:Income contributions – What happens to money I earn while bankrupt?
89
Part 5:Other consequences of bankruptcy – how else will it affect my life?
96
5
6
7
Part 6:Small business & bankruptcy
107
Part 7:Family law and bankruptcy
116
Part 8:Gambling and hazardous speculation
125
Part 9:Death and bankruptcy
128
I’VE DECIDED — SO HOW DO I DO IT?
131
Part 1:Declaration of Intention to Present a Debtor’s Petition
131
Part 2:Completing the Debtor’s Petition 136
Part 3:Completing the Statement of Affairs
143
8
WHAT HAPPENS NOW?
183
Part 1:Life in bankruptcy
184
Part 2:The light at the end of the tunnel – getting out of bankruptcy
209
IT’S ALL OVER, OR IS IT?
221
Part 1:What are the ongoing consequences after discharge from bankruptcy
221
Part 2:Debts allegedly incurred by fraud – dealing with Centrelink demands
223
HELP, I’M BEING MADE BANKRUPT!
227
Part 1:Introduction
228
Part 2:Bankruptcy Notices 233
Part 3:Creditor’s Petitions
238
Part 4:Sequestration orders
246
DEBT AGREEMENTS
251
Part 1:The Debt Agreement proposal and acceptance process
251
Part 2:Complaints about Debt Agreements and Debt Agreement Administrators
257
Part 3:Varying, terminating or otherwise ending a Debt Agreement
268
PERSONAL INSOLVENCY AGREEMENTS
275
Part 1:What is the process for entering a PIA?
275
Part 2:Variation of a PIA
278
Part 3:Termination of a PIA
278
Part 4:Complaints
279
TOOLS AND RESOURCES
281
Checklists
281
Client handout
286
Other resources found in this kit
288
Useful contacts
288
TABLE OF STATUTES
290
TABLE OF CASES
292
INDEX
293
9
10
11
12
13
1INTRODUCTION
I
n the last few years financial counsellors have increasingly found themselves working with
clients who have a whole range of complex issues. Since the Global Financial Crisis a new
type of client has joined the ranks of the traditional financial counselling target group – those
who may have formerly enjoyed a high income and acquired assets and large loans along the way.
At the same time the regulatory landscape has evolved rapidly, with new laws and amendments
affecting the financial counsellor’s work occurring with considerable frequency. The pressure on
financial counsellors to keep abreast of all these new demands has led to the need for resources
which give support to financial counsellors and allow them to develop the necessary skills
required to meet these challenges.
After the success of the Credit Law Toolkit and the Mortgage Stress Handbook there was a
clear need for the development of a Bankruptcy Toolkit. As a result of a chance conversation an
opportunity arose to develop such a resource and thanks to the assistance of FAHCSIA (now
the Department of Social Services) funds were made available to write this toolkit.
As with all such resources the more you consult the greater the range of views on bankruptcy
that come to the surface. We decided having had these many conversations to utilise the help,
knowledge and insights of a recently retired deputy official receiver, Mr Bob Cruickshanks, to
produce a practical guide to bankruptcy.
The purpose of this toolkit is to assist financial counsellors to be able to explain to their clients the
consequences of bankruptcy, the alternatives, the process and the practical details of completing
the forms. It also covers problems that may arise during bankruptcy and even beyond discharge.
Financial counsellors and bankruptcy
Bankruptcy is now a major part of financial counselling and with the continued stress upon
Australia’s two-speed economy something that many more people are facing. These clients deserve
access to the information that will allow them to make educated and considered decisions. We
believe this toolkit will assist financial counsellors to deliver that to their clients.
The role of the financial counsellor in assisting clients with bankruptcy is to provide comprehensive
support and information. Financial counsellors should not allow themselves to be limited to
giving assistance to “fill out the forms”. Financial counsellors should strongly resist pressure from
clients to reduce their role to this as it raises major issues of duty of care and professional practice.
The financial counsellor’s role is one of
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Ensuring clients have considered all the available options
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Making sure clients understand all the potential consequences
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Supporting clients to enable them to cope more easily with the consequences of their
decision (including the emotional impact and practical challenges)
F I NA N C I A L R I G H T S L E G A L C E N T R E A N D L I S M O R E A N D D I S T R I C T F I N A N C I A L C O U N S E L L I N G 1
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Assisting clients to understand the forms including why particular questions are being
asked, what will be done with the information provided, and the consequences of
omitting information or providing wrong or misleading information
Supporting clients through the lodgement process
Ensuring clients understand what is expected of them during bankruptcy and beyond
(some financial counsellors may also respond to questions during the bankruptcy and
advocate for the client to creditors and/or the trustee should that be appropriate).
It is almost impossible to do this properly in the course of one interview and it should therefore
be a rare situation where bankruptcy forms are completed at a first interview. Even when the
situation seems urgent, there may be other options to buy time.
Some services have a policy of not completing bankruptcy forms at the first interview and this
position is clearly communicated to clients.
Clients who say they only want help with the forms and do not want to discuss the options and
consequences not only miss an important opportunity to make sure they are taking the best
course of action from their own perspective, but also put financial counsellors at risk of falling
short of their professional obligations.
It is rare that the client will not listen if it is stated that the service requires the client to be
informed of their other options as part of considering bankruptcy, and to be fully informed of
the consequences of bankruptcy before proceeding with that option.
About this toolkit
This kit is designed for use by financial counsellors and other caseworkers (such as community
lawyers) who assist clients with bankruptcy.
As the law of bankruptcy is very complex and no two clients the same, it is important to work
through both the decision-making process with the client – whether to go bankrupt – and the
completion of the forms, thoroughly and systematically. Unfortunately, bankruptcy is also an
area that leads to fairly frequent consumer complaints.
Some of these complaints may be justified, such as where a caseworker has failed to explain an
important consequence to the client, but in other cases it may be that the client was simply not
prepared to listen and with the benefit of hindsight is now disappointed. In the interests of both
better client outcomes and to protect yourself professionally you need both:
■■
Systems which help you avoid mistakes and oversights, and
■■
Records that explain and justify what you have done.
Many financial counsellors and financial counselling services have already developed their own
forms and procedures for assisting clients with bankruptcy. In this kit we try to pool the benefit
of this vast experience to develop a convenient source of information and tools to help achieve
best practice in this area.
We encourage you to use this resource as a starting point and add information by simply slotting
in extra pages as you come across other things that are useful, such as updates from the Australian
Financial Security Authority (“AFSA” – formerly the Insolvency Trustee Service of Australia)
or handouts from further training.
2
B A N K RU P TC Y TO O L K I T
While newer financial counsellors and community lawyers may wish to read some sections of this
kit entirely, others may simply use it as a reference to look up in the event of unusual problems.
If you are completely new to bankruptcy law you might want to start by reading Chapter 3 and
Chapter 6. Another possible way of using this kit is to refer to Chapter 7 question by question
as you complete a client’s Statement of Affairs and use the cross references to other parts of the
kit as particular issues come up relevant to the particular client.
The Structure of the toolkit
This resource is divided into 12 Chapters. Chapters 2 – 9 roughly following the bankruptcy
process and consequences from beginning to end.
Chapter 2 How did I get here?
Chapter 3 Bankruptcy in a nutshell – a very skeletal summary of the consequences of bankruptcy
Chapter 4 The A-Z of Bankruptcy, a format for working out if a client really should be
considering bankruptcy
Chapter 5 Formal alternatives including Declaration of Intention to Present a Debtor’s Petition,
Part IX Debt Agreements and Personal Insolvency Agreements
Chapter 6 The consequences of bankruptcy in detail (the real guts of the issue)
Chapter 7 Completing the forms (a practical guide with lots of cross references to the previous
chapter)
Chapter 8 Life in Bankruptcy dealing with issues that commonly arise during bankruptcy
Chapter 9 Post Bankruptcy, the ongoing ramifications.
Chapter 10 covers entering involuntary bankruptcy via the Creditor’s Petition process and what
options clients have at each stage, from receiving a Bankruptcy Notice to finding out there has
been a sequestration order made (an order making someone bankrupt).
Chapters 11 and 12 cover trouble-shooting for clients who are already in Part IX Debt Agreements
and Personal Insolvency Agreements respectively. Chapter 11 also covers the situation where
clients have signed up to complete a Debt Agreement proposal but have now changed their mind.
Notes
4
2
HOW DID I GET HERE?
B
ankruptcy is a very serious step which can have major consequences for clients. People
often approach financial counsellors in a very emotional state and see the issue as requiring
urgent assistance and resolution. Sometimes the first role of the financial counsellor is
to slow the client down and determine whether the urgency is real or imagined. Bankruptcy is
a serious decision requiring detailed consideration.
Bankruptcy can happen in two ways – initiated by the debtor by lodging a Debtor’s Petition,
or by a creditor or creditors using a Creditor’s Petition. The latter way (initiated by creditors)
usually occurs at the end of a whole series of processes to recover the debt and although creditors
often threaten their clients/customers with bankruptcy during the early stages of negotiation,
they cannot force the client into bankruptcy without going through a number of steps.
Occasionally clients consider bankruptcy prior to any enforcement action being taken at all.
This may be appropriate in some circumstances (a permanent change of circumstances making
it impossible to pay outstanding debts or a large debt from a single event such as a car accident
or court case). In practice, however, clients usually opt for bankruptcy after at least one creditor
has or is taking enforcement action against them.
In an ideal world clients would approach us in the early stages of their financial stress but the
reality is that often we do not get contacted until situation has become more difficult and
recovery action has commenced.
Sometimes the clients have been advised by other services, family and friends, creditors or
professional advisers to go bankrupt. Financial counsellors are in unique position due to their
professional practice to be able to inform their clients of a range of alternatives, the consequences,
both long-term and short-term, and give them time to reflect.
Clients in financial stress have a range of options available to address their financial issues (although
these reduce significantly as enforcement processes progress). As financial counsellors we encourage
our clients to pursue these options but in some circumstances they feel so disempowered, stressed
or pressured by their debt situation that the only option they wish to pursue is bankruptcy.
Before legal action has commenced there are a number of options available to clients, these include:
1. Keep paying as per contract (if possible)
2. Pay out the debt in full (by selling property or getting assistance from family members,
for example)
3. Refinance (noting the dangers of going to lenders of last resort who charge high interest
and fees)
4. Seek hardship assistance from the creditor, and if declined consider applying to an
independent external dispute resolution scheme (“EDR”) where available
5. Offer a lump sum to settle – a reduced full and final settlement offer
6. Seek a release (a waiver) from the creditor on compassionate grounds
7. Ignore the debt and let the creditor take enforcement action (this may be an attractive
option if the client receives Centrelink payments only and has no property except
personal property that would be protected from the Sheriff 1). The client will need to be
armed with information about dealing with debtor harassment.
Where legal action has commenced the options include:
1. Negotiate with creditor
2. Pay out in full
3. Refinance (noting again the dangers of lenders of last resort)
4. Defend the debt if the client doesn’t believe he or she owes all or part of the debt
(including where the debt may be statute barred)
5. Go to EDR if no judgment entered
6. Make a repayment arrangement directly with the creditor prior to judgment
7. Apply to pay by instalments through the Court (warning – this may create a judgment
debt in some states and should only be done once all else has failed)
8. Let the creditor enforce (See point 7 above).
Resources like the Credit Law Toolkit and the Mortgage Stress Handbook give detailed insights
and guidance for dealing with debts arising from consumer credit such as personal loans, credit
cards and home mortgages.
A financial counsellor needs to be aware of time lines for debt recovery. Even if legal action has
commenced there will often be time to consider a range of options including bankruptcy.
A person’s circumstances need to be carefully considered before advising that bankruptcy is a
viable (or palatable) option. Chapter 4 discusses this decision making process in more detail.
Chapter 5 goes through the other formal options under the Bankruptcy Act. Chapter 6 considers
the consequences of bankruptcy in greater detail.
To force someone into bankruptcy the creditor usually has to have obtained judgment for a
debt of $50002 or more (or two or more judgment debts totalling this amount) and the person
has to have committed an “act of bankruptcy” (See Chapter 10). Usually there will also be a
Bankruptcy Notice (this is the most common way to establish an act of bankruptcy on which
to base a Creditor’s Petition). This means that there will have been a lengthy legal process before
the Creditor’s Petition has been served.
Where clients have ignored all these warning signs their options are very limited. Chapter 10
covers what can and can’t be done at every stage of the process.
1
Note that the laws vary from state to state about both what can be taken by the Sheriff when enforcing a debt, and whether this is
the same or different to what is protected in bankruptcy. In those states where the same household property is protected from the Sheriff as
is protected in bankruptcy, doing nothing can be a realistic option for clients with no other assets.
2
An exception to this is where a debtor has formerly lodged a Debt Agreement Proposal in relation to a debt – see Chapters 5 and
11 for more information in relation to the consequences of proposing a Debt Agreement.
6
3
BANKRUPTCY IN A NUTSHELL
F
or those who are new to this area it is important to understand the concept of bankruptcy
so that you can communicate this to your client. Bankruptcy is a complex topic with
many, many rules and fairly frequent developments. However, at its core there are some
fairly simple concepts.
Bankruptcy law provides important rights for debtors who are in so much debt they can’t
realistically meet their obligations. It can present an opportunity to wipe the slate clean and
move on. When a debtor decides to go bankrupt he or she presents a legal document called a
Debtor’s Petition. How to do this is covered in Chapter 7. The consequences of doing this are
covered in very brief form in this Chapter and then in detail in Chapter 6.
It is also a mechanism for creditors to force an insolvent person to submit to the authority of
a trustee who then acts to recover money for the creditors on a pro rata basis. While this is a
necessary mechanism, it can have disproportionate and punitive consequences for debtors if used
too readily as a substitute for ordinary debt collection. The process for forcing someone into
bankruptcy by an order of the Court is called a Creditor’s Petition. This aspect of bankruptcy,
and what rights and options your client may have once this process is started, is explored in detail
in this toolkit in Chapter 10.
When a person is bankrupt (either voluntarily or otherwise) they effectively lose control of some
aspects of their finances for a set period of time (usually 3 years and 1 day but it can be longer),
at the end of which they are released from most, but not all types of debts. At the end of the
bankruptcy, the debtor is discharged. Any property of the debtor, apart from certain protected
items and property, is taken and sold for the benefit of their creditors, and to recover the costs of
administering the bankruptcy. Income above a designated amount is also taken for the creditors as
income contributions. These contributions are assessed and payable for as long as the debtor remains
an undischarged bankrupt or until their debts and the costs of administering the bankruptcy
are paid (whichever occurs first). Contributions that are assessed during bankruptcy but not
paid can be pursued even after discharge. There may also be limitations on travel and certain
types of employment for the period of the bankruptcy. There are ongoing ramifications for the
person’s ability to obtain credit and sometimes insurance which outlive the bankruptcy itself.
The details of what debts are forgiven at the end of the bankruptcy, what property is protected,
what income contributions may have to be paid and other restrictions are included in Chapter 6.
At the point of entering bankruptcy certain property, and rights to recover money and property,
automatically vest in the trustee in bankruptcy. The role of the trustee in bankruptcy may be
performed by the Official Trustee or a private trustee known as a registered trustee and will
be referred to throughout this kit as “the Trustee”. Property acquired during bankruptcy will
also vest in the Trustee. This property (whether owned at the beginning of the bankruptcy or
acquired during bankruptcy) becomes known as the bankrupt estate. The bankrupt estate may
continue after the bankrupt has been discharged from bankruptcy. This means that the bankrupt
is then free to acquire more property but cannot claim any ownership in property pre-dating
their discharge (such as in a family law settlement or legal action for a breach of contract that
occurred before or during the bankruptcy) because this property will also vest in the Trustee
and form part of the bankrupt estate. Some property may eventually re-vest in the bankrupt if
it has not been claimed by the Trustee after many years, or be purchased back by the bankrupt
after discharge, but this is relatively rare.
The law of bankruptcy in Australia is largely found in the Bankruptcy Act 1966. The latest substantial
amendments to the Act occurred in 2010 and are reflected in this toolkit. Any amendments
after that date have not been included. References to sections of legislation in this toolkit refer
to the Bankruptcy Act 1966 (as amended) unless otherwise specified. In some instances it is also
necessary to refer to the Bankruptcy Regulations 1996. Again, any reference to the regulations
in this toolkit refers to the Bankruptcy Regulations 1996.
The Australian Financial Security Authority, formerly known as the Insolvency and Trustee
Service Australia or ITSA, is responsible for the administration and regulation of the personal
insolvency system, trustee services and the administration of the Personal Property Securities
Register (PPSR) and proceeds of crime. The Australian Financial Security Authority plays the
role of Official Receiver and the Official Trustee and is referred to throughout this kit as “AFSA”.
AFSA also regulates private bankruptcy trustees (registered trustees who perform the role of
trustee in bankruptcy) and Part IX Debt Agreement Administrators. AFSA publishes a range
of information that is vitally important for financial counsellors on its website: www.afsa.gov.au.
Pros and cons of bankruptcy in brief
Advantages
Disadvantages
Any debt collection or harassment by unsecured
creditors should stop
Non-protected assets, including a home, may be sold
The person can usually stop paying most debts
immediately unless it is for a secured asset they
wish to retain
A record of the bankruptcy is retained on a public register
forever (National Personal Insolvency Index – NPII)
Most debts are forgiven at the end of the
bankruptcy – the person gets more or less a fresh
start
Some debts will not be extinguished
Usually a bankrupt can continue to earn an
income
50% of income above a certain amount (the prescribed amount)
is taken
Essential household goods can be retained
A record of the bankruptcy remains with credit reporting bodies
for 5 years from commencement or 2 years from discharge,
whichever is longer period (this may be a shorter or longer
period than the 7 years which applied prior to March 2014
depending on whether the bankruptcy is extended).
A motor vehicle worth up to a certain amount (the
prescribed value) can be retained/obtained
Any (non-protected) asset acquired during the bankruptcy can
be taken and sold for the benefit of the creditors
Tools of trade up to certain amount (the
prescribed value) can be retained/obtained
A bankrupt may be prevented from working in some roles or
professions, or need to seek special permission to do so
The bankruptcy usually ends after 3 years and 1
day
The bankruptcy may be extended in some circumstances to 5
or 8 years
There is generally no criminal sanction (unless
the borrower breaches an obligation or acts
dishonestly)
A bankrupt may experience difficulties trying to be accepted as
a tenant in rental accommodation
There may be a great sense of relief and/or a
reduction in stress
The bankruptcy must be disclosed to potential creditors unless
the amount borrowed is less than a certain amount (the
prescribed amount)
8
Advantages
Disadvantages
The bankrupt may have more income available
for living expenses once relieved of the
requirement to pay some debts
A bankrupt can only travel overseas with the permission of the
Trustee
A bankrupt may have trouble obtaining some types of insurance
cover
A bankrupt may have trouble getting access to some services
such as mobile phone contracts
Past financial affairs may be investigated
The bankrupt will have to co-operate with and report to the
Trustee
Some bankrupts may experience negative attitudes and poorer
treatment by others as a result of being, or having been,
bankrupt. Some people may feel a sense of shame, stigma or
personal failure whether or not others treat them this way.
The consequences of bankruptcy in brief
The good
■■
The client will be discharged from the majority of debts and will get a fresh start
■■
It will stop harassment by unsecured creditors
■■
It will stop legal action by unsecured creditors to recover their money through the courts
■■
It will stop seizure of goods by sheriff ’s officers
■■
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It will stop the garnisheeing of the client’s wages and the garnisheeing of his or her bank
accounts (with the exception of the ATO)
It will protect some of the client’s property, including:
–– Ordinary clothing
–– Most ordinary household furniture and effects
–– Tools of trade (where value under the prescribed amount)
–– Superannuation that has not been accessed prior to bankruptcy
–– Life insurance and endowment policies
–– Compensation payments for personal injury received by the bankrupt (TPD
payments however may not always be protected – See Chapters 6 & 8)
–– Possessions of a non-bankrupt person who the client lives with
–– Motor vehicle that is not secured or leased and is valued under the relevant threshold
–– Vehicle under finance where equity is under relevant threshold and the client can
maintain payments
–– Property held in trusts (get legal advice)
–– Wedding rings depending on value
–– Defence service loans
–– Rural assistance grants (get advice)
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Income up to the relevant threshold is protected
■■
Travel throughout Australia is unrestricted
■■
■■
Overseas travel is allowed if the client has received permission from the Trustee prior to
travel
The client can operate as a sole trader, under certain conditions
The Bad
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The bankruptcy will be on the public record
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Fraudulent debts will not be discharged by bankruptcy
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It will not clear HELP/HECS debts
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It will not discharge child support debts
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Unliquidated debts will not be discharged1
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10
It will not get rid of fines imposed by the court – Traffic and other infringements may be
discharged but their non-payment may cause the suspension of the client’s driver’s license
or car registration
Valuables not protected by bankruptcy will be part of the estate administered by the
Trustee (for example antiques, high value car, etc.)
If the client has an interest in any real estate this will be part of the estate administered by
the Trustee
Inheritances (where the person dies during or prior to bankruptcy) will be part of the
estate administered by the Trustee
Gifts and winnings (during bankruptcy) will be part of the estate administered by the
Trustee
If the client’s income is over the bankruptcy threshold, he or she will have to contribute to
the bankrupt estate from that income
The client may be required to surrender his or her passport and may be refused permission
to travel outside Australia
If clients breach their obligations during the bankruptcy, it may be extended (for 5 or 8
years) and there may be penalties
The client cannot be a director of a company
Preferential payments to creditors or undervalued transactions may be subject to trustee
investigation2
1
See Chapter 6, Part 1 for an explanation of unliquidated debts
2
See Chapter 6, for an explanation of preferential payments and undervalue transactions
The ugly
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The bankruptcy will be listed on your client’s credit report for the longer of 5 years from
the commencement of bankruptcy or two years from discharge and this will affect his or
her ability to get credit
The client’s name will be on the National Personal Insolvency Index (NPII) forever
The client may have trouble getting credit in the future (even after the credit report
listing has expired)
■■
The client may have difficulty getting insurance, or have special conditions imposed
■■
It may affect the client’s ability to rent property in which to live
■■
Property that has vested in the Trustee during the bankruptcy will continue to be vested
with the trustee after discharge (if not already sold)
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It can affect employment opportunities for the client
■■
It can affect the client’s ability to work in certain professions
■■
It may affect the client’s ability to connect to utilities and other services
These issues are all covered in more detail in Chapter 6.
Notes
12
4
IS IT FOR ME?
I THINK I WANT TO GO BANKRUPT
Summary
This Chapter suggests that you work through 26 questions (A-Z) with your clients to determine:
■■
Do they have options other than bankruptcy?
■■
Are they likely to be seriously affected by the consequences of bankruptcy?
■■
Are there compelling reasons to go bankrupt even if there may be other options?
This is a preliminary decision-making tool, not a complete exploration of the consequences of
bankruptcy which is covered in Chapter 6.
A sheet containing the questions with spaces for answers that could be copied and used when
interviewing clients and kept as a file note is included at the end of this chapter.
Should my client consider bankruptcy?
People’s attitude to debt and bankruptcy can differ enormously. This may be influenced by many
things including cultural factors, religious beliefs, perceptions about the reaction of families and
friends, and personal ethics and self esteem. Some clients will seek to avoid bankruptcy when it
appears to the financial counsellor, to be the most beneficial option for the client, while others
will be keen to take the bankruptcy option even when it appears to the financial counsellor to
be one of the least beneficial actions. Financial counsellors play a vital role in guiding debtors
through the complex range of options, consequences and emotions that bankruptcy raises.
Clients with no property apart from essential household goods may find that bankruptcy has
very little practical impact on their lives, unless of course their circumstances change whilst
bankrupt. Those who own or are paying off their home, or who work in certain professions, have
to be made aware of the very serious consequences of deciding to go bankrupt.
The financial counsellor needs to make the client aware that their circumstances are unlikely to
remain static and that people who have absolutely nothing when lodging their bankruptcy, may
experience a drastic change of circumstances during the period of the bankruptcy, for example
inheriting money under a will or winning money or goods. The client needs to know what will
happen if this occurs.
Clients who claim to have little concern about the consequences of bankruptcy may change
their minds later if they receive an unexpected windfall and find they have to pay not only their
debt but thousands of dollars in trustee fees in order to annul the bankruptcy. It is almost always
possible for the financial counsellor to give the client time to reflect on the consequences of
bankruptcy, which may entail negotiating with creditors to buy time even if the client is pretty
sure that bankruptcy is their preferred option.
The A – Z of bankruptcy
The answers to these questions will help you decide whether your client is potentially a suitable
candidate for bankruptcy. Where your client’s answers indicate that there are other options
that could be explored they should be encouraged to do so. Should your client choose not to
do this, or there is a good reason not to do this, you should try to explain your concerns about
the consequences and make careful notes.
Sometimes there are clients for whom bankruptcy is both the obvious solution and urgently
required to prevent detrimental enforcement action. In such cases hard and fast rules, like a set
period of working with a client before considering bankruptcy, may be completely inappropriate.
A full explanation of the consequences is still required regardless.
When a client understands the restrictions of bankruptcy and has made a conscious decision
to go bankrupt there is a far greater chance the bankruptcy will be a positive influence in their
lives. For many people bankruptcy is a fresh start, it is a cathartic moment in their lives but it
does come with restrictions, drawbacks and emotional baggage.
a. Is there any urgency (for example imminent enforcement action – garnishee of wages, seizure
of goods etc.)?
The imminent enforcement of a judgment debt1 can often be the driver for going bankrupt.
The garnishee of the client’s wages or the imminent seizure of necessary household effects, the
client’s car or tools of trade can have a serious effect on the client’s standard of living (inability to
pay rent, inability to work etc). In these circumstances the client needs to get the protection of
bankruptcy very quickly2. They often say they don’t have the time to consider the consequences.
It is our job to attempt to give them time to reflect on what is happening and going to happen.
These clients may be candidates for a Declaration of Intention to Present a Debtor’s Petition,
keeping in mind the consequences of that course of action (See Chapter 5).
b. Does your client have a judgment debt of over $5,000?
A debtor cannot be forced into bankruptcy unless they have a judgment debt of over $5,000
or two or more judgment debts totalling $5,000. While a debtor can opt to go bankrupt for a
lesser amount, debts of less than $5,000 are also more likely to be able to be paid off over time
than larger debts, or other suitable arrangements may be able to be made with the creditors.
Clients should also be warned that if their circumstances change and they want to undo the
bankruptcy it will cost them a lot more than the amount of the debt to annul the bankruptcy
later (for example because they have received an inheritance) – trustees fees can amount to
tens of thousands of dollars. While there will always be exceptions to the rule, bankruptcy is
probably best avoided for very small debts where possible without very careful consideration
of the consequences.
Although using a Creditor’s Petition to force someone into bankruptcy when the debts are
small is relatively rare, financial counsellors are encountering the issue more frequently. This is
especially the case where there is an ulterior motive, for example forcing someone out of business
or getting someone out of strata title housing when there are strata fees in arrears. If your client
has received a Bankruptcy Notice or a Creditor’s Petition they need urgent legal advice (See
Help I’m being made Bankrupt in Chapter 10).
1A judgment debt is a court or tribunal order confirming that money is owed by one party (the debtor) to another (the creditor). A
judgment debt may be made after a full court hearing of the issues where both parties present arguments and evidence, or it can be made
by default because the debtor has not lodged a defence to the creditor’s claim within the required time.
2
The enforcement options available to creditors, and their use of them, vary from state to state. For example, in NSW household
goods are protected to a greater extent in bankruptcy than from the Sheriff under a writ for levy of property. This means that creditors can
use enforcement proceedings against household goods to leverage payment from debtors who own very little, whereas this is not possible
in Victoria due to protection available under the Judgment Debt Recovery Act. Similarly, garnishees (known as earnings appropriation
orders) are rarely used in WA but are used frequently in some other jurisdictions.
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c. Is your client’s current financial problem permanent or long term?
Where your client’s problems are long term, bankruptcy may be a suitable option, particularly
if they have already explored and excluded other possibilities, such as reducing expenditure,
increasing income, reduced repayment arrangements or debt consolidation (where appropriate).
In a very small number of cases a Part IX Debt Agreement or Personal Insolvency Agreement
may be suitable options (See Chapter 5).
Whether a client’s problem is likely to be long term will depend on their individual circumstances.
They may have experienced a significant reduction in income, which is likely to be permanent
or at least last longer than 12 months. Alternatively, they may not have lost income, but have
amassed more debt than they can realistically repay within a reasonable time frame. Sometimes
both will apply.
Where your client is facing a temporary inability to meet their repayments due to illness or
unemployment, for example, there may be other options to deal with the situation such as
seeking a temporary reduction in repayments, a repayment arrangement for lump sums owed,
or a temporary respite from any payments at all (a moratorium). You should make sure you have
exhausted your client’s options, including any rights to a hardship variation under the credit law,
or in relation to essential services, and using the available External Dispute Resolution schemes
(refer to question e. below).
Sometimes even long term or permanent problems can be solved without resorting to bankruptcy
– particularly if the client’s debts are small or there are compelling compassionate reasons.
d. Are most of your client’s debts legally owed?
You need to consider whether most of the debts are legally owed. The client may have a common
sense defence, such as that they did not order the goods, or take out the loan (mistaken identity
or fraud), or the work/goods/services were faulty. They may also have a technical legal defence
or cross claim such as that the debt is statute barred, there was unconscionable conduct by a
lender or service provider, or they may be able to get relief from an unjust contract or failure by
a lender to comply with responsible lending obligations.
If there is no judgment debt, you may be able to use External Dispute Resolution (“EDR”) in
some circumstances to argue your client’s defence (see next question). Your client should get
legal advice if they have received a statement of claim (or other court document commencing
legal proceedings) and consider lodging an urgent complaint in EDR where EDR is available.
If the client already has a judgment debt, he or she may need to seek legal advice about whether
there is any realistic chance of setting that judgment aside – if not, then the debt is “legally owed”
whether the client has a defence or not.
Sometimes a client will have a defence or cross-claim in relation to one or two debts, but not
others. In that case you need to consider whether reducing or eradicating those one or two debts
will make any difference to the client’s ability to avoid bankruptcy (that is, do they have the
capacity to pay or make suitable arrangements in relation to the remaining debts that are legally
owed?). Where the remaining debts will still be insurmountable there is probably little point in
investing time and resources in raising a dispute and bankruptcy may still be a practical option.
You also need to keep in mind that some defences and cross-claims will only reduce the debt
and there may be a residual amount to pay. Where there is doubt about whether your client has
a defence to a debt, get legal advice or encourage your client to do so (see Useful Contacts).
e. Are your client’s debts covered by the National Credit Code? If so, has your client (or
someone acting on behalf of your client) applied for a hardship variation or lodged a
complaint in EDR?
For consumer credit debts (including investment loans for residential property), the external
dispute resolution schemes (“EDR”), including both the Financial Ombudsman Service and the
Credit Ombudsman Service, may be available free of charge. If there is no court judgment against
your client for a particular debt, and your client has not taken a step in any legal proceedings
beyond lodging a defence (and/or cross claim), then EDR is an available option, even after your
client has received a notice commencing legal action such as a summons or statement of claim.
While hardship variations and EDR sometimes have limited relevance to long term hardship
(where there is no likelihood that your client will get back on track with their repayments within
a reasonable time), starting the process may still help get you in touch with the people within the
lending organisation that can make real decisions to resolve long term problems. In rare cases,
such as when the remainder to pay on a loan is relatively small, you may be able to resolve a long
term issue with a permanent reduction in repayments and an extension of the loan term – this is
still a hardship variation under the law and should be available using EDR in appropriate cases.
Sometimes all you need is a little time for your client to digest the consequences of bankruptcy
before making a decision and EDR can assist you to gain this time. However, you may equally
be able to obtain a temporary stay of enforcement by contacting the internal dispute resolution
contact on the EDR website (www.fos.org.au or cosl.com.au). Always try this first if there is
sufficient time to avoid a judgment being entered but get confirmation in writing. If your client
is unsure about bankruptcy, make sure a complaint is lodged with the relevant EDR scheme
before the time for lodging a defence expires.
It is important, however, not to mislead the creditor or any other interested party into accepting
a settlement if your client is not seriously intending to attempt to meet their obligations under
the settlement. In other words, if your client has made an informed decision to go bankrupt, you
should notify the other parties involved and withdraw your EDR complaint or other settlement
negotiations as soon as possible.
If your client has a defence or cross claim including, for example, breaches of responsible lending
obligations or allegedly statute barred debts, then you should explain to your client about the
availability of EDR and offer to assist them with the process (or refer them to a service which
can assist).
➻➻ Remember: Energy and Water debts can also be taken to the appropriate EDR service in each
state (for example EWON in NSW or EWOV in Victoria) and telecommunications debts can be
taken to the Telecommunications Industry Ombudsman.
f. Has your client (or someone acting on behalf of your client) tried to come to a suitable
informal arrangement with creditors? (including reduced amount settlements). Has anyone
sought a compassionate release?
Ideally your client will explore all other reasonable avenues for resolving their difficulties prior
to opting for bankruptcy. Sometimes a client who has had no luck coming to any arrangement
with their creditors will find that having a financial counsellor advocate for them makes all the
difference.
Despite this, if the client’s debts are large or numerous enough, and their assets, if any, are worth far
less, it is possible to make a judgement call that bankruptcy is the only realistic option (unless the
client wants to let the enforcement process play out and hope something comes up to save them
from what looks like inevitable bankruptcy). You still need to make sure the client understands
all the consequences before they lodge their Debtor’s Petition (See Chapter 6).
Serious health issues, sometimes of a terminal nature, can also be a driver for the consideration
of bankruptcy. The financial counsellor may be able to get the creditors to stay action while a
compassionate waiver is considered as an alternative.
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If it is not possible to get a compassionate waiver, then the financial counsellor needs to make
sure the person understands the impact of bankruptcy on any co-borrowers, guarantors or even
beneficiaries under a will (if the person has any property). The client may or may not care about
these consequences but it is the financial counsellor’s job to ensure they make an informed decision.
g. Will your client be released from their debts (or most of them) as a result of going bankrupt?
Not all debts are provable in bankruptcy. Also, some debts are provable but the debtor is not
released from the debt after the bankruptcy. If your client will not be released from a significant
proportion of his or her debts upon discharge from bankruptcy, then it may not really be a
helpful course of action for your client. Which debts are provable, which are not, which debts
may have to be paid regardless for practical reasons, and which will survive the bankruptcy, is
covered in Chapter 6, Part 1.
h. Has your client considered accessing any available Superannuation? Is this a good idea in the
circumstances?
In some cases your client may be eligible for early access to his or her superannuation to assist
with the payment of debts, including in some circumstances, a mortgage. While it is important
that your client considers this option, they should only take it if it will solve the problem. If the
client ends up bankrupt anyway, then the superannuation will be wasted. While superannuation
remains in a superannuation fund it is protected in bankruptcy. Once it has been withdrawn,
it will be lost!
Your client may be a good candidate for early access to superannuation only if the amount they
are entitled to will pay all their debts or reduce them to a manageable size, or if they are in the
position of meeting their current repayments but cannot catch up on arrears as a result of a past
period of hardship that has now ended. More information on when early access to superannuation
if available at
http://www.humanservices.gov.au/customer/services/centrelink/early-release-ofsuperannuation (See also Chapter 8)
➻➻ Remember: the amount your client can access will be limited by the relevant rules and tax will be
deducted.
i. Are there joint debts with another person who is not going bankrupt? Is there a guarantor?
Where there are joint debts the other joint debtor will be left exposed to the whole of the debt
(not half the debt as many clients believe). Where the client needs to maintain a familial or
working relationship with the joint debtor, bankruptcy can raise major issues. Before proceeding
with bankruptcy your client should be encouraged, where possible and without risk of domestic
violence, to discuss their plans with the joint debtor.
Where there is a guarantor for any of your client’s debts the client must be told of the consequences
for the guarantor (who, like a co-debtor, is likely to be pursued for the whole debt in the event of
the primary debtor’s bankruptcy). It should be strongly advised that the guarantor gets legal advice.
j. Has your client claimed on any insurance policy that could assist to meet their financial
commitments? Is your client expecting any type of insurance claim to be paid out in the near
future?
You should check whether your client has any insurance policies that would assist him or her to
pay their debts – for example, income protection, consumer credit insurance, accident insurance,
or total and permanent disability policies attached to the client’s superannuation. In some cases
clients have multiple superannuation accounts all of which include insurance.
You can ask your client to bring in any paperwork they may have in relation to insurance or
superannuation. You can assist them to look for lost super using the ATO website (http://www.
ato.gov.au/individuals/content.aspx?doc=/content/33301.htm&alias=superseeker) and then
obtain their authority to seek details of any insurance policies. For other insurance (not attached
to super) that the client may not be aware of, search their bank and credit card statements for
evidence of premiums being paid.
If your client has tried to claim on an insurance policy and has been rejected, suggest they seek
free legal advice from the Insurance Law Service on 1300 663 464 (or make a call yourself with
the client’s authority).
If your client is unlikely to avoid bankruptcy as a result of such a claim, it is probably not worth
the time and effort. Further, any policy paid out after the date of the bankruptcy will vest in the
trustee unless it is the proceeds of a life insurance or endowment policy received on or after the
date of the bankruptcy (where the insured person is the bankrupt, his or her spouse or de facto
partner), or it is a claim for property that would have been protected in bankruptcy. Total and
permanent disability claims may also vest in the trustee – See Chapter 8.
If the insurance claim covers property that was secured by a loan (such as a motor vehicle or
home for example) then the proceeds of the policy must be paid to the lender.
Bankruptcy and insurance is covered in more detail in Chapters 6 & 8.
k. Does your client own (or partly own) any assets other than household furniture and personal
possessions (real estate, cars, boats, caravans, shares, pedigree breeding animals, livestock etc)?
Is your client considering selling any available assets to meet their debt?
First of all your client needs to consider whether these assets could be sold to meet the debts
(or make lump sum offers) as an alternative to bankruptcy. Where this is not going to produce
sufficient money to avoid bankruptcy, then they need to be made aware that those assets that are
not protected in bankruptcy will vest with the Trustee and are likely to be sold [for a detailed
description of property that is protected in bankruptcy see Chapter 6, Part 2] Where your
client is considering selling goods or property they will need to be aware of what is protected
property (so that they realise what they will be allowed to keep in bankruptcy) and that property
or goods have to be disposed of for market value or face the possibility of the Trustee declaring
it an undervalue transaction if their strategy fails and they end up bankrupt regardless.
Personal injury money (compensation), and the property wholly purchased with it, is protected
in bankruptcy, but only if it was compensation paid to the bankrupt person. Compensation paid
to other members of the family, such as the bankrupt’s partner, and the property purchased with
it, is not protected if it is in the bankrupt’s name, or the bankrupt has a claim to it. More details
on protected property are contained in Chapter 6, Part 2.
Where your client owns real estate or other assets jointly with others, the implications for the
other owners will need to be considered (See Chapter 6, Part 3). If the house is owned jointly by
one or more other people, they will be asked to buy out the bankrupt’s share or join the Trustee
in a sale so that the Trustee can take the bankrupt’s share.
In some cases there may be someone (such as another family member) who could buy out the
client’s share (for full market value) to assist the client pay their debts and try to avoid bankruptcy.
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Money sitting in a bank account is also an asset. While clients in financial difficulty rarely
have savings, it is important to ask the question specifically and warn clients that the Trustee
will also take any available cash apart from a modest amount for living expenses (See Chapter
8 – Freezing of Accounts).
Example:
A client rang a telephone service seeking information about bankruptcy. The client was asked
about whether he owned any property or assets and he replied that he did not. Later in the
conversation it became apparent that the client had over $8,000 in the bank, an amount that
would vest in the Trustee if the client filed a Debtor’s Petition.
l. Are there secured debts? Is your client paying off a house/home unit or investment property?
Where there are secured debts your client will need to consider the implications of going bankrupt.
■■
Will the asset be sold up by the Trustee due to its equity (now or later)?
■■
Can the client afford to maintain payments on the loan to keep the asset?
■■
Is the secured debt a joint liability?
■■
Is the secured asset the family home?
The consequences for secured debts can be hard for clients to grasp. Where the client needs the
secured vehicle to travel to work or access services then going bankrupt will only allow them
to keep the car if they can make the repayments under the secured loan (or make a payment
arrangement with the secured loan creditor) and there is insufficient equity for the Trustee to sell
up the car. Where the secured car loan is the major debt bankruptcy may make little difference
to the client’s overall financial position.
Where there is a mortgage over a house the issues are even more complex. If your client has
sufficient equity the house will be sold by the trustee and the client needs to understand this. If
there is not sufficient equity now, there may be sufficient equity later and the trustee has many
years in which to take action.
Secured debts are covered in more detail in Chapter 6, Parts 1 and 3. If your client has a mortgage,
you need to read the section on clients with real estate/mortgages in Chapter 6, Part 3.
m. Has your client ever made a substantial gift of assets or money or sold/transferred any
property for less than its market value (e.g. to family or friends)?
Where your client has given away money or property (such as to family) in the last five years,
or sold or transferred property for less than its market worth, then the transaction may be void
against the Trustee if the client goes bankrupt (meaning the Trustee can take the property and
sell it and only give the person who was given it the equivalent of what, if anything, they paid
for it). Where it can be shown that such a transaction was made to defeat creditors it may be
void against the Trustee even though it happened many years ago! (more than 5 years). This is
particularly an issue for clients who have transferred property into the name of their spouse or
children, or who purchased property in the name of someone else while providing a substantial
amount (or all) of the purchase price.
The many ways in which the Trustee can undo past transactions to recover money for the bankrupt
estate are covered in Chapter 6, Part 3. Clients who are in this position need to rethink their
options or at least be aware of the possible consequences (the Trustee claiming the money back!).
n. Has your client withdrawn any superannuation or been paid out under any life insurance
policy/TPD in the last few years? Have they made any substantial extra payments into their
superannuation fund?
Any money that has been withdrawn from superannuation or paid out under a life insurance policy
prior to the date of the bankruptcy is not protected in bankruptcy. This means that either the
money itself, or property purchased with that money, can be taken by the Trustee. This includes
amounts given to family or associates to improve their property, or provide a deposit for a home
(for example) and they may get a letter from the Trustee seeking to recover the amount. For a
detailed description of the circumstances in which the Trustee can claw back property which
has been sold or given away, see Chapter 6, Part 3.
Superannuation money taken out of the fund, or a life insurance claim paid, on or after the date
of the bankruptcy is protected. This is in contrast with property that has been received by the
bankrupt by way of compensation for personal injury, which can be kept whether received before
or after the date of the bankruptcy.
Extra payments into a superannuation fund prior to bankruptcy may be recovered by the Trustee
if it can be established that those payments were made to defeat creditors. More detail on this
can be found in Chapter 6, Part 2.
o. Does your client have any legal proceedings on foot, or are they likely to be involved in legal
proceedings in the near future?
Legal action against your client: Generally speaking a creditor cannot enforce any remedy against
the person or property of a bankrupt in relation to a provable debt (Section 58) (See Chapter
6, Part 1 for what is a provable debt).
This does not affect a secured creditor’s right to enforce against property that is security for a loan.
Enforcement action can also be taken in relation to a maintenance agreement or maintenance
order under the Family Law Act 1975 or Child Support (Assessment) Act 1989. Proceeds of crime
proceedings and orders are also unaffected by bankruptcy.
Legal action taken by your client: Any legal action commenced by a person who subsequently
becomes a bankrupt is automatically stayed until the Trustee makes an election in writing about
whether to continue the proceedings or not (Section 60). Your client generally cannot continue
or commence court proceedings during bankruptcy without the permission of the Trustee. This
is because the right to recover any property or money owed to the bankrupt vests in Trustee like
any other property (Section 116(1)(b)). Further any money recovered would vest in the Trustee
in most circumstances in any event.
However, there are exceptions (Section 60(4)) for proceedings in relation to:
■■
■■
any personal injury or wrong done to the bankrupt, his or her spouse or de facto partner
or a member of his or her family
the death of the bankrupt’s spouse or de facto partners or of a member of his or her
family.
See more on legal proceedings in Chapter 6, Part 5.
p. Is your client separated/divorced? Have they already done a property settlement?
Bankruptcy can have serious consequences for non-bankrupt spouses and de facto partners (or
ex-spouses/partners), and as a consequence, for their children as well. Ideally both partners to a
relationship should seek family law advice (from different lawyers) prior to one of them going
bankrupt. However, even if this has not occurred, it is not too late to do so. For bankruptcies
occurring after late 2005, family law applications for a property settlement or maintenance can be
made in relation to property that has already vested in the Trustee as a result of the bankruptcy.
It should also be noted that a Trustee can seek to set aside Family Court orders in certain
circumstances, or to set aside Binding Financial Agreements under the Family Law Act, particularly
20
if these were made in circumstances where it was clear one of the parties was insolvent (unable
to pay their debts as they fell due) and the effect of the orders or agreement is to deprive those
creditors of their ability to recover their debt. This is less likely to occur with Court Orders
than agreements, provided the Court was fully informed of the relevant facts when the orders
were made.
See Family Law & Bankruptcy in Chapter 6, Part 7.
q. Has your client ever received an inheritance? Is your client likely to receive an inheritance in
the next 3 – 5 years?
Case Study
A client attended financial counselling to go bankrupt for substantial debts which he could not pay.
The client had a number of meetings with the financial counsellor and was asked on 3 occasions
whether he owned or has a share in any property. The client consistently said no. At the final
appointment to complete the paperwork the financial counsellor asked the client whether he had
ever been left property in a will. He said “no but I do get my father’s house when my brother who
has a life tenancy dies”.
When your client has received an inheritance (and they still have it) this will be money or
property available to the Trustee. You should ask your client to think carefully about this question
because it may be that they have received a small interest in a property they have forgotten about
because there are a group of owners and the property is occupied by someone-else, or perhaps
they have an interest that they can only claim after a life tenant has died. Where this is the case
the Trustee will find the property upon conducting routine searches, and it may cause enormous
embarrassment to the bankrupt and inconvenience to the occupant when the Trustee seeks to
claim the bankrupt’s share for the estate.
In addition, any inheritance received by your client during bankruptcy will also vest in the Trustee.
This means that clients who anticipate a realistic possibility of inheriting money or property
should think very carefully before choosing bankruptcy as an option. Where there is sufficient
money in the inheritance, then the bankruptcy can be annulled, but this will mean paying out
the creditors (including post-bankruptcy interest which may have accrued) plus the Trustee’s
costs, which can be substantial. It is also important to note that it is the date of the death of the
benefactor that matters, not the date the client receives the money, so even the if the person
dies only days before discharge and the money is distributed many months after discharge, it
will still vest in the Trustee.
r. Does your client manage a company or hold a directorship? Is he or she a partner in a
business?
Bankruptcy and businesses pose particular challenges. For a start, a bankrupt cannot hold a
position as a director of a company. Where your client is in a partnership the partnership will
usually be dissolved as a result of the bankruptcy and the bankrupt’s interest in the business will
vest in the Trustee. Where your client is a sole trader and wants to keep trading they will face a
range of practical problems. Small Business and Bankruptcy is covered in Chapter 6, Part 6.
s. Is your client in a licensed profession or required to be a member of a professional association?
Some professions and licensed trades exclude bankrupts, or require people to show cause why
they should be permitted to continue in their trade or profession while bankrupt. This is covered
in more detail in Chapter 6, Part 5 but clients should be encouraged to contact their own
professional association or licensing body to ensure they get accurate and up-to-date information
about their own circumstances. This can be done anonymously for initial enquiries at least.
t. Does your client earn more than the prescribed limit for making contributions during
bankruptcy?
Bankrupts must contribute from their income while bankrupt if they earn more than the prescribed
limit (“threshold amount”). The limit increases with each dependent. Basically, the bankrupt will
pay 50c in every dollar earned above the threshold amount in any given year towards their debts
and the administration of their bankrupt estate. This will continue until they are discharged or the
bankruptcy is annulled. Non-payment of contributions is also a common reason for bankruptcy
to be extended beyond three years. For a detailed description of how the income contributions
provisions work, see Chapter 6, Part 4.
u. Does your client want/plan to travel overseas in the next few years?
Bankrupts may have to hand their passport (if they have one) to their Trustee and they will not
be permitted to travel outside Australia without the Trustee’s permission. Even if the Trustee
does not take the passport, if the bankrupt is considered a “flight risk” his or her name may be
placed on a Ports Watch List which could result in the bankrupt being accosted upon trying to
leave the country.
More details on travel restrictions is contained in Chapter 6, Part 5. Chapter 8 covers how to
apply for permission to travel and the circumstances in which it is likely to be granted.
v. Does your client have long term plans to buy a home or start a business?
Buying a home or starting a business as a bankrupt, or even a discharged bankrupt, can be difficult.
The bankrupt’s credit report is affected by bankruptcy for five to seven years or more3 and there
is a record on the National Personal Insolvency Index forever. This can make it much harder
to obtain credit and insurance. The bankrupt is also prevented from being a company director
until discharge and has to disclose his or her bankrupt status if he or she wants to borrow more
than a specified amount during the period of the bankruptcy.
More details on small business and bankruptcy are contained in Chapter 6, Part 6. There is also
a detailed description of the other consequences of bankruptcy (apart from the impact on debts,
property and income) in Chapter 6, Part 5.
w. Has your client been bankrupt before?
The Official Trustee has the discretion to refuse accept a Debtor’s Petition in certain circumstances
where a client has been bankrupt before in the last 5 years, or has already been bankrupt 3
times previously. This is covered in Chapter 7 about the process of going bankrupt. Second
and subsequent bankruptcies also attract greater scrutiny. The client becomes more likely to
have their financial affairs investigated or to face prosecution for offences such as gambling
and hazardous speculation if there is evidence to suggest these factors may have been at play in
causing the client’s insolvency (see below).
x. Were your clients debts acquired through gambling and hazardous speculation, fraud, or are
they non-provable?
There is an offence under the Bankruptcy Act for a person causing or exacerbating his or her
insolvency by gambling or hazardous speculation in the 2 years prior to becoming a bankrupt.
While not often used, there have been prosecutions under these provisions. This is covered in
Chapter 6, Part 8.
3
From March 2014 bankruptcies will remain on a person’s credit report for 5 years from the date of bankruptcy or 2 years from
discharge, whichever is the longer period. This means that if the Bankruptcy is extended to eight years the credit report will be affected for
10 years.
22
Debts incurred by fraud are not extinguished by bankruptcy. Further, if the client has not been
charged already, the risk of investigation and prosecution under criminal law is also made more
likely if the debt is not paid.
It is also important to note that the allegation of fraud is insufficient – there must be an admission
of guilt or a successfully prosecuted offence. This is particularly relevant to Centrelink debts
where allegations of fraud are not infrequent. This is covered in Chapter 6, Part 1 & Chapter 8.
There may be no point in going bankrupt if the client’s debts (or the majority of them by value)
are not provable in bankruptcy – see Chapter 6, Part 1.
y. Is your client physically or mentally ill?
You need to consider whether the client is physically or mentally ill to a significant degree.
Sometimes a client may have other options, at least in theory, but does not have the physical
or mental fortitude to see them through. Stress can cause serious setbacks for people trying to
recover from mental illness or serious physical illness and bankruptcy may be a legitimate way
of relieving stress and giving the person room to get well. In this case you need to be very careful
that you have fully explained the consequences to the client, and made clear what support
services may be available to assist with other options, as the client may see things differently if
and when they recover.
You will also have to decide whether the client has the “capacity” to understand and file for
bankruptcy and you will need to refer them for specialist assistance if you believe they do not.
Legal Aid may be able to assist with a capacity assessment. Several jurisdictions have developed
a local Capacity Toolkit which can be a useful resource (for example NSW Attorney Generals
and Victorian Government Department of Human Services).
z. Will bankruptcy make a positive difference to your client?
This is often the cornerstone question for the financial counsellor: How will bankruptcy make a
positive difference in my client’s life? This is usually linked to the physical, mental and emotional
health of your client. The relief of the pressure of the debts will only be positive if the stress and
consequences of bankruptcy are less onerous than the consequences of not going bankrupt.
Judy’s story
A caller to the Credit & Debt Hotline had gone bankrupt with the assistance of a financial
counsellor in 2009 when she could not repay a $2,000 credit card debt. In late 2010, she inherited
a considerable sum of money and wanted to annul the bankruptcy. At the suggestion of the
financial counsellor answering the Hotline, she inquired of the Trustee as to how much it would
cost to annul the bankruptcy. The caller was very upset when she was told it was $24,000!
Your clients’ answers to these questions will help them decide whether they are a suitable
candidate for bankruptcy. Where your client’s answers indicate that they may have other viable
options they should be encouraged to explore those options. Should your client choose not
to do this, or there is a good reason not to do this, you should explain your concerns over the
consequences and make careful notes.
You should explain the consequences of bankruptcy in detail as there may be things your
client has forgotten or failed to disclose. Further, as stated above, circumstances can change
and your client needs to understand the implications of this.
a. Is there any urgency (for example imminent enforcement action – garnishee of wages, seizure of
goods etc.)?
b. Does the client have a judgment debt (or judgment debts) of over $5,000?
c. Is the client’s current financial problem permanent or long term?
d. Are most of the client’s debts legally owed?
e. Are the client’s debts covered by the National Credit Code? If so, has the client (or someone
acting on behalf of your client) applied for a hardship variation or lodged a complaint in EDR?
f. Has the client (or someone acting on behalf of the client) tried to come to a suitable
informal arrangement with creditors (including reduced settlements)? Has anyone sought a
compassionate release?
g. Will the client be released from their debts (or most of them) as a result of going bankrupt?
h. Has the client considered accessing any available Superannuation? Is this a good idea in the
circumstances?
24
i. Has the client claimed on any insurance policy that could assist to meet their financial
commitments? Is the client expecting any type of insurance claim to be paid out in the near
future?
j. Are there joint debts with another person who is not going bankrupt? Is there a guarantor?
k. Are there secured debts? Is the client paying off a mortgage on a house/home unit or investment
property?
l. Does the client own (or partly own) any assets other than household furniture and personal
possessions (property, vehicles, shares etc)? Is the client considering selling any available assets
to meet their debt?
m. Has the client made a substantial gift of assets or money or transferred any property for
less than its market value (e.g. to family or friends) in the last 5 years (including from
superannuation or an insurance payout)?
n. Has the client recently withdrawn any superannuation or been paid out under any life insurance
policy/TPD? Have they made substantial extra payments into their super?
o. Does the client have any legal proceedings on foot, or are they likely to be involved in legal
proceedings in the near future?
p. Is the client separated or divorced? Have they already done a property settlement? Are they
considering doing one?
q. Is the client likely to receive an inheritance in the next 3 – 5 years? Have they received an
inheritance previously?
r. Does the client manage a company or hold a directorship? Are they a partner in a business?
s. Is the client in a licensed profession or required to be a member of a professional association?
t. Does the client earn more than the prescribed limit for making contributions for bankruptcy?
u. Does the client want/plan to travel overseas in the next few years?
v. Does the client have long term plans to buy a home or start a business?
w. Has the client been bankrupt before?
x. Were the clients debts acquired through gambling and hazardous speculation, fraud or are they
non-provable?
y. Is the client physically or mentally ill?
z. Will bankruptcy make a positive difference to the client?
26
5
ARE THERE OTHER OPTIONS?
Content
Part 1: Declaration of Intention to Present a Debtor’s Petition
27
Part 2: Debt agreements
39
Part 3: Personal Insolvency Agreements
43
➻➻ Important: The options covered in this Chapter are formal arrangements under the Bankruptcy
Act. An informal agreement with creditors is almost always better than a formal option under the
Bankruptcy Act where it is possible. Financial counsellors can sometimes achieve fantastic results
for clients with advocacy skills and perseverance.
Part 1:
Declaration of Intention to Present a Debtor’s Petition
Summary
A Declaration of Intention to Present a Debtor’s Petition is a formal process under the Bankruptcy
Act to buy the debtor 21 days. Debts cannot be enforced against the client during this period,
although action can be taken to repossess the security property for secured debts. Lodging a
Declaration of Intention to Present a Debtor’s Petition is an act of bankruptcy and will only be
appropriate in fairly narrow circumstances.
The debtor can decide not to proceed to bankruptcy after lodging a Declaration of Intention to
Present a Debtor’s Petition but creditors may rely on this act of bankruptcy to force the debtor
into bankruptcy (where they owe more than $5,000) even if the debtor does not proceed.
What is a Declaration of Intention to Present a Debtor’s
Petition?
An insolvent debtor who is considering bankruptcy or its alternatives has the option of first
presenting to the Official Receiver at AFSA (formerly ITSA) a Declaration of Intention to Present
a Debtor’s Petition (s. 54A – referred to in this kit by the abbreviated phrase “Declaration of
Intent”). This has the effect of stopping enforcement action by the debtor’s unsecured creditors
for a period of up to 21 days.
➻➻ Warning: Presenting a Declaration of Intent is an “act of bankruptcy” (Section 40(1)(da)). This
means that even if your client decides not to proceed with the bankruptcy by way of a Debtor’s
Petition, one of his or her creditors could use that act of bankruptcy to request a court order
declaring your client bankrupt. This is not a likely scenario (usually a Bankruptcy Notice would be
issued in any event) but clients must understand it is a possibility.
There is also the issue of the disclosed information to consider. Should the bankrupt not proceed
immediately to lodge a Debtor’s Petition there will be a record of their position at the point of
the act of bankruptcy which could be compared to a subsequent Statement of Affairs. This means
that any differences between the debts and assets listed in the Declaration of Intent compared
to the later Statement of Affairs will be immediately apparent to the Trustee and could lead to
money and/or property being recovered as preferential payments, undervalued transactions or
transfers to defeat creditors.
Whilst there are some advantages of presenting a Declaration of Intent, it may not be a good
idea for your client to do so unless:
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There is current or imminent enforcement action such as a garnishee on wages, or the
sheriff has, or is about to, seize goods under a writ for levy of property; and
The enforcement action will cause your client serious detriment (for example, they will
have insufficient income for rent and food or will lose essential household goods that
would be protected in bankruptcy); and
Attempts to negotiate with the creditor to prevent or delay enforcement action have failed
or are impracticable; and
There is insufficient time to pursue a more formal procedure such as an application to pay
by instalments (if the debt is admitted) or an application to set aside the judgment (if the
debtor may have a defence), or such applications have already failed; and
The debt is provable in bankruptcy (see Chapter 6, Part 1 for debts that are not provable
in bankruptcy).
It is pointless to submit a Declaration of Intent to prevent the enforcement of a court imposed
fine, for example, as such debts are not provable in bankruptcy and would not be frozen.
A Declaration of Intent will not be recorded on the National Personal Insolvency Index.
A Declaration of Intent will not affect the rights of secured creditors to take action in relation
to their security. For example, your client’s car may still be repossessed if he or she is in default
under a secured car loan despite the presentation of a Declaration of Intent.
The Declaration of Intent has most relevance in States or Territories where the bankruptcy laws
and debt enforcement laws are not aligned, leaving clients vulnerable to having goods repossessed
by the debt enforcement process that would be protected in bankruptcy. Garnishees are also
used commonly in many jurisdictions and could result in a Declaration of Intent being useful
in such jurisdictions unless a stay of enforcement can be urgently obtained. The latter would
always be preferable if it is practically possible.
One advantage of lodging a Declaration of Intent is that the creditors usually realise that the client
is serious about bankruptcy, giving you one last chance to negotiate an arrangement which might
assist the client to avoid bankruptcy. It is not compulsory to proceed with a Debtor’s Petition
at the conclusion of the 21 days. This must be weighed against the disadvantages, including the
risk that the client may be forced into bankruptcy as a result of the Declaration of Intent itself.
Case example
An indigenous worker had been informed by his employer that his wages were to be garnisheed
pursuant to a court order. The employer was reluctant to do this as he did not want to lose the
worker but he would have no choice. The worker attended a financial counsellor to discuss
the bankruptcy process, as without his full income he could not pay for rent and food for his
household.
The worker said that it was a very old debt. This old debt had been taken to court and judgment
entered but the worker said that he had no knowledge of the court process or any paperwork
relating to it. The last time he heard from the creditor was over 10 years ago and he hadn’t paid or
spoken to them since.
In this case, where the worker was considering bankruptcy and had an imminent threat of a
garnishee of his wages, the Declaration of Intent gave him the opportunity to:
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28
Stay enforcement of the garnishee
Get specialist legal advice on whether the judgement could be set aside and a defence
entered based on the Statute of Limitations
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Become better informed of the consequences of bankruptcy before lodging a Debtor’s
Petition should that prove necessary.
➻➻ Remember: If your client’s creditor is in an EDR (External Dispute Resolution) service, such as
the Financial Ombudsman Service, you can prevent legal action, or the progress of legal action,
by lodging a dispute with the scheme (such as an application for a variation of the contract on
grounds of financial hardship1). Generally you cannot do this if the creditor has obtained a court
judgment. If there is a garnishee or a writ for levy of property (order that the Sheriff can seize
goods) then there is already a judgment and your client can only go to EDR if the judgment has
been set aside.
Will a Declaration of Intent always be accepted?
A debtor is not entitled to present a Declaration of Intent in the following circumstances:
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If the debtor has had a previous Declaration of Intent accepted within the last 12 months
When a Creditor’s Petition has already been presented against the debtor and served on
the debtor (unless it has been withdrawn or lapsed)
After a Debtor’s Petition has been presented by the debtor (unless it has subsequently
been rejected)
If the debtor has formally proposed a Personal Insolvency Agreement (by signing an
authority appointing a controlling trustee) within the preceding 6 months, or is subject to
a control order under Part X of the Act
If the debtor would not be entitled to lodge a Debtor’s Petition without the leave of the
Court (for example, because he or she is in a Debt Agreement).
If any of the above applies the Declaration of Intent will not be accepted by the Official Receiver
(AFSA) (Section 54B).
If your client has decided to proceed with a Declaration of Intent, instructions for completing
the forms and what happens next are included in Chapter 7.
Part 2:
Debt agreements
Summary
This section is for financial counsellors wanting to know more about Part IX Debt Agreements
(“Debt Agreements”) so they can better advise clients about this option. If your client is already
in a Debt Agreement and is having problems or has complaints, you should refer to Chapter 11.
Chapter 11 also deals with the issue of fees that may be payable where someone has either
changed their mind about entering a Debt Agreement or their proposal has not been accepted.
If you have a client who has lodged a Debt Agreement Proposal and is having second thoughts
urgent action may be required to stop the process – See Chapter 11.
A Debt Agreement is a formal alternative to bankruptcy where all the debtor’s creditors agree to
accept part payment of debts in equal proportions. The consequences of Debt Agreements are
serious and are very similar to bankruptcy itself, especially where the debtor does not have any
real estate (such as an apartment, home or land) that would be taken by the trustee in bankruptcy.
Unlike bankruptcy, your client’s property is not affected. A person in a Debt Agreement can also
acquire property during the agreement without it being taken (by the Trustee) for the benefit
of creditors. In a Debt Agreement there is no trustee, only a Debt Agreement Administrator.
Many clients are put into Debt Agreements in circumstances where they would have been
better off bankrupt (financially speaking). Debt Agreements can last longer than bankruptcy
and often do. Further, many clients default and end up bankrupt anyway.
1
A person can only refer their dispute to an EDR scheme if they have not taken a substantive step in the legal proceedings beyond
lodging a defence and/or cross claim. If you are unsure you can seek legal advice. If time is of the essence, you can assist or advise your
client to lodge in EDR (preferably online) and work out whether the EDR scheme still has jurisdiction later.
The debtor will pay an upfront fee for the preparation of a Debt Agreement Proposal. This will
usually not be refunded even if the proposal is rejected.
The circumstances in which a Debt Agreement may be the best option for your client are very few.
Generally speaking clients should NOT consider such agreements when:
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Their income is less than the bankruptcy threshold for income contributions, and
They do not own any property that would be divisible in bankruptcy (see Chapter 6, Part
3 for an explanation of divisible property) or
They have only one debt (or very few)
Clients who wish to remain company directors (or engage in another occupation which is
permitted under a Debt Agreement but not bankruptcy), are a special case but need to carefully
consider the ramifications and risks.
If your client wants to make a contribution to their debts but can’t afford to pay in full, this may
be able to be achieved through an informal arrangement. Further, there is nothing to stop
clients making voluntary payments to creditors during bankruptcy provided they are otherwise
complying with their obligations to the Trustee.
Introduction
A Part IX Debt Agreement (”Debt Agreement”) is a formal alternative to bankruptcy under
the Bankruptcy Act introduced in 1996. Although it is considered an alternative to bankruptcy,
many of the consequences are the same, so clients considering a Debt Agreement should proceed
with extreme care. The potential advantages and risks involved are complex and difficult for most
debtors to weigh up effectively.
Unfortunately Debt Agreements are also usually very effectively promoted by commercial, profit
driven organisations, many of whom market them, misleadingly, as debt consolidations. Clients
usually focus on catch phrases like “freeze your interest”, “make one easy payment” and even
“government backed” and don’t realise the implications until they are well into the process of
signing up. This means that rather than approaching such agreements with careful consideration,
many clients are induced to sign up for Debt Agreements who would not otherwise consider
a formal alternative to bankruptcy, or bankruptcy itself. In other cases, debtors enter a Debt
Agreement when they would have been far better off simply going bankrupt and, in some cases,
end up bankrupt anyway after a long drawn out process of trying to pay in accordance with a
Debt Agreement and then defaulting.
The number of Debt Agreements increased by 156% between 2001 – 02 and 2009 – 10, far
outstripping the growth in the number of bankruptcies in the same period of only 23%2. In the
2009 – 10 financial year Debt Agreements accounted for 23% of all personal insolvency activity
in Australia.3 As a result, you are now more likely to see clients either considering, or already
in, a Debt Agreement.
The Debt Agreement provisions were reviewed in 2005/6, due to dissatisfaction by a number of
stakeholders, resulting in the Bankruptcy Legislation Amendment (Debt Agreements) Act 2007.
These amendments made a number of important reforms including:
30
2
Review of Debt Agreements under the Bankruptcy Act 1966, Consultation Paper, Attorney General’s Department, July 2011, p6
3
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Introducing a registration scheme for Debt Agreement Administrators
Ensuring that Debt Agreement Administrators could only take their ongoing fees as a
proportion of payments made to creditors rather than in preference to creditors
Requiring Debt Agreement Administrators to certify certain aspects of Debt Agreement
Proposals including affordability, disclosure and the debtor’s receipt of the prescribed
information.
These reforms have ostensibly improved the system. For example, termination rates appear to
have reduced markedly and acceptance rates have improved. Despite these changes, consumer
advocates continue to harbour concerns. For example:
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Misleading marketing continues to be rife – attracting debtors who would not otherwise
consider an option under the Bankruptcy Act.
While changes were made to address the affordability and hence sustainability of Debt
Agreements, the result appears to be that the length of Debt Agreements has increased
considerably meaning that many last considerably longer than bankruptcy (over 40% of
agreements proposed in July 2009 – March 2010 were over 5 years in length4).
Young people are overrepresented in the Debt Agreement profiles (15 – 24 year olds were
the most represented age group in 2005 and 2007 and 25 – 29 years old in 20095).
There are regulatory gaps created by unregistered Debt Agreement Administrators
and brokers/intermediaries (who do not administer agreements but play a role in their
marketing and inception).
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Debtors enter Debt Agreements that are clearly not in their best interests.
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Consumer agencies continue to receive complaints about aspects of the procedure.
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While termination rates have decreased from 26.5% prior to the amendments to 8.4%,
only 2.6% of the post-amendment Debt Agreements had actually been completed at
the time of the review making it far too early to say whether these Debt Agreements will
ultimately be completed at a greater rate than previously. Non-completion is a big risk for
debtors because any benefit associated with the Debt Agreement is completely lost upon
non-completion.
The Debt Agreement provisions have again been under review (in 2011 – 2012) and the outcome
of that process may affect some of the information in this section of this kit. Where a particular
provision or issue was specifically considered by the recent review a note will be made in the text
advising the reader to check up on the current situation.
What is a Debt Agreement?
As stated above, a Debt Agreement is a formal alternative to bankruptcy under the Bankruptcy
Act 1966. Under a Debt Agreement, the debtor most commonly agrees to pay a proportion of
their debts in instalments in return for which the creditor agrees to forego enforcement action.
If, and only if, the Debt Agreement is paid out in full, the creditors forego the remainder of
the debt. Other arrangements such as payment of a lump sum or payment of a lump sum from
the proceeds of the sale of identified property (e.g. sale of the client’s car or caravan), are also
possible but less common.
Usually the debtor will pay an upfront fee for the preparation and presentation of the Debt
Agreement in addition to an ongoing percentage of payments made for the administration of
the agreement. There is also a lodgement fee payable to AFSA (as of 1 January 2011) which was
4
5
$200 as at June 2014 (current fees can be found at www.afsa.gov.au)6. As the debts are frozen at
the point the agreement is entered on the NPII further interest is no longer payable, however,
the provable debt that is frozen will include interest charged to date.
Debt Agreement Administrators [“DAAs”], who propose and administer Debt Agreements,
are regulated by AFSA. As noted above, the law regulating DAAs was tightened up in 2007 in
response to concerns and was recently under review again. Increasingly Debt Agreements are being
promoted by intermediaries or brokers who are not necessarily Debt Agreement Administrators
regulated by AFSA. These entities take a fee or commission for identifying debtors as potential
clients but then refer the debtor on to a DAA to lodge the proposal and administer the Debt
Agreement should it be accepted. Many debtors are signed up to pay upfront fees as part of an
initial interview or phone call with the broker and can face resistance to getting out of these
fees if they try to change their mind (often upon receiving more information about the process
& consequences later). Information on how to deal with this problem is located in Chapter 11.
Example: Actual Debt Agreement with names of creditors changed
Debtor owed a total of $38,546 in unsecured debts. She also had a secured car loan of about $39,000.
Her Debt Agreement proposal prepared by a DAA was as follows:
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She should cease paying all debts except the secured car loan.
She would first make two monthly payments of $948 dollars representing the upfront fee for
the preparation of the Debt Agreement Proposal (total $1,896).
She would then make 48 monthly payments (4 years) of $822 totalling $39,456. This would be
distributed as follows:
Distributed to creditor
$27,225
Paid to DAA – fees for administration of the agreement
$10,850
Paid to Australian Government (Realisation Charge)
Total
$1,381
$39,456
Savings to the debtor (assuming she completes the Debt Agreement) are limited to the interest
she would have paid (which could be substantial), less the upfront fee ($1,896) and the amount
by which the payments exceed the amount originally owed ($910). The creditors lose all the
interest plus $11,321 in capital. The DAA gains $10,850 plus $1,896 = $12,746 less the costs
of administering the agreement.
Fees
As shown in the example above, fees paid for both setting up and then administering a Debt
Agreement can be substantial. There is also a lot of confusion, with debtors often misinterpreting
their initial payments on the upfront fee as payments under the agreement, resulting in
disappointment if the proposal is rejected as the money is neither refunded nor set off against
their debts. Despite being given the paperwork to sign, clients also tend to focus on the size of
the repayments, and may not fully appreciate the amount being paid to the administrator rather
than the creditors until much later (sometimes only when they default and lose the benefit of
any amounts paid to the Debt Agreement Administrator).
The amount of fees paid is not currently regulated. Although consumers can theoretically shop
around, in reality it seems to be creditors who constitute the relevant “market force” for ongoing
fees because they can reject a proposal on the basis that the fees are too high. Consumers tend to
6
After 1 July 2011, exemptions apply to individuals in receipt of certain emergency payments for specified periods as set out in
Bankruptcy (Fees and Remuneration) Determination 2010 (No. 2) Amendment Determination 2011 (No. 1)
32
be more passive in the process – only concerned initially about the amount of the repayments
and whether the agreement is accepted (to stop any enforcement activity by creditors).
➻➻ Note: The level of fees was a topic being canvassed by the recent review with the most likely
outcome being that statistics about fees, acceptance rates and agreements length will be
published on AFSA’s website to provide consumers with a point of comparison.
The role of financial counsellors
The information in this kit is not provided with the intention of empowering financial counsellors
to set up Debt Agreements. Debt Agreements have very serious consequences for debtors. Being
a Debt Agreement Administrator also involves many duties and obligations to the debtor, the
creditors and the Official Receiver. Financial Counsellors are not well placed to meet these
obligations and would undertake considerable risk of complaint by any of the stakeholders.
Further, the current rule allowing people who are not DAAs to administer up to five Debt
Agreements is likely to be abolished as part of the recent review (confining the role to DAAs).
The information is provided to enable financial counsellors to properly advise clients who may
be considering a Debt Agreement or who are having problems with a Debt Agreement they
have already entered.
➻➻ Important Note: If your client has just signed up for a Debt Agreement and is having second
thoughts (or you think they should be) there is a very limited time to stop the proposal from
proceeding. Getting out of a Debt Agreement once it has been made is very difficult and undoing
the harm is virtually impossible. You need to act immediately to stop the proposal before it is
accepted – see Chapter 11.
If your client is convinced that a Debt Agreement is the right option for them (once all the
consequences have been explained), suggest they get you to do a reality check on affordability
before the proposal is submitted.
Limitations on who can enter a Debt Agreement
There are limitations on the circumstances in which a debtor can propose or enter a Debt
Agreement. These are:
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The debtor must be insolvent (Section 185C)
The debtor must not have been a bankrupt, or party to a Debt Agreement7, or have
authorised a solicitor or trustee to control their affairs under Part X of the Bankruptcy
Act (covering Personal Insolvency Agreements), in the immediately preceding 10 years
(Section 185C(4)(a)) [Note. Where a sequestration order was made against the debtor
was subsequently set aside, the debtor is not classed as have been a bankrupt in
respect of that sequestration order].
The debtor’s unsecured debts cannot exceed the relevant threshold (or any amount
prescribed by the Regulations (Section 185C(4)(b))
The debtor’s property divisible among creditors in the event of their bankruptcy cannot
exceed the relevant threshold (Section 185C(4)(c))
The debtor’s after tax income cannot not exceed three quarters of the relevant threshold
amount (Section 185C(4)(d)).
➻➻ Note: the final four of the above requirements were specifically canvassed in the recent Review
with an increase in the thresholds a likely outcome, in addition to a possible reduction in the 10
year period.
7 Debt Agreement Proposals that are withdrawn by the debtor or cancelled by the Official Receiver prior to acceptance by the creditors do not disqualify a debtor from proposing another Debt Agreement (Official Receiver’s Practice Statement – Who is eligible to make a
debt agreement? July 2008, updated 1 December 2012, available at www.afsa.gov.au.)
When does the ten years start from?
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Bankruptcy – from the date of discharge/annulment
Debt Agreements – from the date of completion or if not completed from the date of
termination
Personal Insolvency Agreements – from the date the s.188 Authority was signed
As at March 2014 the allowable limit on unsecured debts and divisible assets was $105,086.80.
The maximum income of the debtor as at March 2014 was $78,815.10. To get the most up-todate threshold amount go to www.afsa.gov.au and select Indexed Amounts.
The debtor’s after tax income is their anticipated income after tax and deduction of the Medicare
levy for the year commencing on the proposal date.
If the client has a secured debt but the debt exceeds the value of the security, then the amount of
the excess is considered an unsecured debt and should be included in the calculation to determine
whether the client’s unsecured debts exceed the relevant threshold.
Insolvency
Section 185C(1) specifies that the debtor must be insolvent to propose a Debt Agreement.
The Official Receiver’s Practice Statement states that a Debt Agreement Proposal will NOT be
accepted where there is insufficient evidence in the Explanatory Statement and Statement of
Affairs to support the debtor’s statement of insolvency, that is, they are unable to pay their debts
as and when they fall due.8
The Official Receiver is to have particular regard to the following in the Explanatory Statement
and Statement of Affairs to determine whether these factors support a finding of insolvency:
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The circumstances that led to the debtor becoming unable to pay their debts (e.g. loss of
employment);
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The status of the unsecured debts (e.g. arrears, repossession, judgment);
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The status of the secured creditors (e.g. arrears, legal action); and
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The date the debtor was last able to pay their debts as they fell due shown by the debtor on
the Statement of Affairs.9
According to the Practice Statement above, if there is no evidence apparent to support the
debtor’s claim to insolvency, the Official Receiver will make a compliance phone call to the
debtor seeking further information. It continues to the effect that other factors which might
indicate insolvency are the debtor’s employment history, including periods of unemployment;
the debtor having obtained assistance from a financial counsellor; and whether the income is
sufficient to pay the debts.
It has been noted by consumer advocates, however, that there often appears to be little scrutiny
of whether or not the debtor is insolvent. Statements by the debtor about their insolvency are
often dictated by DAA’s “to ensure it gets accepted”. Further, arrears are sometimes the result of
the DAA telling the debtor to cease paying their debts at the first appointment or phone call.
➻➻ Note: One proposal of the recent review was to require the DAA to also provide a Statement of
Suitability. This would not go so far as to require the DAA to certify that a Debt Agreement is the
best option for the client, but that it is at least a suitable option.
8
Official Receiver’s Practice Statement – Who is eligible to make a debt agreement? July 2008, updated 1 December 2012, available at www.afsa.gov.au
9
Official Receiver’s Practice Statement – Who is eligible to make a debt agreement? July 2008, updated 1 December 2012, available at www.afsa.gov.au.
34
Summary – eligibility for a Debt Agreement as at March 2014
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Insolvent
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No bankruptcy, PIA or other DA in the previous 10 years
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Unsecured debts less than or equal to $105,086.80
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Divisible property less than or equal to $105,086.80
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Taxable income less than or equal to $78,815.10
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All debts must be paid in equal proportion
Consequences of proposing and entering a Debt Agreement
Proposing and entering a Debt Agreement has both positive and negative consequences:
Positive
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Debts and enforcement action are frozen while the proposal is considered.
The debtor may pay less than the full amount owed and may not have to pay any more
interest.
The debtor is released from the same debts as would be the case in bankruptcy upon
completion of the Debt Agreement.
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The debtor may retain any assets, such as their home.
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The debtor can remain or become a Director of a company.
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The debtor is not disqualified from being employed in a position defined as key personnel
under the Aged Care Act 1997 – this includes people in charge of nursing staff .
➻➻ Note: There may be other forms of employment that will differentiate between a Debt Agreement
and bankruptcy but many don’t so the debtor will have to make detailed enquiries).
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The debtor may derive some satisfaction from having met a proportion of their financial
obligations rather than none.
The debtor gets to make a single periodic payment rather than keep track of numerous
creditors and accounts.
➻➻ Important: It should be noted that in some cases, all of the above can be achieved by an
informal arrangement with creditors, without the negative consequences listed below.
Negative
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The Debt Agreement Proposal will be recorded on the National Personal Insolvency
Index (“NPII”) – note that it is the proposal that is recorded, and this occurs whether or
not the proposal is accepted.
Even if the Debt Agreement is not accepted by the creditors, the debtor by submitting
their proposal has committed an “act of bankruptcy” which one of their creditors could
use to base a Creditor’s Petition on and apply to have the debtor made bankrupt by the
Court.
The acceptance or rejection of the proposal will also be recorded on the NPII and any
subsequent variation or termination of the Debt Agreement.
These details will be recorded on the debtor’s credit reporting records making it harder for
the debtor to obtain credit in the future.
The debtor is required to disclose that they are subject to a Debt Agreement when they
apply for a loan or credit (including a hire purchase agreement or lease) for an amount in
excess of $5,333 (as at June 2014).
The debtor will most commonly have to pay both up front and ongoing fees to the DAA.
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The Debt Agreement may last longer than bankruptcy.
There is a significant risk of non-completion – if the debtor is unable to pay out the
agreement in full, the whole amount originally owing will become payable again (with
interest) less the amounts received from the Debt Agreement, and collection/enforcement
activity will recommence. The debtor may then have to consider bankruptcy after all at the
point of default, which could be several years down the track. Any amounts paid for the
preparation and administration of the Debt Agreement will not be refunded.
There may be ramifications for their employment – check with the appropriate
professional body or licensing authority.
Case study
A man called the Credit and Debt Hotline in NSW wondering what to do. He had entered a Debt
Agreement 3 years previously for unsecured debts totalling about $20,000. In that time he has
paid $13,925 towards the agreement (including upfront and ongoing fees) but only $8,944 has
been distributed to creditors. He is now unemployed and cannot afford to pay.
He has been advised to terminate the agreement but he is concerned about enforcement action
by creditors. The interest from the past 3 years will be added to the debts and the amounts kept
by the DAA for their own fees will not be set off against this. He will probably have no choice but
to go bankrupt now 3 years and nearly $14,000 later.
Changes to the Privacy Act 1988 were enacted in 2012 and commenced in March 2014. Under
the new law the time period for which a Debt Agreement can be retained on an individual’s
credit file is the longer of the following:
■■
5 years from date of agreement; or
■■
2 years from when the agreement is terminated or declared void; or
■■
If the agreement is completed (after longer than 5 years) the date of completion.
It will also mean that Debt Agreement proposals which are withdrawn, voted down, lapsed or
rejected by the Official Receiver (even if initially accepted) cannot be retained on a credit file
once one of these things has occurred.
➻➻ Note: One of the proposals under consideration in the recent review of Debt Agreements was
bringing the NPII into line with the above time limits also. This would be a significant change if it
occurs
Consequences of Debt Agreements compared to bankruptcy
✔
Indicates that this consequence is an advantage (of either bankruptcy or a Debt Agreement
depending on which column it appears in).
✘
Indicates that the consequence is a disadvantage.
✹
This symbol means that it is impossible to tell whether a Debt Agreement will be better
or worse than bankruptcy without looking at the particular circumstances. For example,
without knowing the amount of payments under a particular Debt Agreement, and the
contributions that would be assessed in bankruptcy for that particular person, you can’t
tell whether a person would be better off financially with one or the other. A financial
counsellor can, however, make this assessment in a particular case.
Where there is a tick in both columns or a cross in both columns, then the advantage or disadvantage
applies equally in either case.
36
Bankruptcy
Debt Agreement
Positive consequences of bankruptcy
Comparison
✔
✔
✔
The person can usually stop paying most debts
immediately
✘
Payments will continue, although it may be for a
reduced amount (or a lump sum)
✹
Most debts are forgiven at the end of the Debt
Agreement – the person gets a more or less fresh
start, BUT only if they succeed in completing the
agreement
✔
Most debts are forgiven at the end of the
bankruptcy – the person gets a more or less fresh
start automatically
✔
Usually a bankrupt can continue to earn an
income from their chosen occupation (there are
exceptions)
✔
Usually a Debt Agreement will not affect a
person’s ability to earn an income from their
chosen occupation (there are exceptions)
✔
✔
✔
A motor vehicle up to the prescribed value can be
retained/obtained
✔
The bankruptcy usually ends after 3 years
Any motor vehicle can be retained
There is no limit to how long a Debt Agreement
may be and the evidence from the most recent
review shows that many now exceed five years in
length
✔
✘
Positive consequences of bankruptcy
Comparison
✔
dishonestly)
✹
There may be some sense of relief at lower
payments and fewer creditors to keep track of,
however, many complaints are made by debtors
who are disappointed and feel they have been
misled or who are struggling to keep up with
payments.
✔
✹
Whether there will be more income available for
living expenses will be entirely dependent on how
much less the payments are under the agreement
compared to the contractual payments, whether
or not the debtor could have obtained a hardship
variation on similar terms and the general
affordability of the agreement in the debtor’s
circumstances
Negative consequences of bankruptcy
Comparison
✔
dishonestly)
There may be a great sense of relief and/or a
reduction in stress
✔
The bankrupt may have more income available
for living expenses once relieved of the
requirement to pay some debts
✘
Non-protected assets, including a home, may be
sold
✔
Some debts will not be extinguished
✘
✘
A record of the bankruptcy is retained on a public
register forever (NPII)
Assets will not be sold
✘
Debtor will not be released from those debts
that are not released by bankruptcy even if they
complete the Debt Agreement
✘
A record of the Debt Agreement (& proposal even
if it does not proceed) is retained on a public
register forever (NPII) – See Note above about
potential change to this.
Bankruptcy
✘
50% of income above the prescribed amount is
payable to the trustee
✘
A record of the bankruptcy remains with credit
reference agencies for the longer of 5 years from
the start or two years from discharge
✘
Certain assets acquired during the bankruptcy
can be taken and sold for the benefit of the
creditors
Negative consequences of bankruptcy
Debt Agreement
✹
Income is not taken but payments must be
met – how this will compare to meeting income
contributions will depend on the terms of the Debt
Agreement
✘
A record of the Debt Agreement remains on the
debtor’s credit report for the longer of 5 years
from the start or 2 years from termination or being
declared void. If completed after 5 years, then
until completion.
✔
Assets acquired during the Debt Agreement will
not be affected. However a material improvement
in the debtor’s financial position during the Debt
Agreement may prompt a creditor to apply to
terminate or vary the Debt Agreement.
Comparison
A bankrupt may be prevented from working
in some roles or professions, or need to seek
special permission or show cause to do so
✘
✘
A debtor in a Debt Agreement may be prevented
from working in some roles or professions, or
need to seek special permission or show cause to
do so. However, this would occur in less cases in
comparison with bankruptcy.
➻➻ For example, the Aged Care Act 1997
excludes bankrupts from being key
personnel in certain facilities but does not
mention debtor’s in Debt Agreements.
✘
✘
A bankrupt is disqualified from being a company
director or being actively involved in the
management of a company.
A bankrupt may experience difficulties trying to be
accepted as a tenant in rental accommodation
A person in a Debt Agreement can continue as a
company director.
✔
✘
A debtor in a Debt Agreement may experience
difficulties trying to be accepted as a tenant in
rental accommodation
✘
The bankruptcy must be disclosed to potential
creditors where the debt will exceed $5,333 (as at
June 2014).
✘
The Debt Agreement must be disclosed to
potential creditors where the debt will exceed
$5,333 (as at June 2014).
✘
A bankrupt can only travel overseas with the
permission of the relevant trustee
✔
There are no restrictions on travel for Debt
Agreements, although payments must be met
✘
A bankrupt may have trouble obtaining some
types of insurance cover
✘
A debtor in a Debt Agreement may have trouble
obtaining some types of insurance cover
✘
A bankrupt may have trouble getting access to
some services such as mobile phone contracts
✘
A debtor in a Debt Agreement may have trouble
getting access to some services such as mobile
phone contracts
✘
Past financial affairs may be investigated
✔
Financial affairs are not usually investigated
38
Bankruptcy
Debt Agreement
The bankrupt will have to co-operate with and
report to the trustee
✘
The debtor will need to keep up payments and
communication with the DAA. If the debtor
needs to vary the repayments or terminate the
agreement he or she may be dependent on the
DAA’s assistance.
✘
Some bankrupts may experience negative
attitudes and poorer treatment by others as a
result of being, or having been, bankrupt. Some
people may feel a sense of shame or personal
failure whether or not others treat them this way.
✹
Some people may feel that it is preferable to make
a significant contribution to their debts via a Debt
Agreement rather than go bankrupt. However, as
a result of NPII and credit report listings treatment
by others is often the same as bankruptcy.
✘
Co-debtors and guarantors continue to be liable
for all debts unless they are bankrupt in their own
right
✘
Co-debtors and guarantors continue to be liable
for all debts unless they enter a different Debt
Agreement or are bankrupt in their own right
✘
A bankrupt cannot propose a Debt Agreement for
10 years after bankruptcy
✘
A debtor in a Debt Agreement cannot propose
another Debt Agreement for 10 years
✘
The debtor may experience stress and hardship in
trying to meet the payments
✘
The debtor may default, sometimes after several
years, and then have to go bankrupt anyway
✘
Would my client benefit from a Debt Agreement?
Yes
Then neither a
Debt Agreement or
bankruptcy is an
appropriate option
Yes
Successful agreements
reached – Debt
Agreement is not
necessary
There is no good reason
for your client to consider
a Debt Agreement. Your
client should either enter
informal arrangements
with as many creditors
as possible, consider
bankruptcy, pay as much
as he or she can afford,
or do nothing. You should
advise them of the
consequences of doing
nothing.
Can your client meet their
debt repayments as they fall
due?
A Debt Agreement is a
formal arrangement under
the Bankruptcy Act with
serious consequences.
Attempts should always be
made to come to informal
arrangements with creditors
first.
No
No
negotiations unsuccessful
Is your client a director of a
company or intending to be a
director of a company in the
next 3 – 5 years?
Has your client, or someone acting on
their behalf, tried to negotiate informal
arrangements with the client’s creditors,
such as a hardship variation, reduced lump
sum payment or compassionate release (If
appropriate)?
Yes, without success
Does your client have any assets that would
not be protected in bankruptcy (e.g. a home in
which they live)?
Yes
No
Is your client’s equity in those assets (market
value less and loan/mortgage secured over
the asset) more than the threshold amount
($105, 086.80 as at March 2014)?
No
Yes
No
Yes
Your client is not eligible to
enter a Debt Agreement
Yes
Does your client owe unsecured creditors more than the threshold
amount ($105, 086.80 as at March 2014)?
Yes
Is your client likely to earn more than the threshold amount
($78,815.10 as at March 2014) in income over the next 12 months?
Yes
Has your client done any of the following in the last 10 years:
• Been bankrupt (unless it was annulled) or
• Entered a Debt Agreement or
• Appointed a controlling solicitor or trustee under Part X of the
Bankruptcy Act?
Your client should seriously
consider selling his or her
assets and paying his or
her debts rather than taking
insolvency action and all
its consequences unless
creditors have already
commenced insolvency
proceedings & no compromise
can be made.
40
Yes
If your clients has assets, could s/he sell those assets and pay their
debts in full?
Your client may be a candidate for a Debt Agreement but make
sure he or she fully understands the consequences before referral.
If your client has a mortgaged home s/he wishes to continue paying,
you should warn the client that failure to meet both the mortgage
repayments and/or payments under the Debt agreement could result
in repossession of the home or bankruptcy (and likely loss of home
anyway) in the future. If your client’s creditors are not pressuring
him or her for payment, s/he may be better off just waiting to see
if circumstances improve. If one or more creditors have judgment
or have issued a Bankruptcy Notice then the client will need to act
quickly. See also Chapter 6, Part 3, Bankruptcy & Mortgages.
In short your client should really only consider a Debt Agreement in circumstances where
they have assets to protect and/or they wish to be, or continue to be, a company director (or
other occupation where this is permitted under a Debt Agreement but not bankruptcy). The
circumstances where a client both fits one of these categories and meets all the legal requirements
for eligibility are relatively rare. Further, the risk of non-completion of the agreement is very
real, usually leaving the debtor much worse off than if they had never made the agreement in
the first place.
Tip ►
Your client should NOT enter a Debt Agreement where he or she:
■■
Would not be likely to have to pay contributions in bankruptcy
■■
Does not have any assets that would be taken by the Trustee and
■■
Is not a company director (and does not want to be)
Bankruptcy is likely to be a better option.
Finally, if your client is contemplating a Debt Agreement, they should be warned to make sure
the Debt Agreement is affordable and likely to be completed within a reasonable period of time.
Accordingly, when preparing their budget they should include contingencies. As a general rule
clients should be wary of any Debt Agreement Proposal that will last significantly longer than
the usual period of bankruptcy (3 years).
Using a Debt Agreement to save the home
If the client is trying to protect their equity in a home, then extra care needs to be taken in making
the decision to enter into a Debt Agreement. Importantly, the client needs to be confident of
being able to pay both the periodic payments due under the Debt Agreement and the mortgage
in the coming years.
You should advise your client to do a detailed analysis of their options, including comparing
what they would have to pay under a Debt Agreement in addition to their mortgage, compared
to option of selling the home, renting a home suitable to their needs and either going bankrupt
or attempting to pay the remainder of the debts after applying any equity in their home towards
those debts. You should also try to assist them to imagine their likely position in 3 years and 5
years time under each option.
While losing any hope of capital gain on their home (if they sell) and the problems associated
with getting back into the housing market after leaving it are valid considerations, they are only
valid to the extent that retaining the home is at all realistic. Such considerations should also
be carefully balanced against other important factors, such as the stress associated with debt
repayment and having income available for improvements in lifestyle. Of course if the debtor
would have to pay more to rent a suitable home than the amount of their mortgage payments
then the option of staying in the home has clearer benefits.
If your client has no equity in their home at all and the value of the home is not likely to increase
much in the next 3 years, then she or he could consider bankruptcy in which case they may be
able to keep living in the home whilst maintaining the mortgage/rates/insurance payments with
a view to “buying back” their equity in the home from the trustee when they are discharged in 3
years. However, this alternative also entails significant risk (See Chapter 6, Part 3).
Case study
A husband and wife entered a Debt Agreement in relation to their unsecured debts in an attempt
to save their home. Unfortunately they could not keep up with the repayments under the Debt
Agreement and the mortgage so they put the house on the market. Eighteen months later they
still can’t afford to live because the repayments under the Debt Agreements and rent alone leave
them with only $50 per week! They will need to terminate the agreement and go bankrupt or stop
paying and wait until it is terminated automatically.
Case study
A woman and her husband have $80,000 worth of unsecured debt and a $500,000 mortgage.
Both are working but they are struggling to pay credit cards. The mortgage is up to date. They
have made three Debt Agreement Proposals, all of which have been rejected. So far they have
spent $4,000 on fees with no result. None of this money has gone to their creditors to reduce their
debts.
Case study
A debtor entered a Debt Agreement to reduce her unsecured debts hoping to continue to pay
her mortgage. She sought advice from CCLC in early 2010 because she was having trouble
refinancing her home loan as a result of the Debt Agreement. She was with a non-bank lender
and paying about 2% per annum more than the standard variable rate for the major banks. This
was causing considerable financial stress.
Very occasionally a client may come along where a Debt Agreement offers real advantages:
Case study
The client is a 55 year old company director with his own business. He is married and the family
home is in his wife’s name.
He has a number of debts arising from credit cards that total $52,000. He has a judgment debt of
$36,000 resulting from an action taken against him by the purchaser of a previous business for
poaching his old clients in breach of contract. He had been to mediation but had failed to meet the
agreed repayment schedule.
The judgment creditor served a Bankruptcy Notice and subsequently served a Creditor’s
Petition on the client. The judgment creditor has indicated that he has no interest in a negotiated
arrangement. The client believes creditor just wants to put him out of business.
There is a Creditor’s Petition hearing in 3 weeks time. The client’s income is about $60,000 p.a.
after tax according to a statement from his accountant and his assets are below the threshold
for entering a Debt Agreement. The new business is currently up for sale but in the meantime he
would like to continue as company director. He believes he will eventually be able to pay his debts
either from his income or the proceeds of the sale.
The above client is very likely to end up bankrupt regardless of any action on his part unless he
can come up with a lot of money fast. Without more information we cannot tell whether the
trustee is able to claim an interest in the family home in bankruptcy, but it is certainly possible
depending on the history. The client will also be prevented from a being a company director if he
is made bankrupt. The other advantage of a Debt Agreement in this case is that the credit card
creditors can potentially bind the reluctant judgment creditor (force him to accept the Debt
Agreement) because they hold the majority of the debts by value. If the business was successfully
sold, the client could apply to vary the agreement and pay out the debts earlier than anticipated,
completing the agreement.
However, it is much easier said than done to get a Debt Agreement accepted at this late stage in
the Creditor’s Petition process. The challenges of doing this are covered in Chapter 10.
Non-completion risk
Perhaps the biggest risk not taken into account by consumers entering Debt Agreements is
the risk of non-completion. Many consumers contact financial counselling services after they
have defaulted on a Debt Agreement. This is the real risk that consumers often don’t take into
account. Once they have defaulted they have limited options. They can apply to vary the Debt
42
Agreement but this may not be accepted or they may default again. Once a Debt Agreement
has been terminated, the consumer owes all the original debts, plus back-dated interest, less any
money that was paid to the creditors under the agreement. Any amounts paid to the DAA (or
a broker) are lost. The reality for people who cannot meet the repayments under their Debt
Agreement is often inevitable bankruptcy after a lot of money and time has been wasted.
Possible time line
Enter Debt
Agreement
2012
►
Default on Debt
Agreement
2014–apply to
vary
Debt Agreement
► terminated 2016–
bankruptcy commences
►
Discharged from
►
bankruptcy 2019
Bankruptcy listing
removed from credit
report 2021
If your client is suitable for a Debt Agreement then they will need to consult a suitably qualified
Debt Agreement Administrator. AFSA can provide referral information or go to www.afsa.gov.au.
Further information on what is required to get into a Debt Agreement and what your client can
do if they are already in one and want to get out and/or complain is contained in Chapter 11.
Where your client has been in the process of applying for a Debt Agreement and has now changed
his or her mind, urgent action is required to stop the process (if it’s not too late already!) – See
Chapter 11.
See also Chapter 10 in the event that a Creditor’s Petition has been presented against your client
and he or she is considering a Debt Agreement.
Part 3:
Personal Insolvency Agreements
A Personal Insolvency Agreement is similar to a Debt Agreement in that it is an alternative to
bankruptcy but also a formalised option under the Bankruptcy Act with many similar consequences
to bankruptcy. An agreement is made with creditors to transfer property or funds, or make
periodic payments in return for a release from the provable debts at the conclusion of the
arrangement. As with a Debt Agreement (and unlike bankruptcy), your client’s property does
not vest in the trustee (but some or all of it may have to be transferred to creditors as part of the
agreement itself ). The debtor can also acquire property during the agreement without it vesting
in the trustee or passing to creditors.
Like proposing a Debt Agreement, appointing a controlling trustee (the first step in setting up
a Personal Insolvency Agreement) is an act of bankruptcy.
Unlike Debt Agreements, a person in a Personal Insolvency Agreement cannot be a director of
a company for the duration of the agreement.
A Personal Insolvency Agreement is expensive to set up and will not therefore be useful to most
financial counselling clients.
What is a Personal Insolvency Agreement?
Part X of the Bankruptcy Act covers Personal Insolvency Agreements. A Personal Insolvency
Agreement (“PIA”) is an arrangement whereby a person who is insolvent seeks to avoid bankruptcy
by making an offer to his or her creditors to:
■■
■■
■■
Pay a lump sum payment to creditors (from his or her own money and/or the funds of a
3rd party or parties such as family members); and/or
Transfer property to the trustee (of the PIA) to be sold by the trustee and the proceeds
paid to creditors; and/or
Make periodic payments to the trustee for distribution to creditors.
Unlike a Debt Agreement, there are no limits to the income that can be earned by the person
proposing the PIA or limits on the amounts owed or assets owned. The debtor however:
■■
Must be insolvent; and
■■
Must have an appropriate connection to Australia; and
■■
Must not have proposed another insolvency agreement in the previous 6 months.
The trustee informs the creditors of the proposed agreement and holds a meeting where creditors
either accept or reject the proposal according to a voting procedure at a creditor’s meeting. This
is explained further in Chapter 12 under the heading “What is the Process?”
There are very few financial counselling clients who would be suitable for a PIA and this section
is therefore relatively brief. The cost alone would be prohibitive for most people seeking financial
counselling. More information is available from AFSA at www.afsa.gov.au.
What are the consequences of a PIA?
Like Debt Agreements and bankruptcy, a record of the PIA remains on the debtor’s credit file for
the longer of 5 years from when the PIA is executed, two years from when it is terminated or set
aside, or the date of completion) and on the National Personal Insolvency Index forever, thereby
impairing the debtor’s ability to obtain credit and other services (such as rental accommodation,
telecommunications contracts and insurance) in the future, and especially in the next five to
seven years.
Appointing a controlling trustee (to set up a PIA) is also an “act of bankruptcy” (like proposing
a Debt Agreement) and can be relied on by creditors to petition the Court to make the debtor
bankrupt if he or she fails to complete the terms of the agreement or the creditors do not vote
to accept the proposal.
It may also impact on a person’s ability to remain in a licensed or regulated profession, similar
to both bankruptcy and Debt Agreements.
Like bankruptcy, a person in a PIA cannot be a director of a company until the terms of the PIA
have been complied with in full (that is all agreed amounts are paid or property has been sold
or transferred as provided for in the agreement). This is not the case with a Debt Agreement,
where the person can continue to be a director of a company while in the Debt Agreement.
What is the advantage of a PIA over bankruptcy?
The assets of a person in a PIA do not automatically vest in the trustee. The proposal must detail
what is to become of the debtor’s divisible property. For example, is all or part of the divisible
property being retained by the debtor or is it being transferred to the trustee to be sold for the
benefit of the creditors? Likewise, the proposal must detail whether part of the debtor’s income
is to be paid to the trustee over set periods.
In practice, it may be difficult to get the creditors to agree to the debtor retaining current
assets – in other words, property that would be divisible amongst the creditors in bankruptcy
would usually need to be offered as part of the PIA and would vest in a trustee by virtue of the
agreement. However, creditors will generally agree to the debtor retaining business assets on
the proviso that periodic payments be made to the trustee from the income generated by the
business. Likewise, creditors will generally not object to the debtor retaining their home if there
is little if any, equity in the home.
Property acquired in future (after the PIA has been accepted and executed) will NOT become
available to creditors (unlike the situation for an undischarged bankrupt).
The process commences when the debtor signs a Section 188 Authority appointing a Controlling
Trustee. When the Section 188 Authority becomes effective, the debtor’s property (whilst not
44
technically vesting in the Controlling Trustee) becomes subject to the control of the Controlling
Trustee. Accordingly, there is a certain loss of autonomy in relation to dealing with property,
especially any assets of the debtor’s business. Normally, the trustee will only allow the debtor to
keep their business operational where it is considered be in the interests of the creditors.
Whilst the Controlling Trusteeship is in place , the debtor’s property is subject to a charge in
favour of the creditors, plus the Controlling Trustee is entitled to be indemnified out of the
debtor’s property for his/her remuneration and expenses.
The proposal must also detail whether the antecedent transactions provisions of the Act apply. If
they do not apply, the trustee is precluded from taking recovery action in respect of any under-value
property transfers, transfers to defeat creditors and/or preferential payments to creditors made
prior to the proposal. However, creditors can insist on the antecedent transactions provisions
applying in the PIA as one of the conditions of the agreement.
If the debtor’s proposal states that the antecedent transactions provisions do not apply, the
creditors may be suspicious and assume (rightly or wrongly) that there have been undervalue
transactions, transfers to defeat creditors and preferential payments to creditors prior to the
proposal. Accordingly, debtors are usually advised to state in the proposal that the antecedent
transactions provisions do apply so as not arouse the suspicions of creditors, even if there is a
possibility that the trustee of the PIA might take action to recover property. As with bankruptcy,
the trustee of the PIA will not take any recovery action unless creditors provide funding to do
so or authorise the use of moneys in the estate plus give the trustee an unlimited indemnity as
to costs in the event the recovery action fails and the trustee is ordered to pay the other party’s
costs. Accordingly, creditors are usually most reluctant to provide funding and an indemnity.
The creditors must vote on the PIA proposal at a meeting arranged in accordance with the Act.
The proposal must be approved by a majority of unsecured creditors (by number) who represent
at least 75% of the dollar value of the total debts of the creditors who attend the meeting and
vote on the resolution. Once the agreement is accepted, then the trustee appointed to administer
the agreement will have control over any property necessary to the completion of the agreement.
If the proposal is not accepted or if the PIA is not executed within the prescribed time period (21
days) then the Controlling Trustee remains in control of the property until either: the creditor’s
vote at the meeting for the property to cease to be subject to the trustee’s control; four months
pass; the Court orders the release; or the debtor becomes a bankrupt and property vests in the
Trustee (in bankruptcy).
If the PIA is completed (all obligations under the agreement complied with), then the agreement
will specify the extent to which the debtor is released from any debts that would be provable
in bankruptcy at the date the PIA was executed. A PIA cannot release a debtor from debts in
circumstances where the debtor would not be released after discharge from bankruptcy. It also
does not affect the creditor’s rights against any co-borrower or guarantor, or the rights of secured
creditors to enforce their security.
In practice a PIA is expensive – most Controlling Trustees in Sydney, for example, would
commonly want at least $15,000 upfront to accept an appointment. This means the debtor has to
be very sure that they have sufficient funds to cover this, that they have a proposal that creditor’s
are likely to accept, and that they will still end up better off than if they had gone bankrupt.
Who would consider a PIA?
The majority of financial counselling clients would not be suitable for a PIA because they have
little, if anything, to offer their creditors that would be superior to what was available to them in
bankruptcy. In the rare case that a client has available assets (but insufficient to sell and pay out
the debts) and/or a significant income from which amounts could be offered above and beyond
contributions payable in bankruptcy, then the following should be considered:
■■
■■
■■
■■
■■
Have negotiations been undertaken to try to convince creditors to accept repayments and
or lump sum settlements without needing to resort to bankruptcy?
Is bankruptcy inevitable? If, for example, there is a Creditor’s Petition on foot and the
client is clearly insolvent, a PIA may be the only alternative (always ensure your client
gets urgent legal advice about the Court process). Similarly, even if there is no advanced
enforcement action against your client, he or she may have no prospects of improvement
in their position (for example they have a permanent illness or disability) and have some
assets to offer to avoid bankruptcy.
Does the person qualify for a Debt Agreement instead?
Has the client considered the comparative benefits and disadvantages of bankruptcy?
Like Debt Agreements, a PIA will only be effective if the debtor is able to complete all the
obligations. Failure to do so will be likely to lead to bankruptcy further down the track;
Can the person pay the fees?
Once a Controlling Trustee is appointed, all proceedings in respect of a Creditor’s Petition
that has been presented against the debtor are stayed (suspended) including applications to
extend the life of the Creditor’s Petition past the normal 12 month period. The stay lasts until the
creditor’s meeting has been held and voting on the proposal is complete. If the PIA is accepted,
the Creditor’s Petition cannot proceed.
If the PIA is not accepted, the stay will end and the creditor can resume action under their
Creditor’s Petition and it is most likely that a sequestration order will be made against the debtor.
Personal Insolvency Agreements versus Debt Agreements
If your client wants to be (or continue to be) a company director, then a Debt Agreement is
the only option which allows this. Of course the person would have to meet all the other preconditions such as the income, property and debt thresholds.
Generally, the cost of proposing and administering a Debt Agreement will be much less than
the cost of proposing and administering a PIA.
A PIA, however, gives more flexibility in the types of agreements that can be made and there are
no limitations on the extent of the debtor’s assets, liabilities and income. For example, creditors
do not have to be paid in equal proportions to the size of their debts. PIA’s may also include
transfers of property.
If your client is suitable for a PIA then they will need to consult a suitably qualified Controlling
Trustee. AFSA can provide referral information or go to www.afsa.gov.au.
See also Chapter 12 on the process for proposing/entering a PIA, dealing with complaints about
PIAs, varying and terminating PIAs.
► see checklist for this chapter in Chapter11: Tools and Resources
46
6
THE CONSEQUENCES OF BANKRUPTCY
Contents
Part 1: Debts – will I still have to pay my debts?
48
Part 2: Protected property – What can I keep?
61
Part 3: Divisible Assets – What will the trustee take and sell?
74
Part 4: Income contributions – What happens to money I earn while bankrupt?
89
Part 5: Other consequences of bankruptcy – How else will it affect my life?
96
Part 6: Small business & bankruptcy
107
Part 7: Family law and bankruptcy
116
Part 8: Gambling and hazardous speculation
125
Part 9: Death and bankruptcy
128
Summary
The consequences of bankruptcy are many and varied. Some of the concepts are quite
complicated. It is important to have a broad understanding of the principles and to be familiar
with problems that might arise so that you know what questions to ask the client and when to
seek more advice on their behalf.
This section is broken up into segments. Parts 1 – 5 cover
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What happens to the debts
■■
What property is protected
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What property will be taken by the Trustee
■■
Whether the client has to pay income contributions and how much
■■
What other consequences there might be
Financial counsellors should be aware of the content of all these parts at least in broad terms
as they are relevant to all clients.
Parts 6 – 9 need only be referred to if they are relevant to your client’s circumstances. They
cover in order:
■■
Small Business
■■
Family Law
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Gambling and hazardous speculation
■■
Death
Introduction
Your client must understand the following potential impacts of bankruptcy before making an
informed decision whether to go bankrupt:
■■
■■
■■
■■
Debts – will they go away?
Assets (past, present and future) – Will the trustee in bankruptcy (“the Trustee”) take
them? Can the Trustee undo past transactions and get at assets now owned by others?
What about assets your client may acquire in the future?
Income – Will the client have to pay a portion of their income towards their debts
(‘income contributions’) and if so, approximately how much?
What other limitations might there be on the client’s life as a result of the bankruptcy?
These are all covered in detail below.
➻➻ Note: The same consequences apply when the client has been made bankrupt on a Creditor’s
Petition, although in that case there is no decision for the client to make. You can refer to this
Chapter to advise your client about what to expect during bankruptcy. You should also refer to the
bankrupt’s obligations in Chapter 8. If your client has very recently been made bankrupt and does
not think this should have happened refer to Chapter 10 – A sequestration order has been made
against my client – Is there anything he or she can do? Advise your client to seek urgent legal
advice.
Part 1:
Debts – will I still have to pay my debts?
Summary
Not all debts will be extinguished by bankruptcy. It is very important for your client to understand
which debts will go away permanently, and which may still be enforced during or after bankruptcy.
Very briefly a discharged bankrupt will be released from most unsecured consumer loans, such
as credit cards, personal loans and the shortfall on a mortgage after the house has been sold,
unless they were incurred by fraud. Court imposed fines are not affected by bankruptcy and
will still be enforced against the client. Child Support and Maintenance Orders also continue to
be payable, although these debts may be claimed against the bankrupt estate and against the
client personally. Some debts, for example motor vehicle accident damages, can be provable
in bankruptcy, and the client released, but only if certain conditions are met prior to bankruptcy.
Where a debt has been incurred by fraud, the creditor can claim from the bankrupt estate, but
can also continue to enforce against the debtor after discharge from bankruptcy (until they
have recovered the full amount owed). The law about when this can and cannot occur is quite
complicated and a client being pursued for a debt allegedly incurred by fraud should seek legal
advice about their particular circumstances.
Secured loans are a special case. The client can continue to pay a secured loan to stop the
lender repossessing the goods/vehicle/house. Any equity the client has (or acquires during
bankruptcy) vests in the Trustee and the Trustee can choose to sell the goods, repay the loan
and retain the remainder of the proceeds for the bankrupt estate at any time.
This Chapter explains concepts such as:
■■
Provable debts
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Non-provable debts
■■
Preferential payments
■■
Bankrupt estate
All debts should be included in the statement of affairs, secured or not, provable or not, or
whether the client will be released or not!
48
Understanding the language
For the client in debt, the main objective of bankruptcy is to seek relief from unmanageable debt
including the stress on the debtor and their family of being unable to pay debts, pressure from
debt collectors and other consequences of unpaid debt. It is vitally important for the debtor
to understand which debts bankruptcy will release them from and which debts it will not. It
would be pointless to go bankrupt over court fines, for example, as these will not be affected by
bankruptcy and would remain payable by the debtor.
There are a number of key concepts to understand. For example, there are those debts that are
“provable” in bankruptcy and those that are not. A provable debt is one which the creditor can
seek to recover from the bankrupt estate by lodging a proof of debt. When the proof of debt is
accepted by the Trustee, the rights of the creditor convert from rights against the debtor (such
as the right to take court action to seize the debtor’s personal property) to the right to a share
in the debtor’s bankrupt estate. Sometimes this will be the right to a share of nothing, but this
does not change the fact that the debt is provable and, in most cases, can no longer be enforced
against the debtor for the period of the bankruptcy or afterwards. However, there some debts
which are provable (meaning the creditor can claim against the bankrupt estate) and can be
enforced against the debtor after bankruptcy (if not paid in full out of the bankrupt estate) and
some which can even be enforced during bankruptcy.
To get the full picture debts can be broken down into those debts which are:
■■
Not Provable (creditor cannot claim against the bankrupt estate) and –
–– The debtor still has to pay the debt; or
–– Cannot be legally enforced against the debtor either.
■■
Provable (that is creditor can lodge a proof of debt and seek a proportionate share of the
bankrupt estate) and –
–– The debtor is released from the debt after discharge from bankruptcy (no need for
debtor to pay the creditor) and enforcement ceases during bankruptcy; or
–– The debtor is released from the debt after bankruptcy and legal enforcement ceases but
there are compelling practical reasons to pay (debtor may want to pay)
–– The debtor is not released after bankruptcy (unless the debt is paid in full from the
bankrupt estate) but enforcement ceases during bankruptcy (debtor may still have to
pay)
–– The debtor is not released from the debt after bankruptcy and enforcement can
continue even in bankruptcy (debtor very likely to have to pay).
In short whether a debt is provable or not only dictates whether the debt can be claimed against
the bankrupt estate; there is another step to determining whether or not the client can still be
forced to pay the debt, or may want to do so.
Whether a debt is provable or not is found in Section 82 of the Act and in a long history of
case law interpreting the section. Section 82(1) specifies that “all debts and liabilities, present
or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy,
or to which he or she may become subject before his or her discharge by reason of an obligation
incurred before the date of the bankruptcy, are provable in his or her bankruptcy”. This is quite
difficult to understand so some common examples are included in the section on Provable Debts
below. The section then goes on to specifically exclude a number of types of debts (or demands).
These are included in the section Non-Provable Debts below.
Generally speaking, if a debt is not provable in bankruptcy , the creditor can still pursue the debtor.
There are, however, also debts which are not provable, but cannot be enforced against the debtor
either. An obvious example would be a statute barred debt, where the client may have a defence.
What is the bankrupt estate?
Provable debts are paid from the bankrupt estate if there are sufficient funds to cover them after
paying for the costs of administering the bankruptcy. The bankrupt estate consists of any assets
of the bankrupt that vest in the Trustee – or the proceeds of their sale – including any assets
acquired during the bankruptcy (that is prior to discharge from bankruptcy) unless those assets
are protected by the Act and any money paid to the trustee as assessed income contributions.
These topics are covered in more detail in the relevant sections below.
The bankrupt estate is made up of:
■■
■■
■■
■■
■■
Property owned by the bankrupt at the date of the bankruptcy
Plus any property clawed back by the Trustee as a result of the antecedent transactions
provisions (see page 84)
Plus any property acquired by the bankrupt after the date of the bankruptcy and before
discharge (see page 76)
Plus amounts paid to the Trustee as income contributions (See Part 4, page 89)
Except where any of the above property is protected under the Bankruptcy Act (see page
61)
It is also important to note that even when your client is discharged from bankruptcy, the bankrupt
estate continues to exist, and the Trustee may still deal with property or transactions relevant to
the bankruptcy. The bankrupt may have acquired property just before discharge which vested
in the Trustee, for example. Where ever this publication refers to a client being “released” from
a debt after discharge from bankruptcy, the debt itself still exists and can be claimed against the
bankrupt estate while ever there are funds or property in that estate.
Secured debts
The treatment of secured debts in bankruptcy can be somewhat confusing. Secured debts have
to be listed in the appropriate place in the statement of affairs but the client will not be released
from the debt by bankruptcy until either:
■■
The asset is sold by the secured creditor for a loss. The deficit is then an unsecured liability
and will be dealt with in the same way as all provable unsecured debts. That means the
mortgagee cannot take recovery action against the bankrupt for the deficit (for example,
the shortfall on the sale of the bankrupt’s home). This is the case even if the asset is sold
after discharge from bankruptcy, as the contract came into existence before the date of
bankruptcy.
or
■■
The trustee sells the secured asset and the liability is paid out (in other words the debt has
been fully paid).
or
■■
The bankrupt pays out the secured loan within the bankruptcy and the asset is protected
in bankruptcy [for example, the client pays off his or her car loan but the car is then worth
less than the relevant threshold for the bankrupt’s primary means of transport].
Where your client pays off a loan that is secured over property, or is still paying a secured loan
off at the point of discharge from bankruptcy, he or she needs to be aware that an interest in the
asset is likely to have vested in the Trustee. Trustees have many years in which to make a claim
upon a vested interest in an asset (such as a home or land or caravan) – More details are given
on this in Part 3: Divisible Assets – What will the trustee take and sell? Your client may have
options, such as buying back the Trustee’s share, but they cannot assume that the Trustee will no
longer make a claim because they have been discharged. Further, if they default on a secured loan,
either during bankruptcy or after discharge, the lender may repossess the asset in the usual way.
50
Example
Jackie and Luca were paying off their home when they decided to go bankrupt to deal with
overwhelming unsecured debt. They had minimal equity in their property at the time they became
bankrupt. When they were discharged 3 years later, their equity had grown to $60,000 as a
result of a combination of repayments made and an increase in property values in their area.
This interest has automatically vested in the trustee in bankruptcy and they will need to make an
arrangement with the Trustee to either purchase the Trustee’s interest in the property, or sell the
home for the benefit of their bankrupt estate. The fact that they are discharged from bankruptcy
makes no difference to this – See Part 3 of this Chapter on Divisible Assets.
➻➻ Important Note – All debts must be disclosed in the client’s statement of affairs whether
secured or not!
A creditor cannot repossess a secured property or vehicle just because the debtor is bankrupt (See
Chapter 8 – Dealing with secured loans during bankruptcy). However, if there is sufficient
equity in the asset the Trustee may choose to sell it, repay the secured creditor and use the
balance to pay creditors and/or the costs of administering the estate. In some cases the debtor
may wish to surrender the asset and include the shortfall in the bankruptcy to reduce their
financial commitments.
Non-provable debts
It is easier to begin with those debts which are not provable in bankruptcy because this is a
more defined list than those debts which are provable. The following debts are not provable in
bankruptcy, either because they are specifically excluded by Section 82, or because they do not
meet the definition in Section 82(1) above:
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■■
■■
■■
Unliquidated debts (claims where the client’s liability and the amount of the damages
claimed has not been settled) except where they arise from a contract, promise or breach
of trust. The law in this area is extremely complicated so if your client’s debts include
claims or demands that are not obviously based on a contract, or a court judgment, you
should recommend the client gets legal advice to determine whether the debt is provable
or not. The most common type of demand faced by clients that is not covered by contract,
promise or breach of trust is in relation to motor vehicle accident damage – this is covered
in more detail in the section the following page.
Penalties or fines imposed by a court in respect of an offence against a law (on the spot
infringements that are not imposed by a court are provable in bankruptcy but you may
still want to pay them to avoid loss of licence/registration). The system varies from State
to State as to whether certain fines, such as traffic fines, are issued by a court or as part of
an administrative process. For example, fines imposed under the Victorian PERIN system
are not provable (because they are deemed an order of the court) but infringement notices
issued in NSW are provable. According to AFSA, fines in South Australia, Tasmania and
Queensland are also unlikely to be provable.1 Financial counsellors need to be aware of the
status of such fines in their own jurisdiction.
A pecuniary penalty order made under Section 1317G of the Corporations Act 2001.
Council rates – these are generally secured over the property and paid as a priority upon
sale of the property (relevant local government laws usually empower the relevant local
authority to sell the land in order to recover unpaid rates after a specified period of time).
Water rates are usually similarly secured.
1
The relevant acts are Expiation of Offences Act 1996 (SA), Justices Amendment (Infringement Notices) Act 1997 (TAS), State
Penalties enforcement Act 1999(QLD). See Inspector-General Practice Direction No 19 Provable Debts, September 2010
■■
■■
■■
■■
Creditor’s legal costs (except the Petitioning Creditor) are not provable unless there is
a judgment for costs made before the date of the bankruptcy or there is a contractual
obligation to pay the costs which predates the bankruptcy (for example, enforcement
costs under a mortgage). Furthermore, the amount of the costs must have been quantified
prior to bankruptcy by either being an amount specified in the judgment or having been
assessed (reviewed using the appropriate process in the jurisdiction in which they are
claimed).
HECS-HELP (and FEE-HELP and OS-HELP) and Student Financial Supplement
Scheme (SFSS) debts unless they are subject to an ATO Notice of Assessment – each
financial year the ATO assesses whether a person is required to pay a portion of their
accumulated HECS-HELP or other education debt according to their taxable income for
the year. Amounts that have been so assessed are provable in bankruptcy and will not need
to be paid by the bankrupt following discharge. Accumulated amounts that have not been
assessed as payable in a particular assessment period are not provable and remain payable
unless they were incurred prior to 1 June 2006.2
Proceeds of Crime Orders (and any property subject to a proceeds of crime order is not
divisible among creditors).
Debts incurred after the date of bankruptcy – these can be enforced in the usual ways
despite the bankrupt status of the debtor (therefore property that is protected in
bankruptcy will not be protected from the sheriff enforcing a writ for a debt incurred
after the date of bankruptcy). This could include, for example, unpaid tax or GST for the
period after the date of the bankruptcy.
Bankruptcy will not affect the above debts and there is no point in your client going bankrupt
if one of the above debts is the sole motivation. If your client has other debts, and could still
benefit from bankruptcy, then they need to understand that they may still face enforcement of
any of the above types of debt.
Motor vehicle accident debts
Demands for damages as a result of motor vehicle accident damage for which your client is not
insured are extremely common. Before your client goes bankrupt over a motor vehicle accident,
make sure they have considered the following:
Are they liable?
Your client should get legal advice about whether they have a defence to the debt.
Are they insured?
Check whether the client has an insurance policy which would cover him or her for the relevant
damage. If your client has claimed and been rejected, get advice from the Insurance Law Service
on 1300 663 464 to check there are no grounds on which the rejection can be disputed.
If the other party is an insurance company, has the client or someone acting on their behalf tried
negotiating with the insurance company (to reduce or waive the debt, or make a repayment
arrangement) using the hardship provisions of the Insurance Code of Practice?
Sample letters are available on the Insurance Law Service website at www.insurancelaw.org.au
2
HECS debts accumulated prior to 1 January 2005 or HELP debts accumulated prior to 1 June 2006 are provable in bankruptcy –
and the client is released from them on discharge.
52
Is the debt provable?
If legal proceedings have already occurred and there is a judgment debt for a specified amount,
the debt is provable. Where there is no judgment, the debt will only be provable if the debtor has
provided written acknowledgement of liability for the debt (including specifying the amount
payable in full and final settlement) and can demonstrate that this acknowledgement has been
received and accepted by the other party (or their solicitor or insurer as appropriate). Do NOT
assist your client to go bankrupt until this has been done.
Sample letter (to be sent by client)
To insert the name of the creditor/creditor’s legal representative
Address
Dear Sir/Madam
Re: Your claim [insert details and reference numbers for damages claimed including details of any
court proceedings] in relation to motor vehicle accident on [insert date of accident]
I [insert client’s name] of [insert client’s address] refer to the above claim.
I advise that I admit liability for the amount claimed as [insert details such as damage to motor
vehicle with rego number XXX XXX] and that consequently I am indebted to [insert name of
creditor] for the sum of [insert sum claimed].
Yours faithfully
[insert client’s name and contact details]
➻➻ Important: This letter should not be sent until the client is absolutely certain that he or she
is going bankrupt as it is an admission of liability that could be used against the client in legal
proceedings.
If the letter is sent by FAX a successful transmission receipt may be sufficient to establish receipt
by the other party. If possible, get the other party to reply acknowledging receipt of the letter.
If there are multiple creditors (for example a multi vehicle accident, or an accident where there
is damage to infrastructure or nearby residential or commercial property) a separate letter will
need to be sent to each creditor.
Where there is a debt collector or insurer involved (or both), a copy of the letter should be sent
to all the relevant parties.
Personal injury claims
Usually personal injury will be covered by the vehicle owner’s compulsory third party insurance
but there may be situations where this is not the case. For example, where the client was driving
an unregistered vehicle, or where the insurance claim has been rejected (such as where the driver
of the vehicle was under the influence of drugs or alcohol). If any of these situations apply, the
person should wait if possible until any demands for personal injury damages are made before
going bankrupt, or he or she may risk having to go bankrupt again. A personal injury claim will
also be an unliquidated debt, so a similar letter (or letters) to the Sample Letter above will need
to be sent in relation to any claim.
Debts which are not provable and not enforceable
Debts which are not enforceable against the debtor are also not enforceable against the bankrupt
estate. Therefore they are not provable but there is no obligation on the debtor to pay either – for
example a statute barred debt or a debt to an unlicensed bookmaker. There is a remote chance
that a debt based on a judgment more than 12 years old could be provable in circumstances where
the original court has given leave to enforce the judgment.3 Similarly there are circumstances in
which a court can extend a limitation period and such debts would also be provable. In either case
the debt would be extinguished upon discharge from bankruptcy unless it was incurred by fraud.
➻➻ Note: Where the debtor has a number of provable and non-provable debts and decides it is still
worth going bankrupt (or has been made bankrupt by a Creditor’s Petition) the non-provable debts
must still be included in the debtor’s statement of affairs.
Provable debts
Debts which are provable from which the client will be released on discharge from bankruptcy
(no need to pay)
Basically all debts not included in the previous section are provable, although you need to be
careful about whether or not this means the client will be fully released from them. The following
list of debts would all be provable in bankruptcy (provided they pre-dated the bankruptcy), and
the client will be released from them (unless they were incurred by fraud). However there may
be practical consequences as a result of the debts not being paid. This is not an exclusive list,
simply some common examples:
■■
Credit card debts
■■
Personal loans
■■
■■
■■
Any unsecured portion of a secured debt (shortfall on the sale of a house or vehicle for
example)
Unpaid rent for residential premises (but client may be evicted if the unpaid rent is for
private premises the bankrupt currently occupies – See section in relation to Rent below)
Debts for phone, internet and television services (although current service providers will
disconnect the service if unpaid)
■■
Medical bills
■■
Unpaid workers compensation premiums
■■
■■
■■
■■
■■
■■
■■
Tax debts accrued up to the date of bankruptcy (see section titled Taxation and
bankruptcy below)
Penalties imposed by the Australian Tax Office for late payment of income tax or late
lodgement of returns (as opposed to imposed by a court)
Judgment debts for non-contractual claims (for example motor vehicle accident damage)
HELP/HECs/SFSS debts that have been assessed as payable by the Taxation
Commissioner and the debtor has received a Notice of Assessment
Social security debts (Centrelink) except where incurred by fraud (more on this topic is
included later in this Part)
Victim’s Compensation Recovery Orders (note that these will not be extinguished after
discharge if the offence involved fraud unless the order was registered as a judgment – a
necessary step towards enforcing the debt – prior to the date of the bankruptcy)
Restitution orders (where, for example, as part of a criminal case the Court ordered the
convicted defendant to repay the victim the value of property destroyed). Only this
“restitution” part of the amount is provable – any amount imposed as a fine or penalty is
not provable, nor is any amount ordered to be paid to compensate the victim for pain and
suffering unless it is part of a Victim’s Compensation Recovery order.
3
Note that a Bankruptcy Notice cannot be based on a judgment that is more than 6 years old. This means that for this to be an
issue either the creditor has relied on a different act of bankruptcy (very rare) or the debtor is contemplating, or has presented, a Debtor’s
Petition.
54
➻➻ Warning regarding Restitution Orders: Care must be taken with these orders and the client
should be advised to seek advice from either the court that imposed the order, or their solicitor, as
to what will happen if amount due under the order is not paid. If the restitution order relates to an
offence involving fraud, then the debt is provable but the defendant is not released from the debt
upon discharge unless the order was already registered as a judgment prior to the date of the
bankruptcy.
Also, in some cases, the court imposes a prison sentence on conviction but then suspends the
sentence on the condition that the defendant is of good behaviour and enters into a recognizance
whereby they undertake the pay the restitution amount. Therefore if they do not pay the amount
they breach the recognizance which could result in them going to prison. The client could arguably
apply to the Federal Circuit Court of Australia for the order to be discharged under Section 60 (1)
of the Bankruptcy Act. The client should be referred for legal advice on this issue.
■■
■■
■■
Unpaid wages, superannuation and all other employee entitlements (where the debtor was
the owner of an unincorporated small business).
Costs of immigration detention prior to the date of the bankruptcy charged under the
Migration Act 1958.
Liabilities due under Binding Financial Agreements and other property orders under the
Family Law Act 1975 (for example where there is an amount of money owing as opposed
to an order changing the interests in particular property).
A creditor can no longer enforce any of the above debts after the date of the bankruptcy (unless
they were incurred by fraud in which case enforcement may recommence after discharge – Section
153(2)(b)). Any garnishee over the person’s bank account or salary/wages should cease (except
where it is a garnishee notice issued by the ATO). The sheriff can no longer seize personal property
under a writ for levy of property.
Generally speaking a creditor cannot enforce any remedy against the person or property of a
Bankrupt in relation to a provable debt (Section 58). This does not affect a secured creditor’s
right to enforce against property that is security for a loan. Enforcement action can still be taken
in relation to a maintenance agreement or maintenance order under the Family Law Act 1975
or Child Support (Assessment) Act 1989 – see later section. Debts incurred after the date of the
bankruptcy can be enforced in the usual manner.
What about the interest on a provable debt?
Interest on a provable debt falls into 2 categories:
1. Interest accrued from the date that interest became due and payable under the terms of a
contract or the date of the judgment until the date of bankruptcy – which is provable in
certain circumstances, and;
2. Interest accrued from the date of bankruptcy onwards, which is not provable [see
Section 82(3B)].
The client (and his or her protected property) cannot be pursued for interest in either case.
However, where there is a surplus in the bankrupt estate after the proved creditors have been
paid in full, those creditors with claims for interest accrued from the date of bankruptcy to
the date that they received their final dividend can lodge a claim for such interest from the
bankrupt estate.
Similarly, if the client later wishes to annul his or her bankruptcy, he or she will have to pay all
the debts in full, the trustees costs and disbursements, and any interest accrued on the debts to
the date of payment (Section 153A(1A)).
Tax and bankruptcy
The interaction of taxation and bankruptcy is sometimes complicated and affects most bankruptcies.
The following answers the most common questions.
Are tax debts provable in bankruptcy?
Tax debts are provable up to the date of the bankruptcy. This includes any part financial year (for
example, if a person becomes a bankrupt on 3 March any tax debt accrued between 1 July the
previous year and 2 March is provable in the bankruptcy). This will have little relevance for most
employees as their tax is deducted each pay period. Self employed bankrupts, however, should
lodge two returns: one for the period from 1 July – 2 March in the example above and another from
4 March to 30 June. The tax assessed as payable in relation to the latter period will still be owed
despite the bankruptcy. The tax assessed as payable in the former period, that is the period prior to
the bankruptcy, is provable in the bankruptcy and the client is released from that debt upon discharge.
The ATO is not keen on “split returns” for 1 year, so your client may need to press the issue via their
accountant or tax agent if they have one.
The exception to this (tax debts being provable) is where a Garnishee Notice has already been
issued. According to the Taxation Administration Act 1953 as soon as the Notice is issued a charge
is created over the property detailed in the Notice – for example, the money in the bank account
detailed in the Garnishee. This makes the Deputy Commissioner for Taxation a secured creditor for
the amount covered by the Garnishee – the money can therefore be taken from the account despite
the client’s bankruptcy. This is to be distinguished from a normal garnishee issued by a court pursuant
to a civil debt collection process – such garnishees would normally cease to have any affect once
the client is bankrupt and any amount taken pursuant to the garnishee after the date of bankruptcy
would need to be returned for the benefit of all creditors (or to the bankrupt if the garnishee affected
protected property).
As noted above, penalties imposed by the ATO for late payment or late lodgement of returns are
also provable in bankruptcy and the client is ultimately released from such debts.
However, as with any other court imposed penalty and fines, penalties which are imposed on
clients who have been prosecuted in court for breaches of the taxation laws, will not be provable
in bankruptcy and the client will need to make suitable arrangements with the court to avoid the
consequences of non-payment.
What about tax refunds within the period of the bankruptcy?
Following a similar principle, tax refunds relating to any financial year, or part financial year, prior
to the date of bankruptcy (no matter when the tax return was lodged) vest in the Trustee and form
part of the bankrupt estate (Sections 116(1) and 139N(3)). They will be claimed by the Trustee. Any
refund relating to the period after the date of the bankruptcy received during bankruptcy, is considered
as income and will be used in the calculation of the bankrupt’s income to determine whether they
need to make income contributions.
However, the ATO also has a right of set off against any debt to the Commonwealth (Section 86).
Therefore if the bankrupt owes a debt to the Commonwealth, including but not limited to income tax,
overpaid family tax benefit or child care assistance, social security overpayments, or child support,
the tax refund can be retained by the ATO and applied to such debt(s) (even though it may be a
provable debt).
56
Even if the refund is payable to the Trustee, approval can be sought from the trustee for the client
to retain the total amount of the refund or part thereof, on the grounds that they are experiencing
financial hardship – this may be particularly compelling if they have a disability or medical condition
or other reason they cannot meet essential living expenditure or a special one off expense. However
this decision is entirely at the discretion of the Trustee.
What about future tax returns (post discharge)?
Your client will be discharged from all tax debts arising prior to the bankruptcy (unless incurred
by fraud). The ATO also has a policy of ceasing to set-off refunds against provable tax debts after
discharge. However, any tax debt incurred after the date of bankruptcy will however be subject to
both set-off and enforcement in the usual way.
Overpayments of family tax benefit or child care benefit, whilst provable, are in practice adjusted by
the ATO in subsequent assessments.
What about unpaid GST?
Self-employed (or formerly self-employed) clients may also have unpaid GST debts to the
Commonwealth. Both unpaid GST and administrative penalties (imposed by the ATO) for late/
non-payment are provable in bankruptcy. Again, the ATO will set off any refunds due to the client
during bankruptcy in reduction of a GST debt. However, should the ATO choose to prosecute the
client for breaches of their obligations to collect and account for GST, any court imposed penalty
is not provable. Prosecutions are relatively rare.
Debts which are provable but the client is not released from them on
discharge from bankruptcy (may still have to pay)
Some debts are provable in bankruptcy, and cannot be enforced during the period of the
bankruptcy, but remain payable after your client has been discharged from bankruptcy, unless
they have been entirely paid out of the bankrupt estate (Section 153). Your client may face
enforcement action in relation to such debts after discharge. This includes any debts incurred
by fraud or fraudulent breach of trust.
There is little point in your client going bankrupt if their only debts consist of debts incurred
by fraud as bankruptcy will provide no more than a temporary stay of enforcement. Caution
should be taken with alleged fraudulent debts – mere allegations of fraud should not be enough
to cause the client not to be released from the debt.
Social Security debts and allegations of fraud
Enforcement of Centrelink debts should cease during bankruptcy. Centrelink will sometimes inform
a client (usually just after the client is discharged) that notwithstanding the client’s recent discharge
from bankruptcy they remain indebted to Centrelink because the debt was incurred by means of fraud
[Section 153(2)(b)]. It may be that the debt related to an overpayment due to some misinformation
or omission by the client. This is alone is insufficient to prevent the client from being released from
the debt on discharge from bankruptcy The Courts have consistently found that there must be
evidence that the person either deliberately acted dishonestly or was reckless as to whether
the information they provided was true or false4.
4
A recent High Court case Director of Public Prosecutions (Cth) v Keating [2013] HCA 20 found that the notices issued to the
defendant by Centrelink asking for updated income details created a duty to disclose which, if not complied with could form the basis of the
Criminal Code offence of obtaining a financial advantage from a Commonwealth entity. The implications of this for discharge in bankruptcy
cases are unclear. It is unlikely that this would mean that a person who lacked the capacity to complete a form correctly, or who answered
honestly but mistakenly for example, would be found guilty of fraud.
In circumstances where, for example, the bankrupt is disabled, or suffers from a mental illness which
does not permit them to understand or complete the forms correctly, or where a person has an honestly
held but false belief about a relevant fact, or is under duress when making the false representations,
then there may be no fraud and the client may be released from the debt.
If the client informs you that they have not been convicted of fraud in respect of the debt nor made
an admission to Centrelink that they engaged in fraud to obtain the payment, Centrelink should be
asked to explain the grounds on which it is asserting that the client obtained the benefit payment by
fraud. If Centrelink is unable to produce documentary evidence of either a conviction or admission
of fraud, Centrelink should be requested to cease any recovery action on the basis that the client
has been released from the debt by operation of Section 153(1) of the Bankruptcy Act.
Further, if a Centrelink has obtained a reparation order for the repayment of the debt and registered
it as a judgment prior to the date of bankruptcy, the original cause of action merges in the judgment
and cannot form the basis for the exception contained in 153(2)(b) – meaning that the debtor is
released from the debt. The Guide to Social Security Law, Commonwealth of Australia5[1] states that
“where reparation is ordered before bankruptcy, recovery is only available by ‘proving’ the debt for
the bankruptcy. If the person has been discharged from bankruptcy, debts for which a judgement or
reparation order was made before bankruptcy cannot be recovered.” However, the fine and custodial
sentence or other penalty will not be affected by the bankruptcy (see above for information on fines
& penalties imposed by a court).
For more information on dealing with Centrelink over allegedly fraudulent debts see Chapter 9.
Debts which are provable in bankruptcy, but the client is not released from them, and they
can still be enforced during bankruptcy (may still have to pay)
There are only two types of debt that are both provable in bankruptcy (so the creditor can lodge
a proof of debt and seek to claim on the bankrupt estate) and enforceable during bankruptcy and
beyond: maintenance (agreements and orders made under family law for the benefit of a former
spouse or de facto partner) and Child Support (Section 58(5A)). This means that legal action
and enforcement can continue during bankruptcy provided no more than the total amount
due is claimed (that is part of the debt can be claimed via the bankrupt estate and part from the
debtor directly). Protected property will not be taken.
Further, the bankrupt will not be released from a Child Support or maintenance debt upon
discharge unless specifically ordered by the court (Section 153, subsection (2)(c) and (2A)). In
making such an order the court may impose any conditions as it sees fit. However, the likelihood
of the court making such an order is extremely remote.
Usually if the client has a debt for Child Support it will have an interest component (or late
payment penalties as it is usually expressed) imposed under the Child Support Act. For example,
a total debt $12,000 comprised of $10,000 unpaid child support + $2,000 “penalty”.
Upon bankruptcy, the client is released from the $2,000 portion of the debt and enforcement
action can be taken against the bankrupt in respect of only the $10,000. However, interest or
penalties will start accruing again on the $10,000 from the date of bankruptcy onwards.
As a result of the above, bankruptcy is not at all useful in dealing with Child Support or maintenance
debts unless the client’s main difficulty is in paying accumulated interest/penalties (although you
may be able to negotiate for these to be reduced or waived in appropriate circumstances anyway).
The client may have grounds to challenge the assessment by the Child Support Agency of his/her
liability for Child Support, especially if the CSA has ‘deemed’ the client’s income in the absence
of tax returns and/or financial statements. Accordingly, you should ask the client for details of the
history and composition of the debt plus any correspondence/communications with the CSA.
5 Footnote: Guide to Social Security Law , Version 1.185, 20 March 2012, Commonwealth of Australia, accessed at: http://guides.
dss.gov.au/guide-social-security-law/6/7/3/05
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It may be possible to seek a reduction in (or release from) a debt for accumulated Child Support
on the basis of extreme financial hardship (after discharge or instead of going bankrupt at all).
This would be entirely at the discretion of the Child Support Agency.
Debts that are provable and the client is released from them but there are compelling reasons
to pay (may want to pay)
In some cases a debt may be provable in bankruptcy but there are compelling practical reasons
for the client to pay because of the likely or inevitable consequences of non-payment:
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Any fine/infringement notice/penalty that could lead to loss of driver’s licence and/or
vehicle registration – The NSW State Debt Recovery Office, for example, has recently
been returning licences to bankrupts where the fines occurred prior to the bankruptcy and
the bankrupt produces details to confirm their bankruptcy6. Financial counsellors need to
be aware of both the nature of the fine system in their state and the relevant policies and
practices of the relevant fine enforcement and licensing authorities. It is suggested that
such information is copied and retained in this section of this kit.
➻➻ Remember: Court imposed fines are not provable regardless of who is collecting them.
■■
■■
■■
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Essential service providers such as electricity and water, which are currently providing a
service to the client, to avoid disconnection. Debts that accrued prior to the bankruptcy
to former service providers are provable in the bankruptcy and do not need to be paid.
However, if the client subsequently applies for connection to a former service provider
they may be required to pay a substantial security deposit before the service will be
provided.
Current telecommunications providers to avoid disconnection.
Rent where the bankrupt remains in the same privately rented premises and does not wish
to be evicted (for rent outstanding on previous premises or government housing – see
separate section below headed What about Rent?).
Local store, chemist, vet, dentist, service station etc where there are no alternatives (for
example, if your client lives in a small country town).
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Family members.
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Joint debt(s) with a non-bankrupt partner/spouse/family member.
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Debt(s) guaranteed by family member, friend etc (or where security has been taken over
another family member’s home or other asset).
Restitutions orders made as part of criminal proceedings where the debtor may be
imprisoned for non-payment (note, if the restitution order is not part of the penalty, the
debtor may apply to the Federal Court or Federal Magistrates Court under Section 60(1)
of the Bankruptcy Act for a stay on the imprisonment order in respect of a provable debt
– the client will need legal advice).
There is nothing to prevent clients from paying such debts voluntarily from income while bankrupt
(if they earn enough). However, these amounts will not be deducted from their income for the
purpose of working out income contributions (See Part 4 of this Chapter) – they will need to
be able to afford their day-to-day living expenses, their income contributions (if any are payable)
and any payments to creditors listed above. These debts need to be listed in the statement of
affairs regardless of whether the debtor intends to try to pay the creditor during bankruptcy.
6
For example, the NSW Government Minister’s Guidelines for writing off fines includes where a bankrupt has been discharged
from bankruptcy and the fine pre-dates the bankruptcy. In practice licenses are being returned prior to discharge. Clients should however
be warned that debts can be reinstated in some circumstances including where there is another offence within 5 years or the debtor’s
circumstances change substantially – debts predating the bankruptcy could not be enforced at law but the client’s license and registration
could be at risk again.
Where a creditor accepts payment from a person who later becomes bankrupt in roughly the six
months prior to their bankruptcy (the exact period varies – See Table on page 88), the creditor
is in danger of having those payments “clawed back” by the Trustee as “preferential payments”.
However, it is a defence if the payments were made:
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In good faith and in the ordinary course of business;
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For market value;
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Where the creditor did not know, or have reason to suspect, that the debtor could not pay
his debts as they fell due and that the payment (or transfer of property) would give the
creditor preference, priority or advantage over other creditors.
The requisite knowledge or suspicion of the debtor’s insolvency can be inferred from the
circumstances.
When the debtor wishes to pay a debt simply to maintain a business or personal relationship,
then it safer to make an arrangement to repay the debt from income (after contributions) during
bankruptcy, than to make a lump sum payment prior to going bankrupt. Very small payments
are unlikely to be a problem – Trustees are unlikely to raise the issue for less than about $1,000
and are unlikely to take legal action for less than about $5,000.
What about rent?
As noted above, outstanding rent in relation to your client’s privately rented premises will
usually need to be paid to prevent eviction (unless the client has alternative accommodation).
Private rental arrears may be recorded on tenancy databases. This could severely impact on a
bankrupt’s ability to rent in his or her own right in future. The NSW Department of Housing
will generally not pursue rent from the period prior to bankruptcy, but current payments and
any post-bankruptcy arrears will usually need to be paid. Financial Counsellors should make a
point of knowing the relevant practice and policy for government housing in their own state. It
is suggested that such information is copied and retained in this section of this kit.
Joint debts
Where there are joint debts the other joint debtor will be left exposed to the whole of the debt
(not half the debt as many clients believe). Where the client needs to maintain a familial or
working relationship with the joint debtor, bankruptcy can raise major issues. Before proceeding
with bankruptcy your client should be encouraged, where possible and without risk of domestic
violence, to discuss their plans with the joint debtor.
Where the joint debtor (who is not considering bankruptcy) pays the total debt owing to the
creditor, they can if they wish lodge a proof of debt in the bankrupt estate for one half of the
amount paid to the creditor so they will receive a share of any dividend.
Guarantors
Likewise, a guarantor for any of your client’s debts is in a similar position to a joint debtor – the
guarantor will be liable for any part of the debt outstanding as a result of the debtor’s bankruptcy.
The client must be told of the consequences for the guarantor. It should be strongly advised that
the guarantor gets his or her own independent legal advice.
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Motor vehicle leases
The client can continue to make payments on a leased vehicle if he or she wishes to retain the car
and can afford it. The lease should be included in the client’s statement of affairs. In the event that
the client was to later default on the lease, any penalties under the contract would be provable in
the bankruptcy as contingent liabilities existing at the date of the bankruptcy. Any contractual
penalties incurred under a lease taken out after the date of the bankruptcy would not be provable.
Likewise, with similar arrangements relating to acquisition of motor vehicles such as “rent/buy”
(entered prior to the date of the bankruptcy) – usually there is no equity in the vehicle as the
amount required to “buy” the vehicle under the option usually exceeds the market value of the
vehicle at the expiration of the “rent” period. Clients can continue to pay in accordance with
the contract if they wish to retain the vehicle or surrender the vehicle and include any resultant
debt in the bankruptcy.
Forgotten debts
It is important that the debtor does not intentionally omit any relevant information, or provide
misleading information in the statement of affairs. However, genuinely forgotten debts can be
added later by contacting the Trustee (or AFSA when AFSA is acting as Trustee). From time to
time, creditors will falsely assert because their debt was not included in the statement of affairs,
the client is not released from it on discharge. This is not true.
Set off
As a general rule, a creditor when lodging a claim with the Trustee is required to set off (that
is, deduct) any amounts they owe to the bankrupt and only lodge a proof of debt for the net
balance owing by the bankrupt. This is most common with tax refunds (covered in Tax and
Bankruptcy above) and bank accounts.
When your client is contemplating bankruptcy and they have a bank account for basic living
expenses with the same institution as they have an outstanding loan, then they should open a
savings account with another deposit-taking institution prior to lodging their Debtor’s Petition.
As banks have a general right of set off it is a good idea to keep savings and loans with separate
institutions in any event, particularly if the client is experiencing, or likely to experience, financial
hardship.
See also Chapter 8 in relation to Freezing of Accounts.
Part 2:
Protected property – what can I keep?
Summary
When a person becomes bankrupt (either by filing a Debtor’s Petition or by an order of the court
based on a Creditor’s Petition) their divisible property vests in the Trustee and becomes available
to be sold and distributed among creditors. Some property is protected by the Bankruptcy Act
and does not vest in the Trustee or become available for creditors. This Part explains what
property is protected and therefore not divisible.
In brief, protected property includes among other things:
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Essential household property (furnishings and appliances for example with very few
exceptions).
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Tools of trade up to a prescribed value.
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A vehicle used as a primary means of transport up to a prescribed value.
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Policies of life assurance or endowment in respect of the life of the bankrupt or his or her
spouse or de facto spouse.
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Superannuation that has not been withdrawn from a superannuation fund prior to
bankruptcy.
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Compensation for personal injury paid to the bankrupt.
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Superannuation withdrawn on or after the date of the bankruptcy.
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■■
Proceeds of life assurance or endowment policies received on or after the date of the
bankruptcy.
Property where substantially the whole of the purchase price was made up of funds from
one or more of the last three dot points. These are collectively referred to as protected
money (that is personal injury compensation paid to the bankrupt, or where received
on or after the date of the bankruptcy, payments from superannuation, life assurance or
endowment).
Amounts for prescribed values (or thresholds as they are often called) are included up to the
date of publication. For current amounts see www.afsa.gov.au and select indexed amounts.
Of course it is not always that simple and the detail and potential complications are covered below.
Sometimes a property will be partially protected and partially divisible. For example:
■■
■■
A car worth more than the prescribed value.
A house that has been purchased with a combination of protected money and other
funds.
In that case the unprotected portion will vest in the Trustee and the Trustee may sell the property
and return to the bankrupt the value of the protected portion.
All other property is divisible property and is covered in Part 3 of this Chapter.
All property should be included in the statement of affairs, whether it is protected property or not!
What happens to a person’s property when they become
bankrupt?
When a debtor becomes a bankrupt (on the first instant of the day on which the Debtor’s Petition
is accepted by the Official Receiver – Section 57A), then the property of the bankrupt “vests”
in the Trustee (Section 58) (that is the trustee in bankruptcy which may be the Official Trustee
[AFSA], or the relevant Registered Trustee) The same occurs when a court makes a sequestration
order making a person bankrupt (See Chapter 10).
Any property acquired by the debtor during the period of the bankruptcy also vests in the relevant
Trustee. This property (along with any income contributions) makes up the bankrupt estate. This
mean that the debtor has no right to deal with the property anymore and the Trustee acquires
extensive rights to deal with the property for the benefit of the creditors. The Trustee is then
entitled to take possession of the property (Section 129) and can sell the property, lease it, divide
it among creditors, carry on any business of the bankrupt until such time as it can be wound
up or sold, mortgage any property, make compromises with creditors and more (Section 134).
None of this, however, affects the right of a secured creditor to repossess and sell the secured asset.
Dealing with secured debts in bankruptcy can be quite tricky and the most common scenarios,
houses and motor vehicles are dealt with separately later in this Chapter (Part 3).
The property that has vested in the Trustee can then be dealt with as the Trustee sees fit in order
to meet the demands of creditors with provable debts and to cover the costs of administering the
estate. However, there are some types of property which are not available to creditors. Property
which is available for creditors is known as divisible property and property which is protected
is referred to as protected property.
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Protected property
Importantly, some property is protected by the Bankruptcy Act from division among the creditors
including (Section 116):
■■
■■
■■
Property held in trust for another person (the trust must be properly documented and
comply with any relevant laws to be valid);
Household property (See Protected Household Property section on p69);
Tools of trade used to earn a living (property used to earn income by personal exertion) up
to the prescribed value ($3,600 as at Jan 2014 – for the current amount see www.itsa.gov.
au and select indexed amounts in Quick Links).
➻➻ Remember: The value is garage/auction value not replacement or insurance value.
■■
■■
■■
■■
■■
■■
■■
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A vehicle used primarily as a means of transport up to the prescribed value ($7,350 as at
January 2014 – for the current amount see www.itsa.gov.au and select indexed amounts
in Quick Links). Where the vehicle is secured the critical amount is the equity level (value
of vehicle less any loan secured over the vehicle);
Policies of life assurance or endowment assurance in respect of the life of the bankrupt
or the spouse or de facto partner of the bankrupt (that is the policy itself, not any money
paid out or withdrawn from it prior to bankruptcy);
The proceeds of a life assurance (or life insurance) or endowment assurance policy referred
to in the previous point received on or after the date of the bankruptcy;
The interest of a bankrupt in a superannuation fund (except where it can be shown
that funds or property were transferred to the superannuation fund for the purpose of
depriving the creditors of that property or otherwise or delaying their access to it);
A payment from a superannuation fund received on or after the date of the bankruptcy
(provided it is not a pension within the meaning of the Superannuation Industry
(Supervision) Act 1993). The issue of Total & Permanent Disability (“TPD”) payouts linked
to superannuation and life policies is a difficult issue and your client should seek legal advice
before proceeding with bankruptcy (more information is included in below in the section
titled Superannuation and Bankruptcy and in Chapter 8 in the section titled Insurance
Claims);
Money held in a Retirement Savings Account (under the Retirement Savings Act 1997);
A payment from an Retirement Savings Account (provided it is not a pension within the
meaning of the Retirement Savings Act 1997);
Any right of the bankrupt to recover damages or compensation for:
–– personal injury or wrong done (for example defamation) to the bankrupt, their spouse
or de facto partner, or a member of their family
–– the death of the bankrupt’s spouse or de facto partner, or family member;
■■
■■
■■
Any compensation received by the bankrupt for personal injury, wrong or death in the
previous point, whether received before or after the bankruptcy (NOTE – compensation
paid to others as opposed to the bankrupt is not protected if it is has been given to the
bankrupt, nor is any divisible property – such as a house – purchased with compensation
received by, for example, a spouse of the bankrupt and placed in the name of the
bankrupt);
Amounts originating from a Rural Support Scheme in prescribed circumstances;
Money required to be transferred to a spouse or de facto partner under the Family Law
Act 1975 (Parts VIII and VIIIAB)
■■
Awards of a sporting, cultural, military or academic nature made to the bankrupt, such
as trophies & medals, that are claimed as having sentimental value, may be exempted by a
vote of creditors (in practice this issue rarely arises as most such awards have no monetary
value). Money paid as prize money is not protected.
➻➻ Note: Defence Service Home Loans: Where the client has a home that is being purchased with
a Defence Services Home Loan, the home is protected unless the Secretary of the Department
waives the protection due to fraudulent behaviour of the borrower (which would be most unusual).
Also, the protection ceases if the borrower re-finances and the Defence Services Loan is paid out
in the process. Accordingly, clients should be advised to maintain the Defence Services Home
Loan when they are re-financing by way of a second mortgage.
Protected household property
A full description of household property that is NOT divisible among creditors is found in Bankruptcy
Regulation 6.03
Generally, “household property (including recreational and sports equipment) that is reasonably
necessary for the domestic use of the bankrupt’s household, having regard to current social standards”
is not available for distribution among creditors and can be retained by the bankrupt (emphasis added).
Specifically:
a. In the case of kitchen equipment, cutlery, crockery, foodstuffs, heating equipment, cooling
equipment, telephone equipment, fire detectors and extinguishers, antiburglar devices,
bedding, linen, towels and other household effects (to the extent consistent with the above
definition); b. Sufficient household furniture;
c. Sufficient beds for the members of the household; and
d. Educational, sporting or recreational items (including books) that are wholly or mainly for the
use of children or students in the household;
e. 1 television set;
f. 1 set of stereo equipment;
g. 1 radio;
h. Either:
–– 1 washing machine and 1 clothes drier; or
–– 1 combined washing machine and clothes drier;
i. either:
–– 1 refrigerator and 1 freezer; or
–– 1 combination refrigerator/freezer;
j. 1 generator, if relied on to supply electrical power to the household;
k. 1 telephone appliance;
l. 1 video recorder (or equivalent technology).
In the case of household property not included above, the following should be considered in determining
whether or not a particular item is protected household property:
a. The number and ages of members of the bankrupt’s household;
b. Any special health or medical needs of any of those members;
c. Any special climatic or other factors (including geographical isolation) of the place where the
household residence is located;
d. Whether the property is reasonably necessary for the functioning or servicing of the
household as a viable and properly run household;
e. Whether the costs of seizure, storage and sale of the property would be likely to exceed the
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sale price of the property;
f. If paragraph (e) does not apply — whether for any other reason (for example, costs of
transport) the sale of the property would be likely to be uneconomical.
Antiques may be divisible property (that is “not protected”). An item is considered antique
only if a substantial part of its market value is attributable to its age or historical significance
(Regulation 6.03 (6)).
➻➻ Note: This regulation also forms the definition of property that cannot be taken as security for a
loan under the National Credit Code.
Tools of trade
Tools of trade used to earn a living up worth up to the prescribed value are protected in bankruptcy
and cannot be taken by the Trustee (the prescribed value is $3,600 as at January 2014 – for the
current amount see www.afsa.gov.au and select indexed amounts in Quick Links).
➻➻ Remember: The value is garage/auction value not replacement or insurance value.
The Act no longer refers to “tools of trade” since the 1996 amendments. Instead the phrase is
property “for use by the bankrupt in earning income by personal exertion” (Section 116(2)
(c)). This reflects a general trend to widen the scope of the provision from being restricted to
men who earned their living by manual labour using the implements or tools of their trade to
encompass a broader range of occupations. Therefore it could include a pianoforte (for a music
teacher), or a computer for a home based consultant or law books up the threshold value for a
lawyer. However, there are some restrictions:
■■
■■
The person must have the capacity to use the property to earn an income by personal
exertion – that is the bankrupt must have the requisite skills and ability. If the
property relates to a trade that the bankrupt is not trained in or the bankrupt is too ill
(permanently) or disabled to continue in, then the property will not be protected;
The property must have a readily identifiable connection with income producing activities
carried out by the bankrupt – although it could arguably be a different activity to the
primary income generating activity of the bankrupt prior to the bankruptcy.
Bottles of wine used for wine tasting were found by the court not to be protected because they
were consumables and therefore did not fit in the ordinary concept of a “tool”. However, it is
not clear whether this case was referring to the current Section 116(2)(c) which uses the broader
term “property” or the former version of the Act which referred specifically to tools of trade etc.
Property in excess of the threshold amount can be protected where:
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■■
There is a resolution passed by the creditors to allow this (presumably because they are
convinced that they are better off allowing the bankrupt to use the property to earn
income than by selling and dividing the proceeds); or
A higher amount is ordered by the court upon the application of the bankrupt.
These exceptions are clearly intended to address the somewhat arbitrary nature of the setting of
the threshold amount.
Motor vehicles
A vehicle used primarily as a means of transport up to the prescribed value is protected and
cannot be taken by the Trustee (the prescribed value is $7,350 as at January 2014 – for the
current amount see www.itsa.gov.au and select indexed amounts in Quick Links). Where the
vehicle is secured and the bankrupt can afford the payments the critical issue is the equity level.
If your client owns one or more motor vehicles you need to ask the following questions:
■■
What is the total value of the vehicle(s)?
■■
Is/are the vehicle(s) security for a loan?
Unencumbered motor vehicles (no secured loan)
➻➻ Note: All of the following assumes that the vehicle is not protected for another reason, such as
that it was wholly or substantially purchased with money received for compensation for personal
injury – see next section below.
Where there is no loan, then whether or not your client can keep the car will depend entirely
on the market value of the car. Your client will be able to retain one vehicle as a primary means
of transport if it is valued at less than the prescribed amount (in reality a bankrupt can usually
retain more than one vehicle provided their combined value does not exceed the threshold). If
your client’s vehicle is worth this amount or less, then he or she will definitely be able to retain
it. If it is worth more than $2,000 over this amount, then the Trustee may sell the vehicle. There
is a grey area in the middle where the Trustee is highly unlikely to take the vehicle because the
costs of selling it will not make it worthwhile. If there is a question over the protection of the
vehicle the client should be advised to discuss the situation with AFSA. Clearly the closer the
value to the prescribed amount, then the less likely it will be sold.
If your client has more than one vehicle, then any additional vehicle will be sold unless their
combined value is worth less than the threshold amount. Where your client has one car worth
a significant amount of money (say $25,000) and another worth very little (say $2,500) then
the Trustee will take and sell the more expensive car and there is no requirement to return the
difference between the value of the cheaper car and the threshold amount. If the client has a
good relationship with the Trustee they may be able to come to another arrangement but strictly
speaking the bankrupt is entitled to a (singular) primary means of transport. Your client may
want to consider selling both (for market value) prior to bankruptcy and purchasing a car valued
closer to the threshold amount. Keep in mind that the Trustee may seek to recover any proceeds
received above the value of the car eventually retained if this transaction occurred close to the
date of the bankruptcy. It is most unusual for a client to a have an unsecured motor vehicle that
has an auction value well in excess of the threshold, as high value vehicles will usually be subject
to a lease, hire purchase or other secured credit agreement.
If your client has only one vehicle valued at well above the threshold amount, then it will be
sold and the threshold amount returned to the bankrupt to allow them to purchase a cheaper
vehicle as a primary means of transport. However, the Trustee will usually accept an offer from
a friend or relative for the difference between the auction value of the vehicle and the threshold
amount, to enable the bankrupt to retain the vehicle. If your client and his or her partner are
both bankrupt, they can usually retain one vehicle each valued up to the threshold amount.
AFSA (where the Official Trustee is the Trustee) may allow a couple who are both bankrupt to
retain one vehicle worth twice the threshold amount but it is unclear whether private registered
trustees will interpret the law in this same way.
Case study
A client and his wife have a car worth approximately $19,000. They still owe about $4,000 on
a secured loan. The husband is considering going bankrupt but the wife is not. Although there
is $15,000 equity in the car, the husband’s share is only $7500 which is close to the threshold
amount. In these circumstances the Trustee is very unlikely to take the car. If the car was worth
closer to $24,000 the Trustee may request the wife to make an offer to purchase the husband’s
share less the threshold amount – in this case about $2,650.
The Trustee cannot take a car that does not belong to the bankrupt. Proving ownership of a vehicle
may not always be straightforward. Registration is only an indicator of ownership. Who paid
for the vehicle is also very important, as is any evidence of the purchaser’s intentions in relation
to ownership (was the car intended as a gift?). Who predominantly uses and maintains the car
may also be important. Even if it can be established that the vehicle belongs to someone other
66
than the bankrupt, then the bankrupt will be asked to supply details of their ongoing use of the
vehicle in the statement of affairs as this benefit could be deemed as income for the purpose of
establishing whether income contributions are payable and how much. Often, clients under 25
will have their vehicle registered in a parent’s name to reduce the insurance premiums.
➻➻ Remember: : Putting a car in another person’s name, such a spouse or family member, in
anticipation of bankruptcy could be found to be an undervalue transaction or transfer to defeat
creditors as with any other asset. These are known as antecedent transactions and more
information on the trustee’s powers in relation to antecedent transactions is found in Part 3 of this
Chapter.
Where a vehicle has been specially modified for a person with a disability, AND is necessary
for their transport, AND is worth more than the prescribed value, then there may be a way of
protecting the vehicle:
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■■
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Was it paid for with compensation funds? – if so it may be protected (See below in
relation to compensation for personal injury);
Is the trustee willing to seek a resolution from creditors under Section 116(2)(ca) that a
greater amount than the prescribed value should apply in the circumstances?
Apply to the court (it is not clear whether this is possible – it is not mentioned as an
option in the relevant section of the Act, as it is with property used for personal exertion,
but there are broad powers under the Act to apply to the court on a range of issues
[Section 30 ] and your client should seek legal advice);
Have a relative or other interested party negotiate to pay the Trustee the difference in
value.
As there is always some discretion involved in deciding whether to sell a vehicle for the benefit of
the creditors it is always worth making a case to the Trustee on behalf of a client with special needs
(their own or their dependents) where the value of the vehicle is not too far above the threshold.
Tip ►
If your client is unsure of the value of their vehicle, you can find out by using www.redbook.
com.au
You will need the following details:
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Make
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Model
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Year
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Kilometres travelled (odometer reading)
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Condition (well maintained/poorly maintained etc)
This service cost $22 (as at March 2014).
Where there is a loan secured over the vehicle
Where the car is security for a loan (whether by mortgage, bill of sale or other means) then what
will happen to it depends on the amount of the client’s equity in the vehicle. This is simply the
market value of the vehicle less the amount outstanding on the loan. If the equity equals the
prescribed amount or less, the Trustee will not be interested in the vehicle and the client may
retain it provided they can keep up the repayments on the loan. Should the client fail to make
the repayments then the lender can repossess the car in accordance with their contractual rights.
In most cases the market value of the car will be less than the loan because cars depreciate in
value quite quickly.
➻➻ Note: In some cases creditors will seek to rely on a provision of the contract to repossess
the vehicle just because the debtor is bankrupt, even though he or she is up to date with their
repayments. Such clauses are void by virtue of Section 301 (or 302) of the Bankruptcy Act. This
means that the creditor cannot take action on this basis alone (the fact of the bankruptcy) – the
client needs to have otherwise breached the contract, such as not meeting the repayments
or failing to the keep the vehicle insured. More information on what do if the creditor tries to
repossess the car or vary the contract as a result of the bankruptcy is included in Chapter 8.
Where the secured vehicle’s value is substantially less than the secured loan balance and the
bankrupt cannot maintain payments on the secured loan, the bankrupt may be able to negotiate
a pay out with the secured creditor to release the security. If the subsequent value is then below
the AFSA threshold the vehicle should be protected from recovery action by the Trustee.
Where the equity in the vehicle is higher than the prescribed limit plus the likely costs of
organising a sale, then the Trustee may require the vehicle to be sold. When the vehicle is sold
the amount of the loan would be repaid to the secured creditor; the amount equivalent to the
prescribed limit would be returned to the bankrupt for the purchase of another vehicle; and
the Trustee would retain the balance (less the cost of the sale) for distribution to the creditors
(and to meet the costs of administering the estate).
Example
Bankrupt has one car worth $40,000
There is a loan secured over the vehicle with $20,000 owing.
The Trustee can sell the vehicle and:
$20,000 will go to the lender to pay out the loan
$7,350 will go to the bankrupt to cover the cost of a vehicle as primary means of transport (the
threshold amount)
$12,650 less the costs of the sale will go to the bankrupt estate for the the benefit of creditors and
the costs of administering the estate.
The Trustee can elect to do this at any time during the bankruptcy or afterwards (See How long
does the Trustee have to make a claim on property in Part 3 of this Chapter). It is important
to note that the property which vests in the Trustee is that which is “acquired” before or during
the period of the bankruptcy. This means that if your client keeps paying the loan and building
up equity, then the Trustee may opt to sell the vehicle later in the bankruptcy or even afterwards.
Due to the rate at which most vehicles depreciate, this is far less likely to be a problem with cars
than it is with houses and other real estate.
If your client is paying off a fairly expensive vehicle but has little equity you need to:
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Warn the client that continuing to pay off the vehicle could lead to the risk of the Trustee
opting to sell it at a later date;
When the client is interested in retaining the vehicle, assist him or her to assess whether
he or she will have the capacity to meet the repayments on the vehicle once other provable
debts no longer need to be paid – if he or she does not have the capacity to repay the loan,
then the vehicle should be surrendered or the client will risk losing the vehicle plus the
benefit of any repayments made. It is also important that the client can afford to keep the
vehicle comprehensively insured;
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When the client is interested in retaining the vehicle, and has the capacity to meet the
repayments, determine whether there is a relative (or other appropriate person) who
would be interested in purchasing the Trustee’s interest in the vehicle and allowing the
bankrupt to keep it (the client should be aware that use of the vehicle may then constitute
a benefit for the purposes of calculating income contributions);
When the client is interested in keeping the vehicle and can afford the repayments but has
no interested “buyer” to help out, then the client will need to be aware of the need to try
to buy out the equity in the vehicle from the Trustee upon discharge (if there is any);
In any event the loan should be listed in the statement of affairs. This is not only required
but will make it easier in the event that the vehicle is repossessed or otherwise damaged
or destroyed, and the client needs to be released from the liability for any shortfall by the
bankruptcy.
What if my client has sold a vehicle that is security under a loan
contract?
This is not an uncommon occurrence among the clients of financial counsellors. Where your
client has sold a vehicle over which there is a mortgage or bill of sale securing a loan, he or she
is in breach of contract and may potentially face criminal proceedings if the creditor refers the
matter to the police. This is not a likely outcome, but it is a possible one.
Where your client can afford to keep paying the secured loan, then they could consider doing so in
order to avoid detection for the misconduct, or at least discourage the lender from taking further
actiion. However, including the secured loan on the statement of affairs without a corresponding
vehicle in the appropriate questions in relation to vehicles may also lead to detection.
If the creditor threatens to go to the police, or the police wish to question the client, or lay
charges, the client will need criminal law advice.
If the creditor claims the debt has been incurred by fraud and that the client will not be released
at the end of the bankruptcy – refer the client for legal advice.
Superannuation and bankruptcy
Generally speaking, funds in a superannuation fund are protected in bankruptcy (Section 116).
This means they are not available to the Trustee unless they have been withdrawn from the fund
prior to bankruptcy. Funds withdrawn by the bankrupt on or after the date of the bankruptcy
are also protected.
Superannuation withdrawn prior to the bankruptcy is not protected. If this money has been
spent on living expenses (or medical expenses, for example) the client should inform the trustee
and provide evidence such as receipts where possible. If the money is still in the client’s bank
account it will vest in the trustee. If it has been used to pay someone else (for example, given
to adult children to assist with the purchase of their home) the Trustee is likely to require the
money to be repaid. There are a number of possibilities for the Trustee to void the transaction
including as a preferential payment, undervalue transaction or transfer to defeat creditors – See
Part 3 of this Chapter.
Case examples
1.
A client obtained early release of some of her superannuation to repay a debt to her mother
prior to going bankrupt. The mother was in receipt of the Aged Pension. After the client went
bankrupt, the Trustee considered the payment was a preferential payment and required the
mother to repay it to the bankrupt estate. The mother had already spent the money and was
asked to enter into a repayment arrangement with the Trustee. The amount was ultimately
waived after representations were made by a financial counsellor on behalf of the mother,
but this outcome cannot be guaranteed. If the mother had owned significant assets or had a
good income the amount would have been more determinedly pursued by the Trustee.
2.
A man in his fifties who was bankrupt sought advice from a legal centre. He had withdrawn
$90,000 in superannuation a couple of years previously and had given it to his daughter to
assist her to purchase an apartment. The trustee was now demanding the daughter repay
the money to the bankrupt estate or join with the Trustee in the sale of the apartment. The
man was advised that the Trustee was entitled to do this as it was an undervalue transaction
under the Bankruptcy Act (see Part 3 of this Chapter).
While superannuation that has not been withdrawn prior to bankruptcy is generally protected,
there is an exception for superannuation contributions “made to defeat creditors” (Section 128B).
The contribution(s) will be found to be made to defeat creditors if the now bankrupt person’s
main purpose in making the contribution(s) was:
(i.) To prevent the transferred property from becoming divisible among his or her creditors;
or
(ii.)To hinder or delay the process of making property available for division among his or her
creditors.
However, the Act also provides that the main purpose will be taken to be one or both of (i) or (ii)
above if it can reasonably be inferred from all the circumstances that, at the time of the transfer,
the now bankrupt person was, or was about to become, insolvent. Other evidence may also be
used to establish the main purpose of the contributions (instead of or in addition to imminent
insolvency). Of course the compulsory contributions made by a person’s employer would not
be relevant – it would only be additional, voluntary contributions that would be vulnerable to
this allegation.
In deciding what the main purpose was regard must also be had to whether the now bankrupt
person had established a pattern of making contributions to one or more eligible superannuation
plans, and whether, in the light of that pattern, the contribution(s) in question were out of
character. This means that if a person can demonstrate a long history of contributions of a similar
amount and regularity predating their insolvency, they can use this to combat the inference that
the contributions were made to defeat creditors.
Contributions by third parties to the bankrupt’s superannuation fund may also be challenged
applying the same principles (Section 128C).
Self-managed superannuation funds
The same rules apply to self managed superannuation funds, but only if they are found to comply
with the definition of a regulated superannuation fund [within the meaning of the Superannuation
Industry (Supervision) Act 1993]. The Trustee may review the underlying trust deeds establishing
the fund to determine if this is the case.
Also, a bankrupt is not permitted to remain as the Trustee of a self-managed superannuation
fund. He or she has 6 months from the date of the bankruptcy to cease to perform this role.
More information on this is available from the Australian Taxation Office.
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Total and Permanent Disability Payouts
Whether payments under Total and Permanent Disability (“TPD”) claims paid out under an
insurance policy attached to a bankrupt’s superannuation are protected is currently a vexed issue.
The most recent advice from AFSA suggests that the answer will vary depending on the nature
and wording of the policy and the nature of the illness or disability. Other legal advice, however,
says that a TPD payment should be treated as a payment from a superannuation fund under
Section 116(2)(d)(iv) and is protected regardless of the cause of the disability. See the section
on Insurance Claims in Chapter 8 for more information.
Claims made during the period of the bankruptcy will only vest in the Trustee once a decision
has been made to accept the claim. If that decision is made after discharge the funds will not vest
in the Trustee. The surest solution is to wait until after discharge to make a claim but this will
not always be practical or desirable. Another option may be to have the amount paid into the
superannuation fund’s allocated pension fund (if it has one) and paid as income – this would
then count towards income contributions but would not vest in the trustee. If you client is in
a position where they have no choice but to proceed with a TPD claim during bankruptcy, or
they have already received such a payment and the Trustee is seeking to claim the amount, they
should get legal advice.
Compensation for personal injury
What part of compensation money is protected?
Lawyers often divide compensation claims into heads of damage such as pain and suffering,
expenses paid, economic loss etc. In bankruptcy it is not the head of damage that matters but
the essential nature of the loss that is being compensated. So compensation from a personal
injury claim resulting from a car accident will be completely protected. On the other hand, if
the essential nature of the loss being compensated is economic (breach of contract, negligent
advice in relation to money or property) then the money will not be protected, unless there is
a separate and divisible cause of action relating to a wrong done to the person rather than their
property. When your client is unsure about what their compensation was for, they will need to
obtain records from the relevant proceedings or negotiations, and possibly seek legal advice.
Protected money and property purchased with protected money
Where your client has purchased property using entirely protected money, or almost entirely
protected money (substantially the whole of the purchase price), then that property does not
vest in the Trustee and is not divisible among creditors.
Protected money includes:
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Compensation received by the bankrupt (at any time, before or during bankruptcy) for
personal injury to him or herself or a member of his or her family, or the death of a person
in his or her family. This does NOT extend to compensation received by the bankrupt’s
spouse or other family member that has been given to the bankrupt or used to purchase
property in the bankrupt’s name, jointly or solely – See example below.
The proceeds of a life assurance or endowment assurance policy over the life of the
bankrupt or his or her spouse or de facto spouse received on or after the date of
bankruptcy
A payment from a superannuation fund that was received on or after the date of the
bankruptcy
Any loan repaid with money from one of the above sources.
Where property has been purchased almost entirely with money from one of the above sources
it will be protected and cannot be taken and sold by the trustee. Similarly, if the property was
purchased with a loan for almost 100% of the property and that loan was repaid entirely by one
of the above sources, that property will be protected and will not vest in the trustee (Section
116(2D) and 116(3)).
What if the house purchased with protected money is in more than one
name?
Where the property purchased with personal injury compensation or other protected money is
in more than one name, it gets more complicated.
Examples
A man receives compensation money for personal injury. He uses the money to buy a house for
himself and his wife and puts the house in both names. The house is paid for entirely from the
compensation funds.
Where he later becomes a bankrupt (and his wife does not), the man’s half interest in the house
will be protected because it was acquired with “protected money”– that is compensation for
personal injury paid to the bankrupt. Further the wife is not bankrupt in any event and can retain
her 50% share.
On the other hand, where she becomes a bankrupt and he does not, then her share of the house
will not be protected because the compensation was not paid to “the bankrupt”. This is a very
important distinction.
If they both become bankrupt, then his share will be protected, but hers will not!
The last point above is very important. It is not uncommon for couples to purchase property in
both names regardless of the source of the purchase funds. If a couple purchase a house in both
names with compensation paid to one of them, then it is always possible that the court will
interpret the transaction as a gift from the party receiving the compensation to their spouse/
de facto partner unless there is very clear evidence that this is not the case. This means that
the money that has been gifted is no longer protected under the Bankruptcy Act. As shown
in the example above, this won’t matter if the member of the couple who did not receive the
compensation does not go bankrupt (as his or her share of the asset does not vest in the Trustee
anyway). It is a disaster, on the other hand, if the person who did not receive the compensation
is the bankrupt party, or where both members of the couple end up bankrupt, because half the
compensation money may no longer be protected.
➻➻ Note: If you have a client who has received a compensation payout and is contemplating
buying property with another person, you should strongly recommend that he or she gets legal
advice about the best way to organise their affairs to make sure the compensation funds remain
protected in the event of the bankruptcy of either the client or the other person.
What if property has been only partially paid for by compensation or
other protected money?
Quite often a property will have been purchased partly with protected money and partly with
other funds. Alternatively the property may have been purchased with other funds and then
improved with protected money or the property may have been initially purchased with protected
money and the client has subsequently taken out a mortgage over the property which he or she
has been repaying from other funds. In such cases the property itself is not protected (because
protected money did not make up substantially the whole of the purchase price) – it will still
vest in the Trustee – but when the Trustee sells the property, the Trustee must pay the bankrupt
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“so much of the proceeds of realising the property as can be fairly attributed to that protected
money” (Section 116(4)).
Sometimes there will be a quite complicated chain of purchases, improvements, sales and further
purchases since the protected money was expended. Provided there is sufficient evidence to the
trace the money, then the Trustee should still account to the bankrupt for the protected amount.
Further, the amount to be repaid is not simply the amount of protected money used, but the
proportion of the proceeds of the sale as is attributed to the protected money. This means that if
the property has increased in value, the amount of the protected portion will increase accordingly.
Of course the downside is that if the property has decreased in value, then so will the protected
portion meaning that the bankrupt may receive back less than their original compensation. Of
course the costs of the sale will be deducted to determine the amount of the proceeds of the sale.
Examples
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Where a bankrupt had purchased her home with 50% protected money (say a personal injury
pay out) and the other half had since been paid off using regular income, then the trustee
should return half the proceeds of the sale to the bankrupt (assuming there is no co-owner to
complicate matters).
Where a bankrupt had already owned his home and then received compensation money
which was used to improve and modify the home, the current value of those modifications
would have to be repaid by the Trustee. This would usually be worked out by establishing the
percentage increase in value in the property as a result of the improvements at the time they
were done, and then applying this percentage to the proceeds of sale. Clearly, this will not be
an easy or non-controversial calculation.
Where a non-bankrupt spouse or de-facto (or other co-owner is involved) the calculation will
become very complicated. The court will first have to determine the amount of the respective
shares of the bankrupt and non-bankrupt parties and then work out the appropriate
percentage of protected money used in the purchase and apply this to the bankrupt’s share
of the equity. This may be further complicated if the Court finds that part of the compensation
money was actually a gift to the spouse and is therefore no longer protected (see below).
Stankovic v Van Der Velde [2012] FCA 1436
The parties in this case were a married couple. The couple already owned one block of land
when the male member of the couple received personal injury compensation of $250,000. They
then purchased the property next door, mostly with the compensation funds, but also with a small
mortgage. This transaction was complicated slightly by the fact that the couple set up a company
with both of them as directors and equal shareholders to execute the purchase. This was in
the late eighties or early nineties. In 1994 they sold both properties and bought another one for
$850,000. $255,826 of this amount was financed by the sale of the property purchased largely
with compensation money.
By the time the matter came before the Court in 2012 there were both family law proceedings and
a dispute between the Trustees in the husband’s bankruptcy and the husband about the amount
of protected money involved as a result of the personal injury compensation.
The Federal Court determined the matter as follows:
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The purchase of the house by a company owned equally by both parties meant that the
husband had effectively given 50% of the money to his wife (there being no evidence to the
contrary);
This meant that the contribution of the compensation money had to be reduced by half from
$255,826 to $127,913. This represented only 15.05% of the purchase price or 30.1% of the
husband’s half share in the equity of the new $850,000 property.
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After payment of mortgages and expenses the proceeds of the sale of the above property
amounted to $6,229,795. The Court said that 50% or $3,114,898 should be paid to the wife.
The Trustees then conceded that 30.1% of the remainder should be returned to the bankrupt
as representing the portion of the proceeds attributable to protected money.
The court also ordered that the Trustees were entitled to deduct the costs of the proceedings
before calculating the bankrupt’s share (but after deducting the wife’s full 50%) as a result of his
failure to provide the information to justify this protected amount to the Trustees earlier when
they requested it. The court said that the proceedings would not have been necessary had the
bankrupt complied with his obligations to provide adequate information to the Trustees. Despite
this the bankrupt is likely to have received in excess of $900,000.
Where it appears that there may have been protected money involved in the purchase of an
asset the bankrupt will need to provide as much evidence as possible to the Trustee to establish
the status of the money as protected, and where necessary, to trace the transactions that have
occurred since the purchase in order to justify the amount of the protected portion claimed. It
is not sufficient to simply claim the property or funds are protected. Further, it is vital that all
assets are disclosed in the statement of affairs, regardless of whether they are allegedly fully or
partially protected.
➻➻ Note: Do not attach original documents to the statement of affairs – provide copies or a list of
documents the client holds and tell the client to retain the originals unless requested to produce
them by the Trustee.
More information on the treatment of co-owners of property generally is included in the following
section in relation to Divisible Assets.
Protected Property
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Must be disclosed in the statement of affairs AND
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Protected status must be established by evidence
Where there has been a complicated chain of events with property being bought, sold and/or
refinanced, there must be sufficient evidence of all relevant transactions to conduct a tracing
exercise back to the protected money.
Part 3:
Divisible Assets – What will the trustee take and sell?
Summary
All property of the bankrupt that is not protected (see Part 2 above) is divisible property. This
includes property owned by the bankrupt at the commencement of the bankruptcy and any
property acquired by the bankrupt between the commencement of the bankruptcy and discharge
from bankruptcy (or annulment).
The commencement of the bankruptcy and the date of the bankruptcy are not necessarily the
same thing, with the commencement of the bankruptcy being up to six months prior to the
presentation of the Debtor’s Petition or Creditor’s Petition, depending on the date of earliest act
of bankruptcy committed by the bankrupt in that period (see Chapter 10 for more information
on acts of bankruptcy).
Divisible property vests in the Trustee and the bankrupt can no longer deal with it. The Trustee
has extensive powers to realise the vested property for the benefit of creditors and the costs
of administering the bankrupt estate.
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Complicated scenarios include:
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Where property is security for a loan (such as a motor vehicle loan or home loan)
Where the property is owned jointly with one or more other people
Where the legal ownership of property and the equitable ownership may not be the same
(such as where a person puts a property they have largely paid for in someone else’s name)
A combination of the above.
Generally speaking the trustee will only take property where the bankrupt’s share after deducting
any loan, the shares of other parties, and the costs of the sale, will still leave a worthwhile return
for the bankrupt estate. Co-owners will be given the opportunity to buy out the bankrupt, or
will be given the equivalent of the value of their share after any sale.
The Trustee has a very long time timeframe in which to realise vested property. Just because
the bankrupt has been discharged, does not mean that it is too late for the Trustee to take and
sell vested property unless the bankrupt (or some else) has arranged to buy back the bankrupt’s
share. Property which has not been disclosed to the Trustee can also be discovered and sold
long after discharge.
The Trustee also has extensive powers to look into the past (investigate the financial affairs of
the borrower) and recover property from other people in some circumstances, usually because
the bankrupt has (intentionally or unintentionally) shifted assets to other people when they
would otherwise have been available for creditors. These are called antecedent transactions.
They include preferential payments; undervalue transactions and transfers to defeat creditors.
What can the Trustee take?
Everything else not listed in the previous section (Part 2)! Anything the bankrupt owns as at
the date of the bankruptcy (and possibly before) that is NOT protected property will vest in
the Trustee.
The Trustee has a choice whether to take possession and sell a particular property, bide his or
her time to see if it will be worth selling the property in the future, or disclaim the property.
Generally speaking divisible assets can include many things but most commonly:
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Vehicles (cars, boats, caravans, motorbikes, trailers, trucks, buses, vans)
Houses, flats and other real estate (including the bankrupt’s share of property owned
jointly with others)
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Shares and other investment products
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Cash in a deposit account (or under the bed or buried in the chicken coop)
■■
Registered (pedigree) animals (if their value if sufficient to justify costs of sale)
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Insurance claim proceeds unless specifically protected (for example, life insurance paid
after the date of the bankruptcy) or indemnifying the loss of property that would itself
have been protected
Debts owed to the bankrupt.
➻➻ Note: Clients with intellectual property rights or potential intellectual property rights (such as
copyright, patents) should get specialist legal advice. Any income stream will definitely count
towards assessing whether income contributions are payable, but a lump sum advance, for
example, may vest in the Trustee.
➻➻ Note: Where an insurance policy exists for the benefit of a 3rd party – such as the mortgagee
bank in the case of home building insurance, or the creditor in the case of consumer credit
insurance – then the proceeds of the claim must be paid to the relevant 3rd party (Section 117).
More on insurance is found in Chapter 8.
Assets acquired during the period of bankruptcy (after-acquired property)
Non-protected assets acquired after the date of the bankruptcy and before the bankrupt is
discharged will also vest in the Trustee and be available for distribution to creditors.
This means that if your client inherits money from a deceased estate, wins money, or is given
money or property in the period of the bankruptcy, then that money or property will be taken
by the Trustee. Should the asset (including funds) be sufficient to pay out all the debts, Trustee’s
fees and expenses, and interest on the debts up to the date of payment, the bankruptcy will be
annulled and the surplus will be returned to the bankrupt.
Clients should also be told that while they are allowed to accumulate savings from income earned
during bankruptcy (provided they pay any assessed income contributions) any asset purchased
with such savings, or invested in anything other than a savings account, will be considered after
acquired property and vest in the Trustee.
➻➻ Note: The Centrelink pension bonus which some clients may qualify for because they have
worked past the retirement age and had registered for it is not considered an after-acquired
asset. It will be counted as income in the year in which it is received for the purpose of calculating
income contributions, if any.
It is important to note that it is the date that the client acquires the interest in the property that
is relevant and that the trustee may still be chasing property from the bankrupt estate after the
bankrupt has actually been discharged.
Examples
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A client’s relative dies 6 months before she is discharged from bankruptcy. She does not
receive the money from the will until 3 months after discharge. The inheritance still vests in
the Trustee for the benefit of the bankrupt estate (unless all debts, interest and expenses have
already been paid) because it is the date of death which is relevant.
A client’s relative dies during bankruptcy and bequeaths the client their house but subject to
the “life tenancy” of another relative. Whilst the house vests in the Trustee, the house cannot
be sold by the Trustee until the life tenant dies or vacates the property, which may be many
years after the client is discharged from bankruptcy.
A client has no real estate in his own name but applies for a property settlement from his ex de
facto partner 6 months after discharge. The relevant relationship ended 18 months previously
and the apartment they shared was purchased 6 years previously. If the court orders that the
client should have a share in the property then that share will vest in the Trustee.
Sometimes clients will win, inherit or otherwise come into possession of more property or money
than their debts ever amounted to. In such cases the bankruptcy may be annulled, but only if there
is sufficient money to pay out the debts, any interest that would have been payable up to the date
of payment, the petitioning creditor’s legal costs and the Trustees fees and disbursements. This
can amount to a considerable amount more than the debts by the time the Trustee’s expenses are
paid, which is one of the reasons that going bankrupt should be given very careful consideration
and the client given detailed information on the consequences of bankruptcy. More detailed
information on the process of annulment is included in Chapter 8 of this kit.
Houses and other real estate (including your client’s mortgaged home)
Unlike motor vehicles, there is no concept of protected real estate unless it has been wholly, or
substantially wholly, purchased with the proceeds of a compensation pay out or other protected
money (see previous section on protected property). Any asset that is not listed in the protected
property section above, will vest in the Trustee immediately upon bankruptcy (or upon the
acquisition of the property if acquired after bankruptcy and before discharge). This means that
the Trustee is the legal owner and the bankrupt can no longer deal with the property in any way
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without the Trustee’s permission. The Trustee will sell any house or real estate worth sufficiently
more than the balance of the secured loan (if there is one) and the cost of organising the sale.
It would be rare for an unencumbered house (a house with no mortgage over it) not to be sold
by the Trustee, unless it is in a very remote area and very poor condition. Similarly, it would
be rare for a person to be considering bankruptcy if they owned unencumbered property, as
usually it would be more beneficial for the person to sell the property and try to negotiate with
their creditors prior to considering bankruptcy (of course there will always be exceptions).
A client who has been made bankrupt by a sequestration order, on the other hand, may have
unencumbered property.
A key cause of complaints about bankruptcy (and bankruptcy assistance and advice) is the effect
bankruptcy has on assets, particularly the bankrupt’s home. Some bankrupts enter voluntary
bankruptcy without advice and do not understand that in most circumstances they will not be
able to keep their privately owned home. In rare cases, bankrupts who have received advice claim
not to have been told about the impact on their home, or the effect it will have on other family
members or associates with whom they jointly own property. Claims that the bankrupt did not
receive adequate explanation of the treatment of after-acquired property in bankruptcy also occur.
It is very important that financial counsellors and other advisors always do three things:
1. Specifically ask the client whether he or she owns their own home, is buying their own
home, or has any interest in any other assets (including real estate, shares or money in
the bank etc). You should prompt the client to consider small shares in family owned
property, or assets purchased in previous relationships. You should file note that you
asked the question, and the client’s response.
2. In the event that the answer is yes, you need to warn the client of the rights of the Trustee
in relation to unprotected assets. You should file note your warning. Even if your client
says no, you should tell them that this is very important because the Trustee will take
control of the bankrupt’s share of any property/asset automatically upon bankruptcy
and may choose to sell that property for the benefit of the creditors (or ask co-owners to
purchase the bankrupt’s share). Clients may have genuinely forgotten something or could
be withholding information. You must explain the consequences just in case.
3. Explain that any real estate, money or other assets inherited or otherwise acquired while
bankrupt will also vest in the Trustee.
Example:
A client attended financial counselling to seek assistance to go bankrupt for substantial debts
which he could not pay. The client had a number of meetings with the financial counsellor and was
asked on 3 occasions whether he owned or has a share in any property. The client consistently
said no. At the final appointment to complete the paperwork the financial counsellor asked the
client whether he had ever been left money or property in a will. The client replied “no, but I do get
my father’s house when my brother who has a life tenancy dies”. This information changed the
decision making process of the client because his interest in his father’s house would vest in the
Trustee (subject to the life tenancy) if he went bankrupt. This means that the house would have
passed to the trustee for the benefit of creditors upon the death of his brother. The client decided
to pursue other options to deal with his debts.
What if my client owns, or is buying, property with someone else?
Where your client owns property jointly with another person or other people (for example their
spouse, de facto partner, other family members or someone unrelated), then the other owners
will be affected by the client’s bankruptcy. This is also true if the property is being paid off (such
as a jointly owned home with a mortgage).
Unless the property is protected (see Part 2 above on protected property) then the Trustee will
usually ask the co-owner(s) to buy out the bankrupt’s share. There may be some negotiations
about a fair market value and what constitutes the bankrupt’s share, but generally speaking, if
the co-owners are prepared to pay this to the Trustee then the bankrupt’s share of the property
will be transferred to them.
The co-owner(s) will also have to pay to execute the transfer and will be liable for any stamp
duty payable in the relevant jurisdiction for transfers of that type .7 Where duty is payable it will
be assessed regardless of any mortgage owed (the duty will be payable on the entire value of the
property transferred – not just the equity).
In some cases either the Trustee or the co-owners might argue that the legally owned shares do
not reflect the true equity position of the parties. For example, they co-owners might want to
argue that the bankrupt held his or her share in trust for them (or another 3rd party, such as a
child) or the Trustee may want to argue that the bankrupt’s share is in fact greater than the share
shown on the title because he or she paid for the entire purchase price, or previously transferred
their share to a co-owner for less than what it was worth. More information about co-ownership
and equitable ownership is found in the section titled: Useful information about property
ownership on page 81. Where there is a dispute over the respective shares of the bankrupt and
non-bankrupt owner, it is important to negotiate and bring any relevant information or evidence
to the attention of the Trustee. The Trustee will usually be reasonable rather than undertake
expensive litigation.
For information about transfers of property which may be challenged by the Trustee, refer to
the section Looking into the past – can the Trustee get at money or assets the bankrupt does
not own at the date of the bankruptcy? on page 84
Where there is negative equity and the co-owner cannot afford to buy out the bankrupt’s share
during bankruptcy (as a result of stamp duty and legal fees for example), either the former
bankrupt or the co-owner may be able to buy the share back from Trustee on discharge. This
is a high risk strategy (in so far as a number of things can go wrong) and the co-owner should
seek independent legal advice on this. The co-owner should always try to make an arrangement
to buy out the trustee as soon as practically possible as the trustee’s share may increase over time
in line with the equity in the property.
Example
Janette owns a house as an investment property jointly with her mother and sister. This is her
only asset. She lives in a rented apartment and the house is rented out. The investment property
is worth approximately $450,000. There is a mortgage over the property of $300,000. Janette is
going bankrupt because of a large number of credit card debts and a tax debt she incurred as
a result of a business venture she has now abandoned. The Trustee will give Janette’s mother
and sister the opportunity to buy out Janette’s share of the equity by paying the Trustee its
market value, in this case approximately $50,000 (market value of $450,000 less the mortgage of
$300,000 giving equity of $150,000 divided by 3 owners) provided the family members own the
property in equal shares. If Janette’s mother and sister are in a position to do this, they will need
to also pay the legal costs of preparing and registering the transfer and they will pay stamp duty
on $150,000 (Janette’s share of the market value rather than the equity).
The consent of the mortgagee (lender) will be required as the house is the security for their loan
and the lender’s interest will be registered on the title. Consent will no doubt also be required as
a condition of the mortgage. Janette’s bankruptcy will not affect any of the borrowers’ rights and
7
Whether stamp duty is payable will vary depending on the law of which State or Territory applies. The Duties Act 2000 (Vic), for
example, provides that a transfer from a trustee in bankruptcy to the spouse or domestic partner will not attract stamp duty if the property
will be the principle place of residence of spouse or domestic partner (s 48).
78
obligations under the existing mortgage, except that Janette would not be able to be pursued for
any shortfall in the event of a default and undervalue sale. The bank could only take action under
the mortgage in the event that there is a default under the contract (such as failure to make the
required repayments).
However, if Janette’s mother and sister wished to borrow additional funds to pay out the Trustee
for Janette’s share, the bank could insist on refinancing the entire amount and will only do so if the
mother and sister qualify for the loan (including having capacity to pay). Janette may continue to
assist with paying the mortgage if she chooses to do so but she cannot accumulate any interest in
(ownership of) the property while she is an undischarged bankrupt.
In the event there was no mortgage, then the Trustee would be claiming $150,000 rather than
$50,000 and the stamp duty would remain the same.
Where the co-owners cannot afford to purchase the bankrupt’s share, then the property will
need to be sold so that the Trustee can be paid. Should the co-owner(s) refuse to co-operate, or
an agreement cannot be reached, the Trustee can take court action to seize and sell the property.
This could be a costly exercise and co-owners would be well advised to avoid costly litigation if
possible. The Trustee will also weigh up whether such action is likely to be fruitful for creditors
given the costs involved and will only take action if a return is likely after expenses.
Without the co-operation of the co-owner(s), the Trustee will be forced to take action in Court
(in NSW this would be the Supreme Court under Section 66G of the Conveyancing Act)
seeking an order allowing the Trustee to sell the property in the absence of the consent of the
co-owners. It should be remembered, however, that the Trustee has a very long period in which
to choose to take action against the property (See Table on page 89). This means that even if
the Trustee does not consider it worthwhile to take action now, a new assessment may be made
in the future if the value of the property has increased and/or any mortgage secured over the
property has been paid down.
Where a co-owner is particularly uncooperative and there is little equity in the property the
Trustee may choose to disclaim the property (see later section on this topic). In this case the
bankrupt’s share in the property would pass to the State (or Territory) and the co-owner would
be forced to apply to the Federal Court to establish a claim to the property. They would be unable
to deal with the property without taking such action as the interest of the State (the Registrar
General in NSW for example) would be noted on the title.
Process in summary
1. The Trustee will claim the bankrupt’s share (usually based on legal ownership)
2. The co-owner(s) may make an opposing claim (arguing equitable principles) or family law
3. Negotiations
4. Either the co-owner(s) pay or the Trustee chooses to concede, sell, apply to the court, or
disclaim the interest in the property.
Where your client has a mortgage over their home (jointly owned or otherwise) you should
also read the following section.
Bankruptcy and home mortgages
It is becoming increasingly common for people with home mortgages and a large amount of
unsecured debt, such as credit cards and personal loans to consider bankruptcy as an option,
particularly if they have little or no equity in the property (where the market value of the property
is less than or close to the amount owed under the mortgage). In some cases people will be happy
to surrender their home or real estate to the mortgagee (home loan lender). In others, they may
wish to remain in the home and keep paying the mortgage while bankrupt. This is possible, but
it is a risky course of action, and sometimes gives rise to complaints about advisers, particularly
when the trustee claims an interest in the property a few years down the track.
When your client is considering bankruptcy in circumstances where they are paying off their
home and have very little equity you should warn the client that the Trustee may elect to sell
the property at any time during the bankruptcy should the equity position change significantly.
Further, the Trustee can still do this after discharge unless a formal arrangement is made to “buy
back” any equity in the property.
Generally, where there is little or no equity in the property, the Trustee informs the bankrupt(s) that
they can continue to occupy the property on the clear understanding that they will be required to:
1. Maintain the repayments due under the mortgage; and
2. Pay the council and water rates as they become due and payable; and
3. Keep the property fully insured and properly maintained and kept in a good state of
repair at all times; and
4. Accept that all payments in respect of 1, 2 & 3 above are considered by the Trustee
to be in the form of an “occupation fee” – this means that paying the mortgage and
maintaining the property will NOT create any interest for the bankrupt in the property,
nor create any entitlement for reimbursement of such payments.
Furthermore, bankrupts are usually informed that they can “buy back” their interest in the
property when they are discharged from bankruptcy. In the case where the Trustee has lodged
a caveat to protect the Trustee’s interest in the property (instead of becoming registered on the
title in place of the bankrupt) the Trustee will exchange a Withdrawal of Caveat for a bank
cheque for the agreed “purchase price”. Consequently as the Trustee has not legally transferred
the title there is no conveyance of the property, no stamp duty is payable in that instance. On
the other hand, if the Trustee had become registered on the title in place of the bankrupt, then
there would be a transfer of title from the Trustee to the former bankrupt in which case, stamp
duty would be payable. Normally, Trustees lodge a caveat on the title in the first instance and
only become registered on the title where there is a sale to a third party.
Clearly there is a risk inherent in this process that these arrangements will not play out as planned
and the property will have to be sold after all. Specifically:
■■
■■
■■
Circumstances may change so as to mean that there is sufficient equity in the property to
justify its sale by the trustee for the benefit of the creditors;
The bankrupt(s) may not have sufficient funds to acquire the equity in the property upon
discharge.
The bankrupt may not be able to maintain the mortgage, rates, insurances etc and the
home may be repossessed.
In an attempt to circumvent these problems, some Trustees and bankrupts are coming up with
creative arrangements whereby there is an attempt to settle the arrangements between the parties
prior to the bankrupt’s discharge, or even before the bankruptcy has even commenced. A recent
AFSA publication warned about the problems associated with attempts to allow a bankrupt to
purchase their equity in a property prior to discharge – basically any property transferred to the
bankrupt will automatically vest straight back in the Trustee as after-acquired property even if
it has been paid for with income available after all contributions have been made.
Some arrangements involve third parties such as family members purchasing the equity from
the Trustee. In some cases there is no equity at all and the payment made is effectively paying
the trustees fees for an otherwise “empty” estate. An arrangement to purchase the equity by a
third party may be perfectly valid, however a related agreement involving the promised transfer
of the property back to the bankrupt runs the risk of the bankrupt’s rights simply vesting back
in the Trustee.
80
Financial Counsellors should not attempt to advise any client in relation to such an arrangement.
There are risks and uncertainties for all parties and the arrangements appear to attempt to
circumnavigate some of the basic principles of bankruptcy. Bankrupts and “purchasers” should
be very cautious of entering into such arrangements and should obtain independent legal advice
from a solicitor well versed both in bankruptcy and real property law & practice. Preferably,
if there is no equity in the property the bankrupt should simply inform the Trustee that they
wish to buy back their interest in the property upon their discharge from bankruptcy and start
putting money aside for this purpose.
Useful information about property ownership
Joint tenancy or tenants in common
In Australia, where one or more people purchase or acquire property together they have a choice
whether to own the property as joint tenants or tenants in common.
Joint tenancy means that the parties hold equal shares in the property (50% each in the case
of two people) until the property is sold or transferred or one of the owners dies. If one of the
owners dies, the property is passed to the other owner under the doctrine (rule) of survivorship
and does not form part of the deceased person’s estate. If two people own a property as joint
tenants and one of them goes bankrupt, the joint tenancy is severed at law and the trustee and
the non-bankrupt owner become tenants in common, and the trustee will claim a 50% share of the
property.
Tenants in common can nominate the share of the property that they respectively own. This may
be 50%/50% but it could also be any other ratio, for example 70%/30%. In the case of tenants
in common, there is no survivorship principle and if one owner dies, their share belongs to their
deceased estate. If two or more people own property as tenants in common and one of them who
has a 70% interest goes bankrupt, the trustee will claim that person’s designated percentage of
the property – that is 70%.
Co-owners and “equity”
In some circumstances a co-owner of a property may be able to argue that the interest of a
bankrupt in their jointly owned property (where they are joint tenants) is wholly or partly held in
trust for the co-owner (or co-owners) and that the trustee is therefore entitled to less than the full
value of the bankrupt’s legally owned share. In some circumstances the property may be held
in trust for someone else entirely (not a co-owner). These include, for example, express trusts,
resulting trusts and constructive trusts. If you think any of the following may apply in the case of
your client (or their spouse/partner/co-owner) the parties will need separate, independent legal
advice.
Express trust
An express trust is a clearly documented trust set up for the benefit of named beneficiaries in
accordance with the requirements of the law. The legal owner of the land or money (the “trustee”
of the trust as opposed to the trustee in bankruptcy) can be one of the beneficiaries but not the
only one. The law in relation to trusts over land varies from State to State and anyone wanting to
set up a trust should get legal advice in the appropriate jurisdiction. A trust may be set aside in
bankruptcy for two reasons:
1.
Because it does not meet the technical requirements to establish a trust in the relevant State
or Territory; and/or
2.
Because it is found to be an undervalue transaction or a transfer to defeat creditors under
Section 120 or 121 – See later in this Chapter
If you have a client wanting to go bankrupt but claiming to hold money or property in trust for
others, they will need to get legal advice on whether the trust is likely to be upheld against the
interests of the Trustee.
Resulting trusts
A resulting trust depends on the intention of the parties at the time they purchased or otherwise
acquired the property. A resulting trust may also be found to exist where one party has transferred
property or a share in a property to another person. The law of equity says that where one
party provides all of the purchase money but the property is put in two names, then there is a
presumption that the person who provided no money at all holds their share of the property in
trust for the person who paid. Similarly, if both parties have provided the purchase money but in
unequal shares, then the party who provided the least amount holds part of their legal share in
trust for the other party reflecting the proportions actually paid.
This presumption can be overturned by evidence of the parties’ actual intentions at the time.
The presumptions may also be altered as a result of the relationship between the parties.
The “presumption of advancement” as it is usually referred to, assumes that people in certain
circumstances intended a gift to the other party unless the evidence shows otherwise. For
example, a father placing a property in the name of a child has been presumed to be making a
gift, and in the past, a husband to a wife, or intended wife. These presumptions are not set in
stone and may change with the times – for example in one case the majority of judges in the High
Court found that the presumption of advancement did not apply to de facto relationships whereas
one judge thought that it could and another was of the view that the presumptions had no place
whatsoever in modern property law!
More recently, the High Court also decided that when married spouses placed property in joint
names (as joint tenants) then there is a presumption that the property is owned on a 50%/50%
basis unless the contrary can be clearly established by evidence of their actual intentions at the
relevant time. This is known as the Cummins principle, after the name of the relevant case. This
principle does not affect the powers of the Family Court to alter interests in property according to
the contributions and needs of the parties and their children under the Family Law Act 1975.
➻➻ Note. The non-bankrupt owner in the case of tenants in common will have some difficulty
asserting that they have a greater than 30% share in the property on the basis they have
contributed more than 30% of the acquisition cost of the property, because the extent of their
ownership is designated on the title (reflecting the parties clear ownership intentions at the time).
However they may be able to lodge a proof of debt as a creditor in the bankruptcy. The Trustee
on the other hand may in some circumstances assert the bankrupt has a greater share than that
reflected on the titled.
Constructive trusts
Constructive trusts have been implied by the courts in circumstances where it has been
considered unconscionable to allow one party to benefit from the contributions of another. This
principle can apply to a variety of situations including business ventures but it was commonly
used to allocate property interests upon the breakdown of de facto relationships prior to law
governing de facto relationships being enacted by the various state Parliaments. Prior to the 2005
amendments to the Family Law Act 1975, which allowed the family court to divide property which
had already vested in a trustee in bankruptcy, constructive trusts were often argued to prevent the
Trustee taking property that might otherwise have been dealt with under a property settlement.
A constructive trust was usually found in circumstances where a “joint venture” was thwarted by
no fault of the parties concerned, leaving them in a situation where one would benefit from the
contributions of another in circumstances neither ever intended. For example, in one case a de
facto couple purchased a property with the woman paying over 90% of the purchase price and
placed it in joint names because the man was intended to make considerable improvements to
the property at his own expense and with his own labour. The relationship broke down before the
improvements were ever made. The court found that there was no resulting trust in proportion
to the initial contributions because there was clear evidence that the couple consciously placed
the property in joint names intending to contribute to the venture in differing ways. There was,
however, a constructive trust because it would be unconscionable to allow the man to benefit from
the woman’s much greater contribution. Accordingly, upon the sale of the property, each would
recover their contribution first and then any additional proceeds should be split 50%/50% as
intended by their original joint venture.
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Given that the Family Law Act now provides a statutory regime which provides a clear framework
for dividing up property between both married and de facto couples, and that regime is still
accessible after property has vested in the Trustee (See Family Law and Bankruptcy in Part 7
of this Chapter), it is unlikely that these equitable rules will be as relevant as they have been in
the past. They may still have relevance in circumstances where the co-owners are not and have
never been married or de facto spouses. The trustee may also appeal to the above principles to
assert that a bankrupt has an equitable share in a property owned by someone else such as their
spouse (or greater equitable share than on the title in the case of co-ownership) in circumstances
where there are no family law property proceedings between the parties. This would only be likely
to occur if the bankrupt has made significant and clearly traceable contributions to the purchase or
improvement of the property, and there is sufficient equity to make any proceedings worthwhile.
A Trustee can also rely on Sections 139DA and 139EA of the Bankruptcy Act to argue that the
bankrupt has made contributions to allow the acquisition of property, or substantially increase its
value, to establish an interest larger than the bankrupt’s ownership as reflected on the title, or
even an interest in a property entirely in another party’s name. Such contributions would need to
have been substantial for a Trustee to risk the costs of pursuing such an application.
Co-owners of property should always seek independent legal advice if another co-owner becomes
bankrupt. Similarly, where a party claims to have made a significant contribution to the purchase
or improvement of a property legally owned by a bankrupt, then they should also seek legal
advice to determine whether they can claim an interest in the property against the Trustee. When
the non-bankrupt owner is a spouse or de facto spouse, he or she needs urgent family law advice
– See Part 7: Family Law and bankruptcy later in this chapter.
If you are assisting the bankrupt, you cannot also assist any non-bankrupt co-owner. If your client
is a co-owner of property with another person who is bankrupt, or likely to become bankrupt, then
you should also refer your client for specialist legal advice.
Property outside Australia
Divisible property under Australian bankruptcy laws is not limited to property in Australia.
While few financial counselling clients will be international high flyers with property in multiple
jurisdictions, clients who come from other countries may own, or inherit, property in their
country of origin.
If the country has similar bankruptcy laws and is one of the small number of prescribed countries
listed in Section 29(5) and Regulation 3.01 (for example, Canada, UK, NZ, US, Singapore),
the Trustee is able to claim and sell the property if it is commercially viable to do so with the
assistance of the equivalent court in the foreign country. If it is in any other country (for example
Italy or Serbia) it is difficult if not almost impossible, for the trustee to sell it. However, in some
cases, the trustee may direct the bankrupt to sell their overseas property and pay the net proceeds
to the Trustee. If the bankrupt refuses to do so, the Trustee can take contempt action against
the bankrupt. In some cases there may also be practical difficulties transferring the money out
of the other country.
Disclaiming contracts and property
Sometimes the Trustee will not be interested in a particular piece of vested property or particular
contractual rights and obligations. The Trustee can disclaim property if the property is unsalable,
and/or the costs of holding onto the property or selling the property exceed the value of the
property to the bankrupt estate. The usual example of this is when there is estimated to be little
or no equity in the property after taking into account the amount owed to the mortgagee, charges
such as rates, holding charges such as insurance and the costs of sale. However, the Trustee will
usually refrain from disclaiming the bankrupt’s residence (unless there is no equity and particularly
intractable co-ownership issues). Another common example might be a lease arrangement where
the costs of maintaining the lease are worth more than its value to a potential purchaser.
The reason a Trustee disclaims a contract or property is to avoid personal liability in respect of
the property if there is no benefit for the bankrupt estate. For example, if the Trustee didn’t insure
the house and it was subsequently destroyed, then he or she could be held liable for the loss by
the mortgagee because the Trustee effectively steps into the shoes of the bankrupt.
A disclaimer in relation to property or a contract has the effect of operating to bring to an end
the rights and interests of the bankrupt in respect of the property and crystallises or fixes the
liabilities of the bankrupt in respect of the property. A disclaimer also discharges the Trustee from
all personal liability as from the date when the property vested in the Trustee, usually the date of
bankruptcy. However, the disclaimer does not affect the rights or liabilities of another person.
The disclaimer must be in writing and served upon each person who, to the knowledge of the
trustee, has an interest in the property being disclaimed. The disclaimer does not take effect
until after 28 days of the service of the notice. A person entitled to receive a notice can apply
to court, within the 28 days, for the court to review the proposed disclaiming of the property.
What happens after the property is disclaimed?
In most cases the property reverts to the person with the next best interest. In the case of land in
New South Wales, for example, the Registrar General on behalf of the State of New South Wales
becomes the legal owner of the property subject to the disclaimer. It is then up to the person
claiming an interest to apply to the Federal Court to have the property registered in their name.
Looking into the past – can the trustee get at money or assets
the bankrupt does not own at the date of the bankruptcy?
In many ways bankruptcy does not begin neatly upon the date your client goes bankrupt and end
on the day of discharge. The Trustee has extensive powers to look backwards into the bankrupt’s
affairs to seek funds and assets which may have been transferred in the past, depending on the
circumstances. The Trustee’s rights to recover property also extend beyond discharge – provided
the property vested in the Trustee prior to discharge (See Table on page 89).
The Trustee can challenge transactions which were perfectly legal at the time they occurred but
have now taken on a different characterisation (retrospectively) as a result of the bankruptcy. In
some cases they may be transactions which were clearly arranged to prevent money and assets
being available to creditors. In others they may have been normal acts of generosity or familial
support which are considered (by law) unfair to creditors who are now being asked to forego
debts which they are legally owed.
The Trustee can challenge transfers of property or money made in the years leading up to the
bankruptcy under the following rules or principles:
■■
Relation back
■■
■■
Undervalue transactions
■■
Transfers to defeat creditors
■■
Superannuation payments to defeat creditors.
Superannuation is usually protected but not if payments have been made to defeat creditors.
Where the Trustee is of the view that the bankrupt has been making extra superannuation
payments in anticipation of becoming insolvent then he or she may take action to recover these
extra payments for the benefit of creditors. This is covered earlier in this Chapter under Part
2 – Protected Property, in the section on Superannuation and bankruptcy.
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Relation back
The bankruptcy does not necessarily commence on the date of the presentation of the Debtor’s
Petition or the date of the sequestration order made by the court. A variety of time limits apply
up to 6 months prior to the presentation of the first Creditor’s Petition (where there was a
Creditor’s Petition) or in the absence of any Creditor’s Petition, up to 6 months prior to the
presentation of the Debtor’s Petition – See Table on page 88.
This means that any property or funds owned by the bankrupt at the time of the commencement
of the bankruptcy will vest in the Trustee even though they may no longer be owned by the
bankrupt at the date of the bankruptcy. Accordingly, in some circumstances a transfer of property
may be void against the Trustee, which means that it is as if the transaction never occurred and
the property vests in the Trustee upon bankruptcy regardless of the transfer.
It also means that the time limits for undervalue transactions run further back than would
otherwise be the case because the starting point for counting backwards to determine whether
a transaction is potentially void against the trustee is the commencement date rather than the
date of the bankruptcy.
The Bankruptcy Act provides for a number of defences to protect those persons who have
acquired property from a debtor prior to bankruptcy, in the ordinary course of business, and
paid the prevailing market value for the property.
Where a creditor has accepted payment (or a transfer of property) in the period immediately
prior to the bankruptcy they may be vulnerable to having the money taken back by the Trustee
as a preferential payment (Section 122) – again a variety of periods apply of not more than 6
months prior to the presentation of the first Creditor’s Petition or the presentation of a Debtor’s
Petition where there was no Creditor’s Petition – see Table on page 88. The creditor can resist
such a claim by the Trustee by establishing that:
■■
The transfer or payment occurred in the ordinary course of business;
■■
For market value;
■■
Where the creditor did not know, or have reason to suspect, that the debtor could not pay
his debts as they fell due and that the payment (or transfer of property) would give the
creditor preference, priority or advantage over other creditors.
The requisite knowledge or suspicion of the debtor’s insolvency can be inferred from the
circumstances.
Where the creditor repays the money or property to the Trustee by way of recovery of a preferential
payment, the creditor can then lodge a proof of debt for the amount owing prior to the payment
or transfer being made.
Undervalue transactions
A transfer of money or property may be void against the trustee because the person who received
the money or property did not give adequate payment (or anything else of equal value) in return
(Section 120). A typical example is where a husband transfers his share of their jointly owned
property to his wife for a nominal amount like one dollar. The Trustee will request the wife to pay
the Trustee the actual market value of the husband’s half interest in the property or transfer back
the husband’s half interest to the Trustee. If the wife transfers back the husband’s half interest,
the trustee must pay the wife the one dollar she paid.
The circumstances in which a transaction may be void against the Trustee as an undervalue
transaction are as follows (subject to the exceptions which follow):
■■
■■
There is no consideration given for the transfer by the person who received it
(consideration usually means payment but may include other property or rights given in
return), or the consideration given was worth less than the market value of the property at
the relevant time. A common example is where a relative pays out the existing mortgage
and the house is transferred to them but they do not pay the bankrupt for the bankrupt’s
net equity in the home (that is the difference between the market value of the home and
the mortgage payout amount); and
The transaction took place in the five years prior to the commencement of the bankruptcy.
However, where the money or property was transferred to a person who was NOT a relative
or related entity of the bankrupt, then the transfer will not be void against the trustee where:
■■
It occurred more than 2 years prior to the commencement of the bankruptcy; and
■■
The bankrupt was solvent at the relevant time.
Where the money or property was transferred to a person who was a relative or related entity of
the bankrupt, then the transfer will not be void against the trustee where:
■■
It occurred more than 4 years prior to the commencement of the bankruptcy; and
■■
The bankrupt was solvent at the relevant time.
A transaction is not void against the trustee if is payment of tax due to the government or a
transfer made pursuant to a maintenance agreement or order (including assessments under the
Child Support Act).
There is a presumption of insolvency, which can only be rebutted by evidence, if the bankrupt
has not kept adequate accounts or records (or has since destroyed or lost them).
Some things are defined by the Act as having no value as consideration for a transfer, for example:
■■
Love and affection;
■■
Being a relative;
■■
A promise to marry;
■■
A promise to allow the bankrupt to live in the property by a spouse or de facto partner, or
ex-spouse or de facto partner.
Summary – undervalue transactions
Property (or funds) given away for no consideration, or less than market value, in the 5 years
before bankruptcy unless:
■■
Where a relative or related entity –
–– It was more than 4 years ago AND
–– The now bankrupt person was then solvent
■■
Where not relative or related entity–– It was more than 2 years ago AND
–– The now bankrupt person was then solvent.
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Transfers to defeat creditors
Transfers of property or payments of money can also be void against the Trustee where it is
found that the transaction was intended to defeat creditors (Section 121). The test is whether
the transferor’s main purpose in making the transfer was:
i.
To prevent the transferred property from becoming divisible among his or her creditors;
or
ii. To hinder or delay the process of making property available for division among his or her
creditors.
There is no time limit to how far back the Trustee can go to challenge a transaction of this nature.
However, it can be assumed that the further back the transaction, the more difficult it will be
for the Trustee to produce adequate evidence to challenge the transaction.
This is a subjective test in so far as it is the bankrupt’s main purpose in making the transfer that
matters. However, the Act also provides that the main purpose will be taken to be one or both
of (i) or (ii) above if it can reasonably be inferred from all the circumstances that, at the time of
the transfer, the transferor was, or was about to become, insolvent. Other evidence can also be
used to demonstrate the main purpose (it does not have to be imminent insolvency).
There is a presumption of insolvency, which can only be rebutted by evidence, if the bankrupt
has not kept adequate accounts or records (or has since destroyed or lost them).
A transaction will not be void against the Trustee if consideration of at least market value has
been given AND the person who received the money or property did not know, or could not
have reasonably inferred, that the bankrupt was trying to defeat his or her creditors, or was
about to become insolvent.
A transaction is not void against the Trustee if it is payment of tax due to the government or a
transfer made pursuant to a maintenance agreement or order (including assessments under the
Child Support Act).
Summary – transfers to defeat creditors
Main purpose in making the transfer was:
i. To prevent the transferred property from becoming divisible among his or her creditors; or
ii. To hinder or delay the process of making property available for division among his or her
creditors.
There is no time limit – Trustee can go back a long way in time.
It can be assumed to meet the test if it can reasonably be inferred from all the circumstances
that, at the time of the transfer, the transferor was, or was about to become, insolvent.
Other evidence of intention can also be used.
How far back can the trustee look to claw back property for the bankrupt’s estate?
Circumstances of
bankruptcy
Commencement
of bankruptcy
& relation back
period for divisible
property (s115)
Period for
preferential
payments (s122)
Period for
repaying
proceeds of
creditor’s
execution (118)
Undervalued
transactions
(s120)
Transfers
to defeat
creditors
(s121)
Creditor’s petition
First act of
6 months prior to
6 months
5 years
No time limit
bankruptcy in the 6
the presentation
prior to the
before the
months prior to the
of the Creditor’s
presentation of
commencement
Creditor’s Petition
Petition
the Creditor’s
of the
Petition
bankruptcy
(usually the expiry of
a Bankruptcy Notice)
and ending on
the date of the
bankruptcy
Debtor’s Petition
Time specified by
Time specified by
6 months
accepted by the Official
the court as the
the court as the
prior to the
Receiver under a
commencement of
commencement
presentation
direction of the court
the bankruptcy
of the bankruptcy
of the Debtor’s
Petition
But not if
More than
4 years ago
Debtor’s Petition
Time of the
Time of the
6 months
where the
presented when at least
commission of
commission of
prior to the
transferee is
one Creditor’s Petition
the earliest act of
the earliest act
presentation
a relative or
was pending against
bankruptcy on which
of bankruptcy
of the Debtor’s
other related
the petitioning debtor
any of the Creditor’s
on which any of
Petition
entity and the
(whether alone, as a
Petitions were based
the Creditor’s
bankrupt was
member of a partnership
(usually the expiry of
Petitions was
then solvent
or as a joint debtor), and
a bankruptcy notice)
based
Or
Receiver without a
direction from the court
Debtor’s Petition
Time of commission
6 months before
6 months
presented when no
of the earliest act of
the presentation
prior to the
Creditor’s Petitions were
bankruptcy within the
of the Debtor’s
presentation
pending but the debtor
6 months before the
Petition
of the Debtor’s
had committed at least
Debtor’s Petition was
one act of bankruptcy in
presented
Petition
More than
2 years ago
where the
transferee was
not a relative
or other related
the past 6 months, and
entity and the
bankrupt was
Receiver without a
then solvent
Debtor’s Petition
Time of presentation
6 months before
6 months
presented when no
of the petition
the presentation
prior to the
creditor’s petitions were
of the Debtor’s
presentation
pending and the debtor
Petition
of the Debtor’s
had not committed any
Petition
act of bankruptcy in
the past 6 months, and
Receiver without a
Composition or
First act of
arrangement under Part
bankruptcy in the 6
IV Division 6 or Part X
months preceding
the application for the
sequestration order
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How long does the trustee have to make a claim on property?
As the following table shows the trustee has a maximum of 20 years in which to make a claim
against property owned at the time of the bankruptcy, transferred prior to the bankruptcy in
the circumstances referred to above, or acquired during the period of bankruptcy. When the
Trustee does not make a claim within the period below (or extend the period by written notice
in cases where this is provided for), then the property revests in the bankrupt or any other 3rd
party claiming through the bankrupt – for example the beneficiary under a will).
Circumstances
Time limit
Actions to recover property from other parties allegedly
transferred by the bankrupt for less than market value
6 years from the date of the
bankruptcy
Actions to recover property from other parties allegedly
transferred to defeat creditors
unlimited
Actions to recover preferential payments
6 years from the date of the
bankruptcy
In all other cases
20 years
When does property re-vest in the bankrupt?
Part 4:
For property disclosed in the bankrupt's
statement of affairs
6 years after discharge unless the trustee extends
the period in writing prior to the end of this period
for up to 3 years or 3 years from a specified event
(there is no limit to the number of extensions)
For property acquired after bankruptcy
that is disclosed to the trustee in writing
within 14 days of the bankrupt becoming
aware of it and prior to discharge
6 years after discharge unless the trustee extends
the period in writing prior to the end of this period
for up to 3 years or 3 years from a specified event
(there is no limit to the number of extensions)
For property acquired after bankruptcy
and not disclosed until after discharge but
within 14 days of the bankrupt becoming
aware of it
6 years from disclosure to the trustee unless the
trustee extends the period in writing prior to the
end of this period for up to 3 years or 3 years from
a specified event (there is no limit to the number
of extensions)
Income contributions – What happens to money I earn
while bankrupt?
Summary
There are two ways in which the Trustee can obtain funds for the bankrupt estate:
■■
■■
Realising divisible property as covered in Part 3, and
Income contributions from the bankrupt between the date of the bankruptcy and
discharge.
In order to be required to pay contributions the bankrupt must earn above a certain threshold
amount. This amount varies according to the number of dependents maintained by the bankrupt.
In brief, the bankrupt must pay the Trustee half of any money earned above the relevant threshold.
The amount of the relevant income thresholds are given in this Chapter as at the date of
publication. For current amounts refer to www.afsa.gov.au and select Indexed Amounts in
Quick Links.
The hard part is working out what might be counted as income, particularly if the bankrupt
has complicated personal and working arrangements. For example, the use of a car or house
could be deemed income for the purpose of calculating income contributions. The Trustee can
investigate the bankrupt’s affairs and adjust the income used to calculate income contributions
if the Trustee has reason to believe that the bankrupt is not fully declaring his or her income.
The bankrupt has the right to apply for a review of that decision.
It is very important that the bankrupt declares his or her income to the Trustee and keeps the
Trustee informed of any significant changes in income throughout the bankruptcy. Failure to do
so is a breach of the Bankruptcy Act and can lead to significant arrears when the amount of the
income contributions is adjusted later (when proof of actual income for the period is supplied
or investigation uncovers additional income).
If the bankrupt fails to make assessed income contributions, the Trustee has a number of
options for collecting arrears, including objecting to the bankrupt’s discharge from bankruptcy,
garnisheeing the bankrupt’s wages or bank account, employing the supervised account regime
under the Bankruptcy Act, or obtaining a court judgment and enforcing it in the usual way.
Income contributions
A bankrupt is required to pay contributions towards the bankrupt estate if they earn income
above the relevant threshold amount during bankruptcy. The amount required to be paid will
be assessed from the income earned in this period, but the liability to pay the assessed amount
continues beyond the period of the bankruptcy until the assessed amount has been paid in full.
➻➻ Note: Often your new client will ask you “How much income can I earn when I go bankrupt,
because I have heard that I will not be allowed to earn more than a certain amount?” This is a
misconception. There is no limit to the amount a bankrupt can earn – the required contributions
simply increase as the income increases.
In short, the amount payable is 50% of the amount of after tax income earned above the relevant
threshold, in any given year of bankruptcy (or a proportional amount for any lesser period). For
example if a person’s after tax income is $72,001.21 and the applicable threshold is $60,001.21,
the contribution payable would be $6,000 for that year, being 50% of the $12,000 difference
between the two amounts.”
The assessment of the bankrupt’s liability for income contributions is done on a yearly basis,
which is known as a Contribution Assessment Period (“CAP”). Accordingly there will be three
CAPS in the normal three year period of bankruptcy.
The detail, however, such as what is counted as income, or which threshold applies is much
more complex.
➻➻ Note: for more information on any aspect of income contributions see also Official Trustee
Practice Statement 1 Income Contributions Issued I 7 February 2008, updated August 2013
available at www.afsa.gov.au. This area can be complicated for some bankrupts with complex
arrangements and there is no room to cover all the possible contingencies in this Kit.
Do I really need to work this out for my clients?
While it is not necessary to perform an exact calculation of your client’s likely contributions, it
is wise to at least try to approximate whether your client will need to pay contributions based
on their current and likely income, and if so how much, as part of the decision-making process.
It is clearly an important potential consequence your client needs to consider. At the very least
a pre-assessment of contributions can prevent nasty shocks and complaints against your service
when the contributions are later assessed by the Trustee. It may also assist clients who have a
moderate to high income to reconsider their other options when they have been reticent to do so.
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Case example
A client had been left exposed to huge joint debts by the actions of her ex partner who has now
fled the country. She has a high income ($90,000) and a salary sacrifice arrangement ($15,000)
in place. She is unable to meet her debts as they fall due and has insufficient funds after meeting
living costs, the cost of educating her children, rent and her car loan to make any significant
contribution to her liabilities. She needs the vehicle to be able to work. The equity on the car loan
is under $4000 and without her other debts she can just maintain the car loan.
The client was advised of the contribution rule and the impact of grossing up the salary sacrifice
on the assessable income for the purposes of the threshold. She could then check whether
she will be in a position to continue to pay the car loan and her other expenses. She can also
determine how much she is likely to pay in total over the period of her bankruptcy in order to more
accurately compare this to any other available arrangement.
The relevant income threshold
The base income threshold amount (BITA) per annum is the applicable threshold for a person
with no dependents. As at March 2014 the relevant threshold for a bankrupt with no dependents
was $$52,543.40 (for the current amount for both the BITA and the AITA see www.afsa.gov.
au and select indexed amounts in Quick Links).
If a bankrupt has dependents, then the actual income threshold amount (AITA) is defined as
(Section 139K):
a. No dependents, then the BITA
b. One dependant, then the BITA plus 18%
c. Two dependants then the BITA plus 27%; or
d. Three dependants then the BITA plus 32%; or
e. Four dependants then the BITA plus 34%; or
f. Where more than 4 dependants, then the BITA plus 36%.
As at March 2014 the applicable AITA for each category was:
No. of dependents
Amount
0
$52,543.40
1
$62,001.21
2
$66,730.12
3
$69,357.29
4
$70,408.16
More than 4
$71,459.02
All threshold amounts are stated per annum. If a contribution assessment period of less than 12
months applies, then the threshold applies pro rata. These amounts are indexed twice yearly in
March and September so it is important to go to www.afsa.gov.au to obtain the current amounts.
What is counted as income?
Income is defined very broadly and includes anything that would be ordinarily defined as income
(Section 139L). Clearly this would include any wage or salary payments or interest earned on
savings. Centrelink income also counts including the Centrelink pension bonus for those who
have registered and worked past the retirement age. In practice the various retirement payments
that are available from Centrelink, including lump sums, would not usually take the bankrupt’s
income over the threshold amounts.
It also specifically includes the following, whether they would come within the ordinary meaning
of income or not (Section 139L):
■■
Annuities or pensions paid to the bankrupt from a provident, benefit, superannuation,
retirement, approved deposit fund or RSA
■■
Termination payments/redundancies from employers
■■
Annuities or pensions paid under a policy of life insurance or endowment insurance
■■
■■
■■
■■
An amount received by the bankrupt as a beneficiary of a trust as long as it comes from
the income of the trust (capital payments would be claimed as assets by the Trustee)
The value of a benefit given to the bankrupt by any person (as defined by the Fringe
Benefits Tax Assessment Act 1986 and in accordance with its rules in relation to exempt
benefits as modified by Regulation 6.12), for example:
–– Provision by an employer of a fully maintained motor vehicle and/or computer which
can be used for private use. (Note: Living away from home and travel allowances are
not counted where it can be shown that the amount paid is fully expended for the
purpose it is paid for).
–– A significant benefit provided by a friend or family member (or any other person) such
as substantial regular use of a vehicle or free accommodation.
The value of a loan made to the bankrupt by an associated entity, even if the bankrupt
simply directs the payment of the proceeds and does not receive the proceeds
The value of any net benefit paid to a third party as a result of work performed by the
bankrupt (that is where instead of paying the bankrupt for a job done for the person
by the bankrupt , the person pays a relative or friend of the bankrupt as directed by the
bankrupt)
■■
Royalties from Intellectual Property Rights. However, an advance would be an asset.
■■
Payments received from an income protection insurance policy.
■■
Instalments drawn from a reverse mortgage may be classed as income in some
circumstances.
➻➻ Note: Where the bankrupt has a salary sacrifice arrangement in place, the grossed up value of
the salary sacrifice is used for the income contribution calculation (not the net amount received “in
the hand” by the employee).
The following are not income for the purposes of calculating income contributions regardless
of whether they might ordinarily be defined as income (Section 139K):
■■
Child Support or any other form of maintenance paid for the benefit of children of
whom the bankrupt has custody up to the amount that would be payable under the Child
Support (Assessment) Act 1989.
■■
A payment to or for the benefit of the bankrupt under a relevant legal aid scheme.
■■
Super contributions paid by the employer.
➻➻ Note: Where there is partial custody/shared care arrangement, the trustee will determine these
on a “case by case” basis.
92
An amount will also still be included as income if an amount is deducted from it, or applied to
something else, by law (such as the repayment of a repayable government assistance payment), if
it is reinvested, accumulated or capitalised, or paid to another person or entity at the direction
of the bankrupt (Section 139M).
The income established applying the above rules is then (Section 139N):
1. Reduced by any income tax paid or payable including the Medicare Levy and special
levies such as the Flood Levy, in respect of that income.
2. Reduced by any Child Support payable
3. Increased by any relevant tax refund received during the CAP.
The assessed income will not be reduced by any income tax debt that is provable in the bankruptcy.
Tax refunds for years that ended prior to the bankruptcy are not counted as income, but vest in
the Trustee as property of the bankrupt estate. Tax refunds for income pertaining to a year that
started prior to the bankruptcy and ended after the bankruptcy are apportioned on a time basis
with the percentage pertaining to the period prior to bankruptcy vesting in the Trustee and the
percentage pertaining to the period after the date of the bankruptcy counting as income (See
also Tax and bankruptcy in Part 1 of this Chapter).
Where payments are made for the maintenance of children under any arrangement other than
an assessment under the Child Support (Assessment) Act 1989 (such as a maintenance order or
agreement under the Family Law Act 1975), then the maximum amount that can be deducted
is the amount of the assessment that would be made under the Child Support (Assessment) Act
1989. Payments of spousal maintenance to ex-spouses (including de facto spouses) do not count
as a deduction whether payable pursuant to a court order or not. They are also counted as income
if the bankrupt is the recipient, rather than the payer.
At the end of each CAP, a contributing bankrupt is required to complete an income questionnaire
disclosing details of income earned from all sources during the past 12 months and includes a
question for interest received. It would usually only be in the case of a very high income earner
that the Trustee would take the time to investigate whether the bankrupt had earned any interest
on their accumulated savings.
Who can be counted as dependents?
Dependents include anyone who:
■■
Lives (“resides”) with the bankrupt; and
■■
Is partially or fully dependent on the bankrupt for economic support; and
■■
Earns less than the amount prescribed in the Regulations – as at June 2014 the amount
was $3,363 (to check the most current amount go to the AFSA website www.afsa.gov.au
and select Indexed Amounts in Quick Links).
The residential qualification in practice means “ordinarily resides” with the bankrupt and thus
includes children who attend boarding schools or are boarding with families Monday to Thursday
nights in country areas. University students who live away from home whilst partly dependant on
the parents, often receive an income or Centrelink payment well in excess of the above threshold
amount and accordingly cannot be regarded as a dependant for income contribution purposes.
What period is income assessed from?
A person’s bankruptcy is divided into contribution assessment periods (CAPs) of twelve months
(or less if the bankrupt is discharged or the bankruptcy annulled within a CAP) (Section 139K).
The first CAP commences when the person becomes a bankrupt (the date their Debtor’s Petition
was accepted or a sequestration order was made against them).
The first CAP ends 12 months later and the next CAP begins on the anniversary of the
commencement of the first and so on until the bankrupt has been discharged or the bankruptcy
annulled. Whilst the Act does not specify when the assessed income contribution amount is to
be paid, the Trustee in conjunction with the bankrupt, decide the frequency of the payments.
Generally, the contribution payments will align with the bankrupt’s paydays – weekly, fortnightly
or monthly.
How is the contribution calculated?
The income contribution is payable if the income likely to be earned as assessed by the Trustee is
greater than the Actual Income Threshold Amount (AITA) applicable to the bankrupt (Section
139P). If the assessed income is less than the applicable AITA, then no contribution is compulsorily
payable, but the bankrupt is entitled to make voluntary contributions if he or she chooses to do so.
The formula for calculating the contribution the bankrupt is liable to pay is simple (once you
have identified what income counts and valued benefits etc which is not always simple) and
contained in Section 139S
Assessed income – Actual income threshold amount
2
Assessed income means the amount assessed by the Trustee to be the after-tax income that the
bankrupt is likely to derive, or derived, during the contribution assessment period in accordance
with the rules above.
Actual income threshold amount means the actual income threshold amount (AITA) assessed
by the Trustee to be applicable in relation to the bankrupt when the assessment is made.
The Trustee must make an assessment as soon as practicable after the commencement of a CAP
of (Section 139W):
■■
The income the bankrupt is likely to derive in the relevant CAP; and
■■
The applicable AITA; and
■■
The contribution payable in accordance with the above formula.
The bankrupt is obliged by the Act to provide documents as proof of income to the Trustee
(Section 139U) within 21 days of the end of a CAP. In practice the bankrupt will be asked
to complete a form indicating the income received in the previous period (where there was
one) and the estimated income for the current CAP, and attaching the required evidence. The
Trustee also has broad powers to request more evidence (Section 139V), take into account other
information obtained from sources other than the bankrupt (Section 139X), and to assume
reasonable remuneration for an activity undertaken by a bankrupt even if the bankrupt claims
they are not being paid (139Y & Z). Generally, the assessment for the first CAP is based on the
information in the statement of affairs.
When income is assessed, salary sacrifices, fringe benefits and benefits obtained from other
parties (not limited to employers) are counted at the grossed up rate.
94
The contribution can be reassessed if the bankrupt’s situation changes in certain material ways
(Section 139W). Also, at the end of each CAP the Trustee will compare the estimated projected
income figure against the actual income for the CAP, and do a re-assessment where there is a
significant variation. If the actual income is greater, the amount payable under the re-assessment
will be greater than the original assessed amount and the difference between the two amounts
will be added to the next CAP.
A bankrupt can also apply to the Trustee for a higher BITA to be used where the imposition
of the usual threshold will result in hardship for a variety of defined reasons (Section 139 T).
Should the bankrupt disagree with any aspect of the Trustee’s assessment (including the Trustee’s
response to a hardship application), then the bankrupt can apply to the Inspector-General
for a review of the decision (Section 139ZA). Where the bankrupt is dissatisfied with the
Inspector-General’s review of, or refusal to review, an assessment, an application can be made
to the Administrative Appeals Tribunal (Section 139ZF). More information about applying for
the threshold to be increased due to hardship is included in Chapter 8 of this Toolkit.
The bankrupt should keep the Trustee informed of any fluctuations in income throughout the
year (CAP). This is because:
■■
■■
■■
The bankrupt is obliged to do so (Section 77);
If the bankrupt’s income increases, the contribution will increase and the bankrupt may
have difficulty paying both the contribution for the following period at the same time as
the unpaid balance from the previous period;
If the bankrupt’s income decreases, they will not be paid back any excess contributions
paid – these can only be applied as a credit to a future year’s assessment. This means that
if there is no future period in which a contribution is payable the bankrupt will never
recover these amounts (Section 139ZH).
Contributions for any relevant CAP continue to be payable, even after discharge from bankruptcy
(Section 139R). There is also no time limit on the Trustee’s right to make a fresh assessment
relating to a previous CAP if fresh evidence comes to light.
Enforcement of unpaid income contributions
The Trustee has wide powers to enforce payment of contributions including garnisheeing of
wages or bank accounts under the Act during bankruptcy, without the need to obtain a court
judgment. Also, the Trustee can take enforcement action in court after discharge from bankruptcy
to collect unpaid contributions.
Failure to pay contributions is also grounds for the Trustee to object to the bankrupt’s discharge
from bankruptcy (Section 149D) and is quite often used by Trustees especially with high income
earners. Whilst not stated in the Act, the Trustee will usually withdraw the objection to discharge
upon receipt of the arrears if there are no other grounds for an objection. Where the bankrupt is
not discharged, then the requirement to pay income contributions continues, increasing the total
amount payable. The Trustee will warn the bankrupt prior to the expected date of discharge, of
the consequences of having arrears of income contributions immediately prior to the date the
bankrupt would otherwise be due to be discharged.
In any situation where the bankrupt has repaid (by contributions and/or the realisation of
assets) more than the amount of the debt plus the costs of administering the estate (legal costs,
trustee remuneration & expenses) then the bankruptcy can be annulled by the Trustee and no
court application is required.
More information is included in Chapter 8 of this Toolkit about the Trustee’s powers in relation
to assessing income and options in relation unpaid contributions.
Part 5:
Other consequences of bankruptcy – how else will it
affect my life?
Summary
There are other consequences, and potential consequences, of bankruptcy. Whether these
other consequences are relevant and how badly they affect a particular bankrupt will vary
considerably from client to client.
All bankruptcies are included on the National Personal Insolvency Index (NPII – a register which
can be searched by anyone for a fee) and on the person’s credit report.
Other consequences which may potentially impact on bankrupts include:
■■
Restrictions on employment in some roles, trades and professions
■■
Prohibition on being a director of a company
■■
Problems with getting credit, insurance, rental property, telecommunications connections
and utilities
■■
Restrictions on travel outside Australia
■■
Feelings of shame or personal failure
The bankrupt cannot initiate or defend legal proceedings without the involvement of the Trustee
(because the right to do so has vested in the Trustee along with other property) except in relation
to personal injury or wrong done to him or herself (the bankrupt), his or her spouse or de facto
partner or a member of his or her family, or the death of his or her (the bankrupt’s) spouse, de
facto partner of member of his or her family.
Employment
Generally speaking bankruptcy does not prevent your client from working. However, if your
client is engaged in particular trades or professions there may be certain restrictions imposed
by the relevant professional association or licensing authority. Your client should contact their
professional association or licensing authority to confirm whether there is any effect on their
membership or ability to practice a particular trade. A list of some trades/professions where
restrictions may apply is available in the Information for Debtors on bankruptcy section at
https://www.afsa.gov.au/debtors/bankruptcy/bankruptcy-overview/trades-or-professionswhere-employment-restrictions-may-apply.
It is important to note that this is not a comprehensive listing and your client is strongly encouraged
to contact the relevant licensing authority or professional body to obtain further information
about their own particular circumstances.
A bankrupt cannot hold a role defined as key personnel under the Aged Care Act 1997 – this
includes people in charge of nursing staff.
In some cases it is possible to apply for permission to continue (or to show cause to the relevant
licensing authority) to continue to work in the particular trade or profession. It is better to take
proactive action to seek permission where relevant rather than compound the problem with
concealment or dishonesty. In some cases the client may reassess their options as result of the
potential impact on their employment.
A bankrupt’s employer will not be notified of their bankruptcy in the usual course of events.
However, bankruptcies are public information and the employer may become aware of it by
other means.
96
An employer may become aware of an employee’s bankruptcy if the bankrupt fails to pay assessed
income contributions and becomes subject to a garnishee as a result (See Part 4 of this Chapter).
The paymaster (and therefore the employer) will also become aware of the bankruptcy if there
is a garnishee in place that needs to be stopped upon the client becoming bankrupt.
Prohibition on being a director of a company
A person is automatically disqualified from managing a corporation if they are an undischarged
bankrupt or they have entered a Personal Insolvency Agreement under Part X of the Bankruptcy
Act (Corporations Act 2001, Section 206B). This does not apply to a person proposing or entering
a Debt Agreement. Managing a corporation includes not only being a director, alternate director
or secretary (cessation of these roles is automatic upon bankruptcy) but also actively participating
in the management of the corporation in any other way including (Corporations Act 2001, 206A):
■■
■■
■■
Participating in making decisions that affect the whole, or a substantial part of the
business of the corporation;
Exercising the capacity to significantly affect the corporation’s financial standing;
Communicating instructions or wishes to the directors of the corporation knowing that
the directors are accustomed to act in accordance with those instructions or wishes or
intending them to so act (there is an exception for advice given in the proper performance
of functions attaching to the person’s professional capacity, for example accountant or
solicitor).
When a person ceases to be a Director, alternate Director or Secretary of a corporation as a result
of bankruptcy the following needs to occur:
■■
■■
■■
The bankrupt person must inform the fellow directors that he or she has ceased to be a
Director;
The bankrupt must lodge a Form 296 Notice of disqualification from managing
corporations with ASIC; and
The remaining directors should complete and lodge a Form 484 Change to company
details with ASIC.
More information and these forms are available on the ASIC website (www.asic.gov.au). Select
the For Companies tab on the home page and choose Insolvency and Information for Directors.
Scroll down to Bankruptcy and personal insolvency agreements.
A person who has been disqualified from managing a corporation as a result of insolvency can apply
to the Federal Court for permission to manage corporations (generally); a class of corporations;
or a particular corporation. ASIC must be notified by a prescribed form at least 21 days prior
to the application being made to give the regulator the opportunity to file an appearance if it
has an interest in the matter.
In making a decision the court will have regard to the following:
■■
■■
■■
■■
■■
The onus is on the applicant to convince the court to make the order;
The provision is intended to protect the public not punish the offender; however hardship
on the bankrupt caused by the prohibition is anticipated and will not by itself be a reason
for granting leave;
The prohibition is supposed to have some deterrent effect;
The prohibition is supposed to deter others from abusing the corporate structure to the
detriment of shareholders, investors and others dealing with the company;
The court will consider the reason the person has ended up disqualified, the role they will
play in any relevant corporation, and any consequential risks to shareholders, creditors,
employees and the public.
Example: Carey, in the matter of Carey [2011] FCA 235 (17 March 2011)
A woman who was bankrupt applied to the court for permission to be a director of a not-forprofit health advocacy organisation. She had become bankrupt after she had suffered severe
complications from surgery and had unsuccessfully sued her surgeon, ending up with an
enormous legal costs order against her that she could not possibly pay. She was successful
in her application. In granting her permission to be a director of the organisation the court
considered the reason she became bankrupt, the fact that she would not be paid for the role, the
fact that she would have little involvement in the organisation’s finances and that she had been
sought because of her extensive experience as an advocate on health issues (as opposed to
management or financial management skills).
However, this case is probably more the exception than the rule due to the somewhat unique
circumstances. In most other cases, the courts have been reluctant to grant approval to an
undischarged bankrupt to be a director, especially where the bankrupt owes a significant amount
to their creditors.
A person can become a Director again once they are discharged from bankruptcy. However, they
will need to be reappointed by the Company in accordance with its Constitution and another
Form 484 Change to company details lodged with ASIC.
ASIC receives data from AFSA about bankruptcy activity and will be alerted to your client’s
bankruptcy (or Personal Insolvency Agreement). They will also publish your client’s cessation
as a director, alternate director, or secretary on ASIC’s publicly available database.
Travel restrictions
A bankrupt is not permitted to leave Australia (or even prepare to leave Australia) without
the written permission of their Trustee (Section 272(C)). To do so is an offence potentially
punishable by imprisonment.
A bankrupt is required to hand over his or her passport “forthwith” after becoming a bankrupt
(Section 77). In reality, the Trustee will often dispense with this requirement, depending on the
circumstances of the bankrupt. If the client is considered a flight risk – that is someone who
has both the means and the motivation to leave the country – they may be placed on a Ports
Watch List regardless of whether the Trustee takes the person’s passport. In order to ensure a
conviction for leaving Australia without the Trustee’s written permission, the bankrupt must
have actually boarded the aircraft. This means that the bankrupt would be allowed to board the
plane and then be escorted off (no doubt to their embarrassment). This would be very unlikely
for clients who have few assets.
It is also an offence (in fact a more serious offence) to attempt to leave Australia with the intent
to defeat or delay payment to creditors during bankruptcy and within the 6 months before the
presentation of a petition (Section 272). Simply having left Australia in the 6 months prior to
bankruptcy will not be sufficient to be an offence – there must be some evidence of the intent
to defeat or delay creditors.
Bankrupts will usually be given permission to travel provided that:
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It is necessary to earning their income; OR
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They have compassionate reasons; AND
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It will not interfere with the administration of the estate; AND
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He or she is not considered a flight risk – that is likely to never return.
Permission must be sought at least 14 days in advance of Travel (it is advisable to apply for
permission well before this to give adequate time to make travel arrangements after getting an
answer). See Chapter 8 for how to apply.
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The Trustee may impose conditions when providing consent to travel. Conditions may include
such things as:
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Returning to Australia by a particular date; and/or
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Paying up any income contributions due in the period of travel in advance.
The bankrupt should carry a copy of the trustee’s written consent with them when leaving the
country just in case they have been placed on an alert list with the immigration officials and the
Federal Police. While this is unlikely for consumer bankrupts with few assets, it is wise to carry
a copy of the Trustee’s consent just in case.
If the bankrupt fails to abide by any condition imposed by the Trustee, he or she can be charged
with a breach of Section 272 (3). The following are also grounds for the Trustee to object to the
bankrupt’s discharge:
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Leaving Australia without the Trustee’s permission;
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Failure to abide by a trustee’s condition(s);
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Failure to return to Australia at the time specified in the request for permission;
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Failure to return to Australia upon the request of the Trustee.
This could result in the bankruptcy being extended from 3 years to 5 or 8 years depending on
the circumstances.
By comparison, people who enter Debt Agreements or Personal Insolvency Agreements do not
need to seek permission to travel.
The obligation to seek permission to travel ceases when the bankrupt is discharged or the
bankruptcy annulled.
Public record
All bankruptcies are recorded on the National Personal Insolvency Index (“NPII”) permanently.
This is a publicly available register of all insolvency proceedings in Australia including not only
bankruptcies but also Creditor’s Petitions, Debt Agreements and Personal Insolvency Agreements.
Information recorded on the NPII includes:
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Name and other personal information that identifies a debtor or bankrupt (name, date of
birth, aliases, address, occupation to the extent these are known);
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The type of administration or proceeding;
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The Trustee, administrator or controlling trustee of the administration or proceeding;
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■■
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The petitioning creditor and/or creditor’s solicitor (where a Creditor’s Petition is
recorded);
The date an administration or proceeding commenced; and
The current status of the administration or proceeding – for example: whether a person
has been discharged from bankruptcy.
Tip ►
Clients who are concerned for their own physical safety
If your client fears that his or her safety may be compromised by the inclusion of their address
on the NPII they can apply in writing to the Inspector General to suppress the address only
(the name, date of birth and details of the insolvency process will remain). Evidence such as a
copy of any court orders or reports from police, a social worker, a medical practitioner or other
relevant professional should be supplied along with the request. Where your client is lodging
a Debtor’s Petition, then the request should be lodged at the same time to avoid unnecessary
publication.
A decision will usually be made within 1 day and the response supplied to the applicant in
writing. Review by the Administrative Appeals Tribunal is available if the client believes the
request has been unreasonably refused.
Records are only removed from the NPII in the following circumstances:
■■
■■
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When the record is ordered to be removed by the Federal Court or Federal Magistrates
Court, for example, because a sequestration order has been set aside;
When it is has been established that the original process was a forgery (Debtor’s Petition
lodged by someone other than the named debtor for example);
There was an administrative error in processing and the information should never have
been recorded.
Where a bankruptcy has been annulled, the bankruptcy will not be removed from the record
but the record will be updated to show that it has been annulled.
The NPII can be searched by anyone for a fee. The search is generally done via an information
broker. AFSA provides the names of some available services on its website www.afsa.gov.au
currently on the right hand side of the home page under the Quick Links heading Bankruptcy
Searches (NPII)). A standard search cost about $26 in December 2012.
Obtaining credit/loans
It is an offence for a bankrupt person to obtain a loan or other form of credit (including hire
purchase agreements and leases) of over a prescribed amount without disclosing that he or she
is a bankrupt (currently $5,333 as at June 2014, see www.afsa.gov.au for Indexed Amounts). The
same applies to procuring goods or services on credit or paying by cheque. This is an offence
attracting a maximum 3 years imprisonment and is also a potential reason for the Trustee to
object to the person’s discharge from bankruptcy. This does not mean that the person cannot
obtain or request the credit, only that they must disclose their bankrupt status, which may in
turn lead to credit being refused.
Extracts from the NPII are also given electronically to credit reporting agencies such as Veda
Advantage. From March 2014 bankruptcies will remain on the person’s credit report for whatever
is the longer of 5 years from the date of the bankruptcy, or 2 years from discharge or annulment.
This would be 5 years in the majority of cases but could also be 7 or even 10 years if the bankruptcy
is extended by objection to discharge.
The credit report listing will make it more difficult to obtain credit. In some cases clients may
be able to obtain secured credit, especially at a higher price than the going rate, or expensive
fringe credit such as pay day loans. Of course repaying higher priced credit can be considerably
more difficult than repaying mainstream credit and loans incurred after bankruptcy will not
be provable, placing the client at risk of enforcement activity commencing all over again (and
possibly a subsequent bankruptcy).
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Obtaining insurance
People who are or have been bankrupt may experience difficulties obtaining some types of
insurance. A recent informal survey of members by the Insurance Council of Australia revealed
the following about current underwriting policies:
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Generally, for home contents/building and motor vehicle policies, bankruptcy is not a
consideration, although one insurer reported declining insurance cover where a person
was or had been bankrupt within the 10 years prior to application (clients of financial
counselling services also report such difficulties from time to time);
Bankruptcy may be a relevant consideration for deciding whether to provide consumer
credit insurance;
For business lines of insurance, whether the customer is or has been bankrupt would
generally be a significant underwriting factor;
As an undischarged bankrupt cannot be a director or officer of a corporation, he or she
would of course be unable to obtain Director’s & Officer’s cover. Even after bankruptcy,
the previous bankruptcy would remain an underwriting consideration for this type of
insurance;
Professional Indemnity and Management Liability Insurance may also be affected,
although higher premiums and restrictive conditions would be more likely than an
automatic decline of cover.
The decision of the insurer (whether to provide cover) will depend on the risk appetite of the
individual insurer and would be decided on a case by case basis. It may be that insurance cover
is declined altogether, but it is also possible that the person would get insurance but have to pay
higher premiums or be subject more restrictive terms such as exclusions and special conditions. The consequences would vary depending on:
■■
■■
■■
The type of insurance sought (for example, there may be very little impact on obtaining
public liability for a market stall holder);
The occupation of the person seeking business insurance (for example, a hair dresser
would possibly experience less difficulty than an accountant or financial planner); and
The cause of bankruptcy (bankruptcy following a divorce may not be seen as significant as
that which could be construed as due to business mismanagement). Insurers will vary in the degree to which they will be willing to look into all the above factors
and make a tailored decision.
Case study
Mr T was a builder. He found himself in financial difficulties and went bankrupt. Unable to
continue as a licensed builder, he found employment in teaching the skills he had formerly used
to make his living. When he was made redundant from that position he decided to set up a small
handyman service. Unfortunately he was unable to get public liability insurance because of the
bankruptcy, despite trying a number of insurers. Worse, one of the insurers told him they would
not insure him until 5 years after discharge!
Entering contracts (telecommunications, rental housing)
The bankruptcy listing on the client’s credit report can also affect their access to other services.
Clients report having trouble getting rental properties, getting mobile phone contracts and access
to services such a pay TV. This is even more problematic for clients who live alone and cannot
access services in the name of another member of the household. Sometimes relatives can assist,
but this is not always the case and many clients prefer to keep their bankrupt status confidential.
Clients without any history of rent arrears may not foresee any impact on their ability to obtain
a residential lease. It is important that you draw this possibility to their attention and get them to
think about strategies to deal with this. References from previous landlords may be of assistance,
but the degree of difficulty they will encounter will vary with the number of tenants competing
for available properties.
Immigration and sponsorship of migrants
Clients from outside Australia should check with the Department of Immigration & Border
Protection to determine whether bankruptcy will have any effect on their immigration status.
Sponsors of migrants have an obligation to notify the Department of Immigration & Border
Protection within 10 working days if they become bankrupt. Sponsors should contact both the
Department of Immigration and AFSA to determine the implications of bankruptcy in their
particular situation, including the impact on any funds held in an account by way of bond.
Court proceedings
Legal proceedings against your client
Generally speaking a creditor cannot enforce any remedy against the person or property of a
bankrupt in relation to a provable debt (Section 58). Further, a creditor can only commence
proceedings in relation to a provable debt, or take a fresh step in proceedings in relation to a
provable debt with the leave of the court on such terms as the court thinks fit (Section 58 (3)).
This does not affect a secured creditor’s right to enforce against property that is security for a
loan. So if a client defaults on their home mortgage, or car loan, the creditor can take action to
repossess and sell the secured property or vehicle according to the usual rules. Note that a lease,
mortgage, bill of sale, lien or charge cannot contain a clause which makes becoming bankrupt
(or committing an act of bankruptcy) alone sufficient to trigger a remedy, or modifications to
the rights of the parties to the contract. Such clauses are void by virtue of Sections 301 and 302
of the Bankruptcy Act (more on this is found in Chapter 8).
Enforcement action can also be taken in relation to a maintenance agreement or maintenance
order under the Family Law Act 1975 or Child Support (Assessment) Act 1989. Proceeds of crime
proceedings and orders are also unaffected by bankruptcy.
The court also has broad powers to stay proceedings or discharge orders relating to non-payment
of provable debts, including releasing debtors from custody (Section 60).
When contacted by creditors, your bankrupt client should inform the creditor that he or she is
bankrupt and give them the date of the bankruptcy and the bankruptcy number (this should
be on correspondence received from AFSA). Should your client be sued, or a fresh step taken
in proceedings, after the date of the bankruptcy, he or she should notify the plaintiff and the
Trustee, and provide copies of any court documents to the Trustee. Where the Trustee indicates
that he or she does not intend to defend proceedings, the client should also notify the court
in writing of the bankruptcy – providing documentary evidence of the date of the bankruptcy
and the bankruptcy number.
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Example
Ms Q was bankrupt. Despite this her main creditor persisted in pursuing a Statement of Claim
for $20,000 in the Local Court in her country town. The Statement of Claim was couched in very
colourful language and the plaintiff argued that the debt was not provable in bankruptcy because
it was due to fraud. An examination of the facts, however, revealed that the cause of action was
really damages for breach of contract.
Her Trustee indicated that he would not be defending the action and could not advise Ms Q what
she should do. She was worried about a judgment being entered against her based on the rather
slanderous allegations in the Statement of Claim.
Ms Q was advised to write a letter to the Registry to put before the court on the next occasion,
outlining s58(3) of the Bankruptcy Act which requires the plaintiff to obtain leave from the Federal
Circuit Court of Australia in order to take a further step in the proceedings. Ms Q was advised that
the Local Court put a permanent stay on the proceedings.
When your client is a joint debtor and the other co-borrower is not bankrupt, the client may be
joined to proceedings against the other debtor (receive a Statement of Claim or Summons or
other document initiating court proceedings). Again, the bankrupt should notify the Trustee
and forward the relevant court documents.
Where your client is being subject to proceedings alleging fraud, he or she should seek legal advice.
Where your client is being sued in relation to a contract entered into after bankruptcy, this
debt is not provable and the client will need to seek legal advice about any possible defence. It
is advisable to also discuss the matter with your Trustee.
Legal proceedings by your client
Any legal action commenced by a person who subsequently becomes a bankrupt is automatically
stayed until the Trustee makes an election in writing about whether to continue the proceedings
or not (Section 60). Your client generally cannot continue or commence court proceedings
during bankruptcy without the involvement of the Trustee. This is because the right to recover
any property or money owed to the bankrupt vests in the Trustee like any other property (Section
116(1)(b)).
However, there are exceptions (Section 60(4)) for proceedings in relation to:
■■
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Any personal injury or wrong done to the bankrupt, his or her spouse or de facto partner
or a member of his or her family
The death of the bankrupt’s spouse or de facto partners or of a member of his or her
family.
This means your client can commence or continue proceedings if it relates to one of the above
exceptions.
Personal injury or wrong has been defined by the courts as including any case where the damages
sought are for pain felt by the bankrupt in respect of ‘his mind, body or character’ or alternatively
‘injury to the person or feelings’ of the bankrupt. This means the bankrupt can continue legal
proceedings in his or her own name, and without the approval of the Trustee, for not only physical
injury, but injuries to reputation or character such as libel, slander or assault. Trespass has also
been held to be an exception where the only damage is personal annoyance and inconvenience.
On the other hand, any action which is based upon ‘direct pecuniary loss to property or the
estate of the bankrupt’, the right to sue passes to the Trustee. This would include any incidental
impact on the feelings or health of the bankrupt if that claim is only incidental to a claim related
to money or property. In such cases the bankrupt cannot continue the proceedings in his or her
own name – it is entirely the decision of the Trustee as to whether the proceedings are worth
pursuing for the benefit of the creditors given the time, effort and expense involved and the
likelihood of success.
The courts have also allowed bankrupts to continue with actions that have a direct impact on their
ability to earn an income by personal exertion (consistent with the protection of tools of trade).
This is not an exception under Section 60(4) or Section 116(2)(g) but instead a recognition
that certain types of rights are not property and do not vest in the Trustee under Section 116(1).
The bankrupt would therefore be permitted to continue an unfair dismissal action, or defend
an action which threatened an occupational licence. A commercial pilot’s licence, for example,
was held by the Federal Court not to be a property right, because it was personal to the licensee,
reflected the licensee’s fitness and qualifications only, and could not be transferred. This meant
that the bankrupt could continue with an appeal against conditions imposed upon his pilot’s
licence. On the other hand, a taxi licence or liquor license which could be sold for a market
value, would be considered a property right and any relevant court action would likely vest in the
Trustee. Similarly, any claim that related to earning an income from property rights (protecting
an investment for example) would also pass to the Trustee.
The cases also distinguish between the right to sue to recover “moneys which, by his personal effort,
he [the bankrupt] had earned”, which is protected, and the right to sue for damages for breach
of employment contract (money he might have earned had the contract not been terminated).
In the latter case, the action has been held to vest in the trustee, although in that particular case
the damages claim related to the period prior to bankruptcy. Logically it could be argued that
if the breach of contract occurred after the date of the bankruptcy, then the damages would
form income and the income assessment regime would apply rather than the damages forming
after-acquired property. There is no case law on this point and clients wishing to pursue a claim
for damages for breach of contract while bankrupt should get legal advice.
Legal proceedings commenced by a person who is, or subsequently becomes, bankrupt against
a life insurer or a superannuation fund trustee would also be caught by the stay provisions of
Section 60 of the Bankruptcy Act, and would therefore be subject to the consent of the Trustee
to prosecute. The only exception would be if the action was in respect of a personal injury or
wrong done to the bankrupt.
In practice many Trustees will consent to proceedings being issued or continued, particularly if
they are being conducted on a no win/no charge basis or if the adverse risks are being funded.
Accordingly, always seek the permission of the Trustee in bankruptcy in writing before issuing
or continuing with a court action against an insurer or superannuation fund. The client will
also need advice on whether the proceeds of such a claim will be protected in bankruptcy and
the implications of this.
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Examples
Cause of action/loss
Effect of bankruptcy
Physical injury as a result of car
accident, industrial accident or
other negligence
None – the bankrupt can start or continue proceedings
without the consent or involvement of the Trustee
Defamation or slander
None – The bankrupt can start or continue proceedings
without the consent or involvement of the Trustee unless
damages to business or property rights affected
Physical or mental injury as
a result of an assault or other
criminal act (including Victim’s
Compensation)
None – The bankrupt can start or continue proceedings
without the consent or involvement of the Trustee
Pain, suffering and inconvenience
as a result of harassment or
coercion under the Trade Practices
Act or ASIC Act
Arguably protected – get legal advice
Misleading or deceptive conduct or
unconscionable conduct
Likely to involve damages for loss of money or property
and therefore likely to vest in the Trustee – if in doubt,
seek legal advice
Breach of contract
Will usually vest in the Trustee
Negligence in professional service
such as financial advice or legal
advice
Likely to involve damages for loss of money or property
and therefore likely to vest in the Trustee
Unfair dismissal claim
Any claim to reinstatement does not vest in the Trustee
as the bankrupt is entitled to earn an income. The client
should get legal advice in relation to the status of any
money received by way of settlement (as to whether such
funds will vest in the Trustee or be counted as income for
contribution assessment purposes).
Administrative appeal against
cancellation or suspension of
occupational licence
Probably none – The bankrupt can start or continue
proceedings without the consent or involvement of the
Trustee. There could be doubt if the licence involves
property rights (e.g., can it be sold?) – get legal advice.
In any event it is preferable to inform the Trustee of any proceedings as any payout will need to
be disclosed to the Trustee (along with the reasons why it should be protected in bankruptcy
if that is the case).
Where the Trustee has been notified of the proceedings by another party (a party to the proceedings
other than the bankrupt), then he or she has 28 days within which to elect in writing to continue
the action on behalf of the bankrupt’s estate. Where he or she fails to do so within this time
period, then the Trustee is taken to have abandoned the action and the relevant party could apply
to the court to have the matter discontinued. As the right of action has vested in the Trustee,
the bankrupt personally cannot be subject of any costs orders in proceedings after the start of
the bankruptcy.
The right to continue legal action (or commence legal action) in relation to property rights vests
in the Trustee, like other property acquired before or during bankruptcy. It does not re-vest in the
bankrupt upon discharge. This means that the bankrupt cannot take legal action upon discharge,
even though the relevant limitation date for doing so may not have passed. This right remains
with the Trustee unless it is assigned for valuable consideration (in the same way a discharged
bankrupt can buy back the equity accumulated in their home or other property upon discharge if
it has not been sold during the bankruptcy). Even if the former bankrupt were able to successfully
take legal action (without objection by the Trustee or another party), any money or property
recovered would vest in the Trustee regardless of the bankrupt’s subsequent discharge. In some
cases, the Trustee will assign the right of action to the discharged bankrupt for a nominal sum
of say $5,000, plus a percentage of any successful net verdict amount.
Whether the client can take a dispute to EDR while bankrupt is covered in Chapter 8.
Cooperation with the Trustee
Bankrupts have wide-ranging obligations to co-operate with the Trustee. What this means in
practice will vary greatly depending on the nature of the bankruptcy and whether the debtor has
any assets, or has disposed of (or is suspected of disposing of ) assets in the period preceding the
bankruptcy. These obligations are covered in more detail in Chapter 8, but a client considering
bankruptcy should generally be aware that their Trustee will have considerable power to compel
him or her to co-operate if such assistance would be useful in administering the bankrupt estate.
Criminal penalties can sometimes apply. It is also advisable that the bankrupt co-operates to
minimise the chances that the bankruptcy will be extended (See Chapter 8 – Objections to
discharge).
When the bankrupt (and possibly his or her family) are living in their own home, or a caravan
or other asset that may be sold for the benefit of their creditors, they are likely to be asked to
leave at some point to allow a sale with vacant possession to take place. Bankrupts who have had
business dealings or property ownership arrangements will be expected to answer questions and
supply information and records to assist the Trustee to understand and deal with the estate for
the benefit of the creditors.
How long does it last?
Usually bankruptcy lasts 3 years and 1 day from the filing of the debtor’s statement of affairs, but
it can be extended to 5 years or 8 years in certain circumstances. The reasons that a bankruptcy
may be extended are covered in Chapter 8.
How will I feel about it in the morning?
Bankruptcy is a big step that has the potential to have a big impact on the client’s emotional
well-being. Some clients have little compunction about not paying some or all of their debts,
but may find the restrictions on their life, or the perceived attitude of others, more difficult to
deal with than they first anticipate. Others may experience no real practical consequence of
bankruptcy but suffer terrible feelings of failure and shame. For many there are both practical
and emotional consequences.
It is important that clients are given the space and time to consider the decision carefully. As this
is a very complex area, part of the financial counsellor’s task is try to identify what consequences
are relevant to a particular client’s circumstances so that they are not too overwhelmed with
information to comprehend the implications. At the same time, no consequence can be completely
omitted, in case it has a relevance that the financial counsellor has not foreseen.
It is also important not to rely on the client to tell you everything that may be relevant, because
the client will have no idea what this may be. In some cases clients may deliberately conceal
relevant information. Counsellors need to develop the skills to elicit the relevant information
from the client and to make adequate file notes.
It may also help for people to understand the reasons why we have bankruptcy laws and the
important role they play in allowing people to move on from insurmountable debt.
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Part 6:
Small business & bankruptcy
Summary
Small business bankruptcies present particular challenges for financial counsellors.
Financial counsellors assisting small business clients need to have a working knowledge of the
various business models available – sole trader, partnership and company – and the implications
of bankruptcy associated with each.
Companys
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Insolvent trading
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Prohibition on being a Director or otherwise managing a company
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Has the company been wound up?
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Is the Director personally liable for the debts or not?
Partnerships
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Dissolution of the Partnership
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Impact on other partners
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ITSA’s obligations to refer certain Debtor’s Petitions by partners to the Court.
Sole traders
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Can the person continue in their trade/profession while bankrupt?
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Does the Trustee have an interest in the business or its assets?
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Will the bankrupt be able to get necessary business insurance?
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Requirement to trade under own name (or disclose bankruptcy status to all customers,
suppliers etc) if continuing in business
All
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Requirements to disclose bankrupt status in certain circumstances
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Tax implications
Family trusts and tax debts also come up in this area more frequently.
Financial counsellors provide a very useful service to many small business clients, particularly
when the business is closed and the only outstanding issue is the residual debts. Financial
counsellors should nevertheless treat this area with caution and be careful not to take on cases
(or issues within cases) which are outside their area of expertise.
Understanding the context
Financial Counsellors are often asked to assist with bankruptcies for clients who have been
running small (and sometimes not so small) businesses.
For the financial counsellor these clients are often experiencing very high levels of stress and
relationship strain as the debt burden spills over into all facets of their lives.
When a small business fails it is often the end of a dream and letting go of the optimism that
they had when starting the business can be very difficult. In addition the client may be facing
the loss of their personal assets including the family home and/or the home of a relative (such
as their parents).
In many cases the family home has been used as security and even the family car may be leased by
the business. The failure of the business (if that is the cause of the bankruptcy) and the decision
to go bankrupt can have enormous consequences for the bankrupt and their family. This is where
the role of the financial counsellor becomes a vital one to ensure that the client understands
the consequences of the bankruptcy and has, where possible, time to reflect on the impact on
them and their family. Where appropriate, the financial counsellor should offer the opportunity
for the spouse/partner to be present at an interview to ensure the family unit understands the
implications and consequences of bankruptcy.
These clients can be broken down into a number of sub-groups according to the way they
operated their business:
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Sole traders
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Those who have been involved in partnerships
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Those who have a corporate structure and may be a director (or the director) of a company
This group will often have very complex issues and the financial counsellor will need to be aware
of the different business structures; the issue of insolvent trading; director’s penalties; and when
it is possible for a small business to continue to function within bankruptcy. Often the client
will not appreciate the difference between a partnership and operating a company with another
person. Sometimes they may have started in a partnership and on the advice of their accountant,
incorporated a company that took over the operation of their partnership business however they
still refer to the other person (now a co-director) as “their partner”.
As a financial counsellor you will need to ask a number of questions to make sure you understand
the nature of the business structure (for example – does the client file an Annual Return with
ASIC? Does he or she have copies of a Certificate of Registration for GST? Do they lodge a
Business Activity Statement? Also, ask to look at their financial statements such as Balance
Sheets, Profit &Loss statements and tax returns/notices of assessment, which will provide an
insight into the nature of business structure.)
The categories above can then be further broken down into those who are closing down a failing
business; those who are trying to keep a business afloat while personally going bankrupt; and
those who are really just self-employed, sub-contractors who want to continue earning a living
in this way while bankrupt. Family Trusts also come up more frequently among this group of
clients. Again, many will have little understanding of a Family Trust and will have formed it on
the advice of their accountant.
Financial counsellors assisting these clients need to be particularly careful about setting boundaries
around what they can and can’t assist with so as not to venture outside their areas of competence.
In some cases this might involve insisting on clients getting advice from a lawyer and/or accountant
about a particular issue before you will agree to assist them. Sometimes it might involve giving
clients tailored warnings about particular issues or getting specific advice from AFSA that you
carefully file note (e-mails can be useful if you keep a copy on the file). In other cases you may
have to decline to assist a client at all. This can be difficult when you are aware that the person
cannot, in practice, get help from anyone else (because they cannot afford to pay a private lawyer
or trustee for example), but giving assistance in areas about which you have no real expertise
can be worse than no assistance at all. It will also expose you and your service to complaints and
potential negligence claims.
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Family trusts
Trusts are a minefield and the financial counsellor should recommend that the client seeks legal
advice on the trust issue before they proceed to assist the client to go bankrupt. The financial
counsellor should not purport to advise the client about whether a trust will be protected from
the Trustee. The fact that the client has obtained legal advice in relation to any trust should be
recorded in the financial counsellor’s case notes. Trust issues need expert legal advice.
Sole traders
Some sole traders operate businesses in the usual sense of the word in so far as they are responsible
for finding work or customers, marketing/advertising, employing people, dealing with suppliers
and so on. They may have assets that are associated with or used by the business, and/or significant
loans. Examples could include anything from the local corner shop to an interior decorating
business.
Other sole traders are really closer to employees but are paid casually and retain responsibility
for their own insurance and tax. They have no assets, no employees and no business debts. The
implications of bankruptcy are different depending on where on this spectrum clients are located.
Can a sole trader continue in business after bankruptcy?
This will depend on the nature of the business:
(i.) If the nature of the business is that of a “merchant” (that is buying and selling goods),
for practical reasons, the business cannot continue as all the assets of the business
(stock, plant & machinery etc) will become assets that the Trustee can take and sell.
Furthermore, as soon as new stock and plant & machinery are acquired after the date
of bankruptcy, those assets will be available to the Trustee as “after-acquired assets”.
The same could be said of any business which owns significant plant and equipment or
other assets. In some cases, the Trustee may allow the bankrupt to continue trading for
a short period to enable the business to be sold as a going concern to obtain a return for
creditors. This will only occur, where the Trustee considers that the business has some
value (goodwill) or there is to be sale of the business assets “on site” by the Trustee’s
agent.
(ii.)If the bankrupt is a “service provider” such as a self-employed tradesperson or consultant
with no business related assets, they may be able to continue trading subject to
compliance with a number of obligations under the Bankruptcy Act (and subject to any
occupational restrictions imposed by the appropriate licensing authority or professional
association).
Specifically the client would have to take care not to breach Section 269 which requires that
the bankrupt person disclose their bankrupt status to the other relevant party (for example,
creditor, supplier) in any of the following circumstances where the amount involved exceeds
the applicable threshold ($5,333 as at June 2014, for current amount go to www.afsa.gov.au and
select Indexed Amounts in Quick Links):
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When obtaining credit
When obtaining goods or services from a person:
–– by giving a bill of exchange or cheque drawn, or a promissory note
–– by giving 2 or more of the above which add up to more than the threshold
When entering into a hire-purchase agreement, or enter into a contract or agreement for
the leasing or hiring of any goods
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When obtaining goods or services on credit
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When by promising to supply goods to, or render services
It is also an offence to carry on a business under an assumed name, in the name of another person
or under a business name (in all cases whether in partnership or not) without disclosing to every
person with whom he or she or the business deals his or her true name and the fact that he or she
is an undischarged bankrupt. If the person is in business in his or her own name (the same name
as appears on the bankruptcy documentation) then compliance with the dot points above only
is required. It is recommended that a bankrupt trades in his or her own name for this reason.
➻➻ Note: If the client is in a trade, licensed occupation or profession, there may be limitations placed
on their ability to continue in this work while bankrupt imposed by other regulators or professional
bodies (see Part 5 of this Chapter).
From a practical perspective the reason for the bankruptcy is crucial to whether the person
can realistically continue in business. If the bankruptcy has been caused by a one-off event not
associated with the business, such as a family breakdown, or an uninsured car accident, or legal
costs from an unsuccessful court case, continuing the business may be feasible if the Trustee
approves, or has no interest, and the client can overcome the considerable practical hurdles
above. On the other hand, if the reason for the bankruptcy is that the business itself has been a
losing concern, the client cannot realistically expect to continue.
If the client has an existing ABN when he or she becomes bankrupt, the Trustee will advise
the Deputy Commissioner of Taxation of the bankruptcy. The Tax Office will note the date of
the bankruptcy against the ABN. The client will need to contact the Tax Office and arrange to
have the ABN reactivated if they want to continue using it or obtain another ABN. There is no
restriction on applying for an ABN after becoming a bankrupt.
If the client is registered for GST and wishes to continue in their trade or profession during
bankruptcy, he or she should advise the ATO so that their pre-bankruptcy GST liability (if
any) can be separately identified. Any pre-bankruptcy GST will be provable in the bankruptcy,
including ATO imposed penalties for late payment. However, any Court imposed fines in the
event that the ATO opted to prosecute would not be provable. Regardless of bankruptcy the
client will still be responsible for lodging Business Activity Statements if they have an active
ABN and are registered for GST.
Whether the client continues to be self-employed or not, he or she will be subject to the income
contribution regime (See Part 4 of this Chapter).
When the business is being closed down
This is the most common scenario faced by small business people approaching financial counsellors.
The client is usually very stressed and has been scrambling to try and stay in business for some
time. Paperwork is often the last thing on their mind and the accounts are often incomplete and
tax is in arrears. There may also be lease payments that are in arrears.
The loss of monies invested in the business by other local businesses, family members and friends
is a huge issue for these clients. These clients will need access to a range of support services to
manage the level of stress and isolation this can bring.
This is a perennial problem when businesses are in trouble. Quite often the business will pay
the most pressing creditors and/or debts for essential services to try and stay afloat but if they
subsequently go bankrupt those creditors who have been recently paid may find the trustee
wanting to claw back those payments (See above in Part 1 of this Chapter).
When faced with a small business operator who is facing the very real prospect of bankruptcy it
is the duty of the financial counsellor to make this issue very clear. This is often very stressful for
the client as the creditor they often want to pay out is a family member or friend who has helped
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them prop up the business. The client should also understand that there is nothing legally to stop
him or her from paying back the friend or family member from their income during bankruptcy
or after discharge (there may of course be practical problems like insufficient money, keeping in
mind the possibility of income contributions being required).
Undervalue transactions & transactions to defeat creditors
When a business is trying to stay afloat the client will often dispose of business assets to keep
up the cash flow or to protect them from seizure by the sheriff ’s officers. Where the goods are
disposed of for market value this is unlikely to be a major issue within bankruptcy, but where
the goods are sold for a nominal amount or simply signed over for no consideration, then this
will be subject to investigation by the Trustee and the Trustee may take recovery action against
the person who received the assets (See Part 3 of this Chapter).
Often the client will have sought legal advice on disposing of goods to avoid civil debt recovery
action without seeking advice on the consequences of such action if they go bankrupt.
The time that this transaction took place is also very important, the closer it is to the bankruptcy
the greater the issue (See Table in Part 3 of this Chapter).
Business records
These should be brought up to date where possible to simplify the bankruptcy and give the
client a greater sense of closure. This is not always possible, especially where the accountant or
solicitor is a potential creditor in the bankruptcy. Where no business records are available the
client should seek advice from AFSA about what the Trustee will require.
Failure to keep proper books of account in the five years prior to the bankruptcy or failing to
preserve such records is also an offence under Section 270, potentially punishable by imprisonment.
There is a defence, however, that the failure to keep or preserve the books was “honest and
excusable”. The potential sentence increases where the bankrupt has previously been bankrupt
or entered another form of insolvency arrangement such as a Personal Insolvency Agreement or
Deed of Arrangement. The likelihood of prosecution for such an offence is remote, and usually
only occurs in conjunction with other alleged offences.
Tax debts
Most small businesses that fail have outstanding tax returns and/or tax debts. While it is not a
requirement of bankruptcy that the outstanding tax returns be lodged before going bankrupt it
will make the bankruptcy less stressful for the client. Plus it will avoid action being taken against
the client by the ATO in respect of the non-lodgement of those tax returns.
Where the business is closing part way through the financial year it may be beneficial to lodge
2 returns, one up to the day before bankruptcy and a second for the period from the date of the
bankruptcy to the end of the financial year. Any debt arising from the first return will be provable
in the bankruptcy (and any tax refund will vest in the Trustee). Any debt arising from the second
return will not be provable and any refund will be counted as income for contribution purposes
(or kept by the ATO and set off against any amount owing to the Commonwealth such as Child
Support, Centrelink, etc).
Commercial Leases
The client must be careful to include details of any lease of premises and/or vehicles and plant
& equipment in the statement of affairs. The Trustee will normally disclaim a lease of premises
as the Trustee becomes personally liable for the liability under the lease. If the client has been
permitted to continue trading by the Trustee, they will need to negotiate with the landlord as
to their continued occupation of the premises.
The lessor may have locked the client out and taken possession of business equipment. This will
largely be a matter to be sorted between the Trustee and the lessor but if the client believes there
are protected tools of trade on the premises they should inform the Trustee.
The Trustee does not disclaim leases on vehicles and plant & equipment, so if required, it will
be a matter for the client to negotiate with the finance company concerning their continued
possession and use of the leased asset. If the lease is up to date then there should be no issue as
Section 301 of the Bankruptcy Act provides that any provision in a lease, contract or hire-purchase
agreement which purports to change the agreement, terminate the agreement or allow repossession
in the event of bankruptcy is void. However the client should be advised to contact the finance
company, preferably before it receives notification of the bankruptcy from AFSA, to avoid any
chance of an employee in the finance company not being aware of the effect of Section 301of the
Act and starting repossession action upon receipt of the AFSA notification of the bankruptcy.
See Chapter 8 for more information in the event that repossession action is threatened.
Partnerships
The issue of partnerships and bankruptcy has two major facets for financial counsellors:
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Is your client the partner who is going bankrupt?
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Is your client’s partner going bankrupt?
➻➻ Note: All of the issues above information in relation to preferential payments, undervalue
transactions, tax debts and business records may also apply in the case of partnerships.
Your client is going bankrupt
When a partner becomes bankrupt the partnership is dissolved unless there is specific provision
in the partnership agreement stating that bankruptcy does not dissolve the partnership (these
clauses are rare). The bankrupt’s interest in the partnership is an asset of their bankrupt estate
(and therefore vests in the Trustee).
A Debtor’s Petition filed by one or more members of a partnership, but not all the members of
a partnership must be referred to the court by AFSA [Section 56C (1)(a)]. A Debtor’s Petition
filed by one or more members of a partnership must also be referred to the Court if there is a
Creditor’s Petition pending against one or more but not all of the partners [Section 56C(1)(b)].
If all of the partners file a Debtor’s Petition and there is a Creditor’s Petition against all of them,
then there is no need to for AFSA to refer the matter to the Court. Similarly, if all the partners
file a Debtor’s Petition and there are no Creditor’s Petitions against any of them, then there is
no need for AFSA to refer the matter to the court.
The situation of one partner entering bankruptcy is very similar to that of a jointly owned home
where one of the joint owners becomes bankrupt – the Trustee will invite the non-bankrupt
partner to either make an offer to purchase the bankrupt’s interest in the partnership or wind up
the partnership (that is sell the partnership assets, pay the partnership debts and make a return
of capital to the partners representing their share).
The partnership agreement is an important document as it will detail the proportions in which
the partners hold an interest in the partnership (that is their respective shares) and should detail
how the surplus in a winding up is to be distributed.
If the non-bankrupt partner declines to take either option above, and it is commercially viable
to do so, the Trustee will have the court appoint a receiver to wind up the partnership and make
a distribution of capital.
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Sometimes problems arise determining the ownership of personal assets (such as motor vehicles,
tools etc) used in the partnership business, which need to be resolved by the Trustee in conjunction
with non-bankrupt partner.
The bankruptcy of the partner may cause huge interpersonal issues with the other partners
especially if they are personal friends or relatives. The financial counsellor can do little more
than warn the client about this. The client may have little choice in any event depending on
their personal circumstances.
Your client’s business partner is going bankrupt
When your client’s business partner becomes bankrupt the partnership is dissolved (unless the
agreement provides otherwise). This will happen even if the ex-business partner’s debts have
nothing to do with the partnership.
This will mean that your client will be dealing with a Trustee of the bankrupt estate of the
bankrupt partner in relation to the ex-partner’s interest in the business. This could result in the
Trustee looking to realise the ex-business partner’s interest in your client’s business to satisfy the
ex-business partner’s liabilities.
Where a business partner is considering bankruptcy the solvent partners may wish to consider
satisfying the personal debts of the partner facing bankruptcy to protect the partnership.
Where your client is facing the scenario of a business partner going bankrupt they should be
referred to independent legal advice. This is NOT an area where financial counsellors can
play a significant role, except in picking up the pieces in the usual way if the dissolution of the
partnership leaves the client with insufficient income to meet his or her own personal debts.
Directors and companies
When a client approaches a financial counsellor about their business issues there are a number
of key issues that the client will need to consider if they are a director of a company.
a. Where client’s business is being operated by the company and its failure is the cause of
the bankruptcy
Insolvent trading
Generally, a company is insolvent if it is unable to pay all its debts when they fall due. A director
has a positive duty to prevent insolvent trading under s588G of the Corporations Act 2001 (The
Corporations Act).
There are two main issues with insolvent trading:
1. The director commits a breach of the Corporations Act if they allow the company to
continue to trade whilst insolvent. Accordingly the financial counsellor needs to make
the client aware of the insolvent trading offence and file note that he or she has done so.
It is likely that the client may already have breached these provisions. Section 588G of the
Corporations Act sets out two levels of contravention:
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Firstly, a civil penalty provision (fine) applies to a director who fails to prevent a
debt being incurred where he or she is aware that there are grounds for suspecting
insolvency, or where a reasonable person in a similar position would suspect
insolvency; and
Secondly, there is a criminal offence committed where:
–– A director suspected at the time a company incurred a debt that the company was
insolvent or would become insolvent as a result of incurring that debt; and
–– The director’s failure to prevent the company incurring the debt was dishonest.
2. The director can become personally liable for all the debts of the company if they allow
it to trade whilst insolvent. The liquidator of the company will normally lodge a proof of
debt on behalf of all the company creditors with the Trustee of the bankrupt estate of the
director.
For more information on insolvent trading you can refer the client to ASIC Regulatory Guide
217 Duty to prevent insolvent trading: Guide for directors. See also ASIC website (www.
asic.gov.au) – Select the For Companies tab and choose information For Directors.
If your client has ongoing questions and concerns you will need to refer them for legal advice.
Directors guarantees
Despite the belief that a company structure will protect directors from the company debts,
creditors will often require a personal guarantee from the director(s), particularly if the business
has no significant assets of its own. The personal guarantee will normally contain a clause that
the director grants a charge over their interest in all their current and future real property (that
is the creditor of the company is given a charge over the director’s home, investment property,
holiday home etc) as security for the company’s debt which the courts will enforce in the event
that the company does not pay the debt.
If the client has signed a director’s guarantee, he or she will be personally responsible for the
debts (or jointly and severally liable with others). These guarantees are what often turn the
debt issue from a business debt issue to a personal debt issue. Bankruptcy will only be useful in
circumstances where the debts outstrip the assets taken as security.
➻➻ Note: Directors are personally liable for any company liability in relation to un-remitted tax
deductions from the wages of company employees and as from July 2012 directors also became
personally liable for any company liability in relation to un-remitted superannuation contributions in
respect of company employees. These debts are provable in bankruptcy.
Winding up the company
Where a company is in financial difficulty, the Director or Directors should seek independent
legal and accounting advice. If there is no way out of the predicament, the company will have to
appoint a voluntary administrator or liquidator. This is NOT the role of the financial counsellor.
For more information see ASIC website (www.asic.gov.au) – Select the For Companies tab and
choose information For Directors.
If the client has no personal debts and has not signed a Director’s Guarantee they may not need
to go bankrupt subject to insolvent trading and tax & superannuation liability considerations
as detailed above.
Where there are significant personal debts as a result of the failure of the business, including
as a result of guarantees, then bankruptcy may be appropriate. If possible the company should
be wound up first so that all the debts can be crystallised. However, if clients are facing urgent
enforcement action in relation to personal liabilities this may not be possible. Providing the
company has stopped trading and incurring liabilities this should not present a problem because
the debts will be existing or contingent liabilities at the date of the bankruptcy.
In some cases the client will not have the funds to engage an insolvency practitioner to wind up
their company in which case, the client should be advised to contact ASIC to ascertain their
options. Generally, if the company does not lodge the requisite returns, ASIC will de-register the
company after a certain period of time. Whilst there are penalties for directors not lodging the
requisite returns, it is most unlikely that ASIC will take prosecution action against a bankrupt
director.
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b. Where the client happens to be a Director of another business or organisation unrelated
to the debts
A person may be a Director of a solvent company operating a family business but be going
bankrupt because of personal debts. Alternatively, he or she may be a Director on the Board of
another organisation, in addition to his or her usual occupation. In either case, the person is
disqualified from being a Director from the date of the bankruptcy under the provisions of the
Corporations Act. For more details on this and what has to be done by the bankrupt and the
company on which they used to be a Director see Part 5 of this Chapter.
In the case of the family business, then the client must particularly note that it is not enough to
appoint an alternative director – they must remove themselves from all aspects of management
of the business and influence (or perceived influence) over the continuing directors.
De-registration
If the client is going bankrupt because of personal debts but can no longer be the sole director
of his or her own company (because of automatic disqualification) the company may be eligible
to be simply deregistered:
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All members of the company must agree to the deregistration; and
The company must not be carrying on business; and
The company’s assets must be worth less than $1000; and
The company must have paid all fees and penalties payable under the Corporations Law;
and
The company must have no outstanding liabilities; and
The company must not be a party to any legal proceedings.
The client needs to lodge Form 6010 Voluntary deregistration of a company with ASIC.
What if your client wants to start a new business while still
bankrupt?
Where a client is seeking to continue in business or start up a new business while bankrupt they
should seek independent legal and business advice. They should also discuss their plans with
AFSA, the Trustee and the ATO to prevent potential offences being committed. A company
structure will not be available until the client has been discharged from bankruptcy.
Alternatives to bankruptcy
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In certain circumstances it may be possible to avoid bankruptcy and keep the sole trader
business operating by entering in a Personal Insolvency Agreement under Part X of the
Bankruptcy Act. A proposal could be put to creditors that the client retain their business
assets (and their home if there is little equity in it) and in return the business will pay a
fixed amount each month to the Trustee of the PIA (and possibly a % percentage of the
net profit each year ) for a period of say 3 – 5 years. They may also be able to offer other
personal assets such a block of land or investment property. See Chapters 5 and 12 for
more information about PIAs.
Likewise if the client’s assets, liabilities and income do not exceed the Debt Agreement
limits under Part IX of the Bankruptcy Act, they may be able to have the creditors accept
a Debt Agreement. The costs of administering a Debt Agreement are usually lower
than those of PIA due to less statutory obligations on Debt Agreement Administrators
compared with Registered Trustees. For more information about Debt Agreements see
Chapters 5 and 11.
➻➻ Note: One advantage with a Debt Agreement is that the client is not disqualified from being or
becoming a director of a company by entering into a Debt Agreement.
Part 7:
Family law and bankruptcy
Summary
The Family Court has the power to alter the property interests between the parties to a marriage
or de facto relationship at the end of a relationship in recognition of their contributions (financial
and otherwise) and future needs (including the need to maintain children of the relationship).
They can also order maintenance be paid by one party of the relationship to the other by way
of periodic payments or a lump sum or transfer of property.
If one of the parties to a relationship is bankrupt, or becomes bankrupt during the proceedings,
the Trustee can apply to appear (usually instead of the bankrupt party). Any property that
would have been allocated to the bankrupt by the Family Court passes to the bankrupt estate
instead. Any property that is allocated to the non-bankrupt party is no longer available to the
bankrupt estate (even if it would otherwise have been vested bankruptcy property). It does not
matter whether the bankruptcy or the Family Court application occurred first. If the parties to a
relationship make a Binding Financial Agreement under the Family Law Act, the Trustee may
challenge it under the Bankruptcy Act as an undervalue transaction or transfer to defeat creditors
where appropriate. The Trustee can also apply to set aside the agreement under the Family
Law Act in some circumstances. If the Trustee challenges a Binding Financial Agreement in the
Federal Court bankruptcy jurisdiction, the other party to the agreement may apply to have the
matter transferred to the Family Court. This way, even if the agreement is set aside, the usual
property settlement arguments can be made about the division of ownership of the property.
In very limited circumstances the Trustee can apply to have Family Court orders set aside.
Where there are no Family Court proceedings the Trustee must either accept the legal interests
of the parties (as noted on the title of any property, for example) or rely on equitable common
law principles to assert a different ownership arrangement. The trustee will only do this where
there is compelling evidence and a significant sum involved.
Background
Clients need to get specific family law advice where applicable. The information in this kit is
very general.
➻➻ Important Note: Western Australia has not referred its powers relating to de facto relationships
to the Commonwealth as had occurred in other States. The law of Western Australia is therefore
different in some respects to that described below. For example, the Family Court of Western
Australia (which deals with de factor relationships) does not have any jurisdiction in bankruptcy,
and does not have the power to make splitting or flagging orders relation to superannuation. If you
are in Western Australia and your client is not married, he or she will need local family law advice.
The following section applies primarily to separating or separated couples. The general purpose
of the financial provisions of the Family Law Act 1975 (“FLA”) is to finalise matters between
the parties and prevent further proceedings as far as is practicable (Section 81, FLA). However,
couples who are not separating but one member of the couple is facing bankruptcy should seek
family law advice to determine the extent to which the FLA provisions may be useful, including
the provisions for seeking declarations of interest (Section 78 and 90SL, FLA).
Prior to amendments in 2005 it was a race in time to determine who took precedence when
bankruptcy and family law intersected. If the family law orders were made first, then any property
transferred to the ex-spouse would not vest in the Trustee and was unavailable for creditors. If
the bankruptcy occurred first, then the non-bankrupt spouse could only fall back on common
law equitable principles (See Part 3 of this Chapter above) in arguing, for example, that his or
her share of any jointly owned property was larger than fifty per cent and could not apply to the
Family Court for a greater share under the principles of family law.
Since the 2005 amendments this situation has altered dramatically and the spouse or de-facto
spouse can now apply for orders from the family court under the Family Law Act 1975 (“FLA”)
after the date of the bankruptcy (provided they are within any relevant time limit under the FLA).
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The orders the Family Court can make under both maintenance and/or property settlement
applications can now include transferring vested bankruptcy property back to a non-bankrupt
ex-spouse or de facto spouse.
However, to balance this, the Trustee also has recognition under the Family Law Act, and can
apply in certain circumstances to be heard in relevant proceedings, and to apply to have orders
of the court or Binding Financial Agreements set aside. This is covered in more detail below.
Powers of the Family Court to divide up property and debts
Summary
The court has the power to alter the legal property interests of separating couples, and/or
order payment of maintenance of one member of the couple by the other (by way of regular
payments, a one-off lump sum or a transfer of property)
The court will take into account the:
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Financial contributions by the parties
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Non-financial contributions by the parties including contributions as a homemaker or carer
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Future needs of the parties
The Family Law Act 1975 provides for the division of property (and debts) at the conclusion of a
relationship. It also provides for orders to be made for the maintenance of one spouse by another
in certain circumstances. Applications in relation to marriages are dealt with under Part VIII of
the FLA and de facto relationships are dealt with in Part VIIIAB of the FLA.
A de facto relationship is defined as persons who are not legally married to each other, not related
by family and having a relationship as a couple living together on a genuine domestic basis (s4AA,
FLA). A de facto relationship can exist between two people of the same or opposite gender and
can also exist despite that fact that one or both of the members of the couple is/are still married
to another person. In determining whether there is a de facto relationship, the court will consider
all the circumstances of the case including, for example, the length of the relationship; whether
they share a residence; whether there is a sexual relationship; their financial arrangements; their
ownership, use and purchase of property; their degree of mutual commitment to a shared life,
their care and support of children; and their public image (are they known as “a couple”).
There is no particular time frame required to establish the existence of a de facto relationship.
However, to access the financial provisions of the FLA, such as applying for maintenance orders
or a property settlement:
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there must have been a relationship of at least 2 years duration; or
there must be a child of the relationship (as opposed to a child of another relationship that
the couple have cared for); or
the court must be satisfied that the party seeking the order has made substantial relevant
contributions and the failure to make the order would result in serious injustice; or
the relationship is registered under a prescribed law of a State or Territory (s90SB).
A maintenance order can take the form of regular payments or a lump sum payment and/or
the transfer of property (Sections 72, 74 & 75 for marriages and Sections 90SE & 90SF for de
facto relationships, FLA). A maintenance order will be made where one party is reasonably able
to maintain the other and the receiving party is unable to maintain him or herself because of:
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Caring for a child under 18; or
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As a result of age or physical or mental incapacity for gainful employment; or
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Another adequate reason.
A maintenance order can consist (wholly or partly) of a one-off transfer of vested bankruptcy
property (that is property that has already vested in the Trustee as a result of one partner to a
relationship being bankrupt).
There is a list of matters the court needs to consider before making a maintenance order including,
for example (this is not an exhaustive list):
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The age and state of health of the parties
Their income, property, financial resources, physical and mental capacity for earning an
income
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Whether a party has the care or control of a child of the relationship who is under 18
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Their commitments to support any other person
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Their eligibility for pensions, benefits etc
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Their available superannuation
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The effect of any proposed order on the ability of a creditor to recover a debt
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The duration of the relationship and the extent to which it has affected the earning
capacity of either party
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What is a reasonable standard of living in the circumstances
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Any financial agreement that is binding on the parties
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Any order that may be made for the division of property
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Any assessment likely to be made under the Child Support (Assessment) Act 1989
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Any other fact or circumstance the court considers relevant to doing justice.
A property settlement which divides up the assets and debts of a relationship can be applied
for in either marriages or de facto relationships meeting the criteria above (Section 79, FLA for
marriages and s90SM, FLA for de facto relationships). In dividing up property the court takes
the following steps:
1. It determines what makes up the pool of assets available for distribution and any debts
which detract from that pool;
2. It looks at both the financial and non-financial contributions of the parties to the
acquisition, conservation or improvement of the property of the relationship and to
the welfare of the family (including such things as maintaining property with physical
labour, carrying out housework and caring for children); and
3. It considers what orders it would be just and equitable to make taking to account the
relative contributions of the parties and the same considerations that are relevant to
maintenance orders (listed above).
Usually a creditor is able to become a party to the property settlement proceedings if an order is
sought that would mean that the creditor would not be able to recover his or her debt (Section
79(10), FLA) – that is, where the liability of the particular spouse to the creditor would be
“extinguished” if the orders were made. However, where the debtor is a bankrupt (or in a Personal
Insolvency Agreement [“PIA”]) this no longer applies to creditors with provable debts and
instead it is the Trustee who has the right to appear (Section 79(10A), FLA).
The court has to take into account the impact of any orders on the ability of a creditor to recover
a debt, but does not have to give that consideration any greater priority than any other. In dividing
up the assets and liabilities the court has the power to bind third party creditors. In most cases
the pool of assets is considered after deducting any debts, meaning that the FLA orders should
not generally interfere with the ability of creditors to collect their debts (although they may be
restricted from pursuing both spouses/partners for some joint debts). However, where one party
is insolvent and the other party has a reasonable claim to a significant portion of a significant
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asset (usually the family home) the competing rights of creditors and the solvent spouse will
often need to be weighed by the court. Generally if there are children of the union, their financial
needs will rank above the needs of the creditor(s).
In the case of marriages, a property settlement or maintenance order can be applied for at
any time after separation and up to 12 months after a divorce. With de facto relationships an
application must be made within two years after the end of the relevant de facto relationship.
The court can also give leave for an application to be brought after the expiry of these periods
in cases of hardship. This may be crucial in cases where the parties have not sought a property
settlement within the relevant time period (possibly because there was no dispute or they were
not in contact with one another) and one party goes bankrupt.
Summary – 3rd party creditors and family law
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The court must take into account the interests of creditors, but this must be weighed
against other competing considerations (such as the needs of children)
The court can alter the obligations of the parties to the relationship to 3rd party creditors –
this would usually mean severing a joint loan obligation in certain circumstances
Occasionally the court will allocate property to one party and liability for a debt to another
(knowing the creditor will be unlikely to be paid as a result)
What if one of the parties is, or becomes bankrupt during the family law
proceedings?
Summary
The Trustee can:
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Appear in family law proceedings in the shoes of the creditors
Apply to set aside past orders (including consent orders) and Binding Financial
Agreements
The court can also allocate vested bankruptcy property to the non-bankrupt partner in a
relationship (even though the bankruptcy occurred first).
The Bankruptcy Act provides for the Family Court to have jurisdiction under the Bankruptcy
Act where necessary because of the bankrupt status of one of the parties to the relationship. The
Federal Circuit Court or Federal Court can also transfer proceedings to the Family Court upon
the application of the parties or at its own instigation.
If a party to family law proceedings is a bankrupt, or becomes a bankrupt while the proceedings
are being dealt with, then the Trustee must be notified of any application of the following
applications (Section 79G, Section 90SP, FLA):
■■
Maintenance (Sections 74 or 90SE, FLA)
■■
Declaration of property interests (Sections 78 or 90SL FLA)
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Alteration of property interests –property settlement – ( Sections 79 or 90SM, FLA)
■■
Setting aside orders altering property interests (Sections 79A or 90SN, FLA)
The same applies if a party enters a PIA under the Bankruptcy Act.
The Trustee can be joined (upon application) if the court is satisfied that the interests of the
bankrupt’s creditors8 may be affected. Once the Trustee is permitted to join the proceedings
then the bankrupt can only appear with the leave of the court in exceptional circumstances.
Because the interests of the creditors is only one of a long list of factors that the court needs to
take into account, the Trustee will usually be arguing the case of the bankrupt person under the
8
The same rules apply where the person is in a PIA.
Family Law provisions more generally – that is that it will be up to the Trustee to establish the
bankrupt’s entitlements in the light of his or her contributions, needs etc as much as to make
the case for payment of the creditors.
Example: Witt v Witt and Another – (2007) 38 Fam LR 431
In the case of Mr and Mrs Witt the wife applied for a property settlement after the husband went
bankrupt (in 2006). The Trustee was notified and appeared in the proceedings. The Trustee
sought the sale of the matrimonial home and an equal split of the proceeds between the Trustee
and Mrs Witt. The house had been owned by Mr and Mrs Witt as joint tenants, but the joint
tenancy was severed by the bankruptcy with a 50% interest vesting in the Trustee.
In addition to the home, there were a number of debts, and superannuation in each of the
spouse’s names. There were also seven children of the marriage (although four had left home by
the time of the proceedings) who were largely cared for by Mrs Witt, in addition to some paid work
being done by Mrs Witt.
The Federal Magistrate made the decision to allow Mrs Witt and the children to remain in
the home, in return for retaining responsibility for some associated debts and that Mr Witt’s
superannuation be split 95%/5% in Mrs Witt’s favour. This deprived the trustee of almost $50,000
in remuneration and legal fees (including legal fees of the Petitioning Creditor).
As part of the Federal Magistrate’s reasoning he noted that Mr Witt had done nothing about
paying the judgment debt. Further, he had received the Bankruptcy Notice after separation and
had not either paid, come to any arrangement or appeared in any of the proceedings. Mrs Witt
had no knowledge of the Bankruptcy Notice, or the subsequent Creditor’s Petition until she was
contacted by the Trustee after these events had taken place. He considered that it was unfair in
the circumstances to deprive the wife and children of their home, especially as the original creditor
(the lender in relation to a car loan) would be unlikely to be paid from the sale proceeds in any
event as a result of the Trustee’s fees being deducted first. He was also influenced by the fact that
the wife, a co-debtor under the original car loan but not a judgment debtor, had offered to seek
early access to some of her superannuation to pay the original creditor. Also, Mrs Witt had already
used a large portion of a personal injury compensation payment she had received to maintain
mortgage payments and for the payment of household debts.
Example: Official Trustee in Bankruptcy v Brown and Anor [2011] FMCA 88
(20 May 2011).
Ms Brown and Mr Daevys were married for over 10 years. Prior to their marriage they had lived
together for almost 1 year. In that period, Ms Brown, had purchased a house with funds of her
own and obtained a mortgage in her own name. The couple lived in the house while they were
married and both made payments at various times towards the mortgage. Mr Daevys made some
improvements to the property and appeared on a development application as an “owner” with
Ms Brown. Mr Deavys went bankrupt in 2004. He was discharged in 2007. While bankrupt he
received an inheritance that was not disclosed to the Trustee. He separated from Ms Brown in
2007 and they were divorced in 2009.
In 2009 he applied for a property settlement in the family court seeking half the property in Ms
Brown’s name (believing that as a discharged bankrupt he could now own property). The Trustee
of his bankrupt estate intervened and argued that 50% of the property had already vested in the
trustee in 2004. As the bankruptcy occurred prior to the Family Law Act amendments in 2005,
the Trustee argued that the property was not available for division in the property settlement. The
Trustee based his claim on the Cummins case (See Resulting Trusts in Part 3 of this Chapter),
arguing that as a married couple who purchased a home intended as a matrimonial home, and
in the absence of any evidence as to intention, Ms Brown held 50% of the property in trust for Mr
Daevys.
120
The court agreed that the Trustee was entitled to a share under the law of bankruptcy and that
a property settlement was not available (because vested bankruptcy property was not available
for division under the FLA in 2004). However, the Federal Magistrate distinguished the case from
Cummins on the basis that the property was purchased by Ms Brown prior to the marriage and
in her own name. The Federal Magistrate preferred to view the case as a “thwarted joint venture”
(see Constructive Trusts in Part 3 of this Chapter) than a “traditional matrimonial relationship”
and divided up the house between Ms Brown and the Trustee on the basis of the differing
contributions of the parties (in this case 67% to Ms Brown & 33% to the Trustee). The Federal
Magistrate also noted that there was no evidence that Ms Brown had any intention to thwart
Mr Daevys’ creditors when she placed the house she purchased in her own name back in the
nineties.
What if the bankruptcy occurs after the Family Court orders have already
been made?
Once the court has ordered that property be transferred to an ex-partner (who is not bankrupt)
it is no longer divisible amongst the creditors (Section 116(q) & (r) of the Bankruptcy Act)
unless the orders are appealed (by the original parties) or set aside.
Property settlements can be set aside, or substituted orders made (Section 79A, 90SN FLA), on
the application of an interested party where:
a. There has been a miscarriage of justice by reason of fraud, duress, suppression of evidence
(including failure to disclose relevant information), the giving of false evidence or any other
circumstance
b. In the circumstances that have arisen since the order was made it is impracticable for the order
to be carried out or impracticable for a part of the order to be carried out; or
c. A person has defaulted in carrying out an obligation imposed on the person by the order
leading to circumstances where it would be just and equitable to set aside or vary the orders
d. Circumstances that have arisen since the making of the order of an exceptional nature relating
to the care, welfare and development of a relevant child where the applicant has caring
responsibility for the child and will suffer hardship if the court does not vary or set aside the
order
e. A relevant proceeds of crime order has been made.
A trustee in bankruptcy will be considered an interested party in many circumstances. Similar
rules apply for trustees of PIAs.
A transfer of property cannot be set aside pursuant to Section 120 (undervalue transactions) or
Section 121 (transfers to defeat creditors) of the Bankruptcy Act where the transfer was made
pursuant to Family Court orders (or any other court exercising jurisdiction under the FLA). This
is not a “transfer of property by a person who later becomes a bankrupt....” within the meaning of
s 121(1) of the Bankruptcy Act – it is a transfer ordered by the court. The trustee would instead
need to make an application to set aside the Family Court orders under the provisions above.
The same rules apply for orders made by consent – that is the orders would stand against the
Trustee unless the Trustee successfully applied to set the orders aside for one of the reasons
set out above. The court cannot approve consent orders without the parties filing supporting
affidavits setting out the relevant facts. The court must conclude that the orders sought are just
and equitable in the circumstances.
Generally speaking, the court should only divide up such property as is available for division after
taking into account the liabilities of the parties (property minus debts). There are exceptions,
however, for example where one party has incurred liabilities with deliberate or reckless regard
for the rights of the other party and the Court feels that the “innocent” party should not be
called upon to contribute to the liability from their portion of the property. This does not
mean the liability is disregarded, but that it has been appropriately weighed against the other
competing factors.
A creditor or the Trustee could challenge such orders (apply to set them aside) if a particular
liability had not been considered at all (as opposed to being considered and disregarded by the
court as outweighed by other factors). Further, a failure to include details of significant creditors
in the material supporting an application for consent orders could also constitute grounds for
setting aside the consent orders under Section 79A Section 90SN (sub-section(a)).
➻➻ Note: Generally, a Trustee will be very reluctant to apply to the Family Court to set aside orders
made in the Family Court (including consent orders). Usually they will only do so where the
creditors have either advanced funds to meet the legal costs, or have authorised the Trustee to
use funds in the estate and at least one creditor has given the Trustee an unlimited indemnity as
to costs should the Trustee be ordered to pay the other person’s costs.
If your client is the bankrupt (as opposed to the non-bankrupt member of a couple) and has
previously had a property settlement, the Trustee will want to know how the proceeds of the family
settlement have been spent. The usual rules in relation to undervalue transactions and transfers
to defeat creditors will apply. Any remaining funds, or funds recovered through challenging such
transactions, will vest in the Trustee.
In considering whether to challenge Family Court orders, including consent orders, the Trustee
is also likely to have regard to whether or not the separation of the couple appears to be genuine
or a sham to defeat the creditors. The Trustee will also consider whether the percentage split
appears to be fair and reasonable having regard to the circumstances of the parties.
What if the parties have made a Binding Financial Agreement under the
Family Law Act?
Parties can make Binding Financial Agreements under the Family Law Act whether they are
married, contemplating marriage (that is the Australian version of a pre-nuptial agreement),
ending a marriage or in, or contemplating, a de facto relationship. There are a number of technical
requirements to ensure that a financial agreement is binding and enforceable (Section 90G for
marriages, Section 90UJ for de facto relationships, FLA), and the court will only declare it
binding on the parties if it would be unjust and inequitable not to do so. If one party would be
dependent on social security payments to support him or herself, then a maintenance application
can be made despite a Binding Financial Agreement (Section 90F for marriages, Section 90UI
for de facto relationships, FLA).
Financial agreements can be terminated by the parties by agreement (Section 90J for marriages,
Section 90UL for de facto relationships, FLA) or set aside by the Court (Section 90K for
marriages, Section 90UM for de facto relationships, FLA). Agreements can be set aside by the
Court where (among other things):
■■
■■
The agreement was obtained by fraud (including non-disclosure of a material matter); or
A party to the agreement entered into the agreement:
–– for the purpose, or for purposes that included the purpose, of defrauding or defeating a
creditor or creditors of the party; or
–– With reckless disregard of the interests of a creditor or creditors of the party.
The Trustee can apply as an interested person for orders setting aside a financial agreement and
requesting the court to make alternative orders (Section 90K(3) & Section 90UM(6), FLA). It
should be noted that this provision is expressed more broadly than Section 121 of the Bankruptcy
Act which requires the main purpose of the transfer to be to defeat or delay creditors; in this
case this need only be one of the purposes of the agreement.
122
Where a Trustee applies to have a binding financial agreement set aside, the non-bankrupt
former spouse or de facto spouse is able to argue both for the agreement to be upheld and, in
the alternative, for a division of property in the form of a property settlement. Of course the
court’s decision would then require weighing up the interests of the creditors (as represented by
the Trustee) and the interests of the non-bankrupt spouse (and possibly dependent children).
Unlike property settlement orders, a Binding Financial Agreement can be declared void against
the Trustee under Sections 120 (undervalue transactions) and Section 121 (transfers to defeat
creditors) of the Bankruptcy Act. That is the Binding Financial Agreement is not effective against
the trustee and any property that would have vested in the Trustee prior to the agreement still does.
If proceedings are commenced under these sections of the Bankruptcy Act, the non-bankrupt
spouse or de facto spouse can apply to have the matter transferred to the Family Court and seek
orders under the property division provisions as an alternative in the event that the Binding
Financial Agreement is set aside (provided they otherwise qualify to apply under these sections).
Example: Sutherland v Byrne-Smith [2011] FCMA 632 (22 December 2011)
A de facto couple purchased an investment property hoping to renovate and make a profit.
They separated before the project was complete. The woman asked the man to enter a Binding
Financial Agreement ostensibly under the FLA signing the property over to her and he later went
bankrupt. The Trustee challenged the Binding Financial Agreement under Sections 120 and 121
of the Bankruptcy Act.
The court found that the binding financial agreement should not be upheld because the couple
had not cohabited for a period of at least two years and there was no child of the relationship. The
court refused to set aside the transfer under 121 because the woman’s purpose had not been to
defeat the man’s creditors, but instead to secure a loan from her father to finish the renovations
(her father would not lend the money unless the property was in her name only). The court did,
however, set aside the transaction under Section 120 (undervalue transactions) because the
man received no consideration for the transfer. The court then ordered that the proceeds of the
sale of the house after payment of debts be divided between the woman and the trustee 60/40 in
recognition of her greater contribution to the purchase and improvement of the property (this was
still not enough to cover her original substantial deposit on the property).
Summary – Binding Financial Agreements under the Family Law Act
Binding Financial Agreements can be set aside as undervalue transactions or transfers to
defeat creditors under the Bankruptcy Act. They can also be set aside under the Family Law
Act if one or both of the parties entered the agreement to defeat creditors, or with a reckless
disregard for the interests of creditors.
Where a Trustee applies to the Federal Circuit Court/Federal Court to set aside a Binding
Financial Agreement, the non-bankrupt spouse can apply to transfer the matter to the Family
Court and argue for a property settlement instead.
Dividing up property where the spouse/de/facto may become bankrupt
If you have a client who is contemplating a Binding Financial Agreement under the Family Law
Act in circumstances where they are aware that their ex-partner is insolvent or likely to become
so, you should advise the client to get family law advice which takes this fact into account (that is
they should make sure that the family law solicitor is informed about the possibility of bankruptcy
and considers what it may mean for the validity of any Binding Financial Agreement). It may be
that the client should consider applying for consent orders instead, ensuring he or she provides
full disclosure to the court of all the relevant financial circumstances (and creditors).
Likewise, if you have a client who is insolvent or on the verge of becoming insolvent and they
are contemplating a Binding Financial Agreement under the Family Law Act, you will need
to point out that in addition to the above information, that if by transferring property under
a Binding Financial Agreement they become insolvent, that is an “act of bankruptcy” which
might have relevance if the person becomes bankrupt in the near future (in other words the
Binding Financial Agreement may be found to be ineffective against the claims of the Trustee).
It also interesting to note that a maintenance agreement registered in a court cannot be void
against the Trustee for lack of consideration (undervalue transactions – Section 120, Bankruptcy
Act) but can be challenged as a transfer to defeat creditors (Section 121, Bankruptcy Act).
Again, when considering whether to challenge Family Court orders, including consent orders,
the Trustee is also likely to have regard to whether or not the separation of the couple appears
to be genuine or a sham to defeat the creditors. The Trustee will also consider whether the split
appears to be fair and reasonable hvaing regard to the circumstances of the parties.
What if the Trustee makes a claim on property of a previous relationship
after the relationship has ended?
The Trustee may claim property from a non-bankrupt ex-spouse or de facto spouse in a number
of circumstances:
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■■
The ex-partner is inhabiting property in the name of the bankrupt, or owns property
jointly with the bankrupt, which has now vested in the Trustee (or at least the bankrupt’s
share has vested in the Trustee);
The trustee believes the bankrupt has a claim in equity (see Part 3 of this Chapter for an
explanation of the possible equitable arguments) or under the Bankruptcy Act against
property in the name of the non-bankrupt spouse or ex-spouse (for example, because
the bankrupt provided the purchase money or a significant proportion of it, or made
substantial improvements to the property); or
There has been a transfer that the Trustee argues is void against the Trustee (as an
undervalue transaction or transfer to defeat creditors).
It may be possible to argue against the Trustee’s claims in bankruptcy law, and/or to make a
family law claim. If the time limits for applying for a property settlement or maintenance order
have expired, the affected person may be able to seek leave to apply out of time, depending on
the circumstances.
If you have a client who receives a letter or notice to this effect they will need immediate legal
advice from a solicitor with appropriate expertise in bankruptcy and family law. If your client is the
bankrupt, you cannot assist the ex-spouse or de facto spouse – they will need to get independent
legal advice (and independent financial counselling if required).
What if there are no Family Court proceedings?
If there are no Family Court proceedings on foot (commenced by one of the parties to the
relationship), then the Trustee cannot commence Family Law proceedings. In those circumstances
the Trustee will refer to the current legal ownership of the parties unless there are strong grounds
to assert a different equitable interest by the bankrupt.
124
A house which is registered in the name of the non-bankrupt spouse (or de facto spouse), will
therefore be relatively safe from claims by the trustee unless:
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■■
There has been a transfer from the bankrupt spouse to the non-bankrupt spouse at some
point in time or
The bankrupt has made substantial and traceable contributions to the property or its
improvement.
Contributions by the bankrupt spouse as a homemaker are unlikely to have an impact except
in Family Law proceedings.
Equitable ownership and antecedent transactions which may be void against the trustee are
covered in Part 3 of this Chapter.
Part 8:
Gambling and hazardous speculation
Summary
Where gambling or hazardous speculation is found to have materially contributed to a client’s
insolvency, they can be charged with an offence under the Bankruptcy Act. Selecting gambling
as a cause of bankruptcy in the statement of affairs may increase the likelihood of scrutiny for
the offence but is far from the only indicator used.
Usually prosecution will only occur where at least one of the following factors is present:
■■
■■
■■
A clear intention to deprive creditors of property
Other offences were also committed such as obtaining money by deception or
concealing money or assets from the Trustee
The bankrupt engages in repeated behaviour despite warnings – for example a second
or subsequent bankruptcy where gambling has been a significant contributor and the
bankrupt has already been warned.
Financial Counsellors can advocate against a client being prosecuted in appropriate cases by
providing evidence from qualified health care professionals that the client is a problem gambler
and is taking steps to address the issue.
The offence
Where it becomes apparent that gambling may have been a contributing factor leading to a client’s
insolvency, financial counsellors need to advise the client of the following provision of the Act:
Section 271
A person who has become a bankrupt after the commencement of this Act and:
(a) within 2 years before the presentation of the petition on which, or by virtue of the presentation
of which, he or she became a bankrupt, whether the petition was presented before or after the
commencement of this Act, materially contributed to, or increased the extent of, his or her insolvency; or
(b) during any period between the presentation of that petition and the date on which he or she
became a bankrupt, lost any of his or her property;
by gambling or by speculations that, having regard to his or her financial position at the time and
any other material circumstance, were rash and hazardous, being gambling or speculations not
connected with a trade or business carried on by him or her, is guilty of an offence and is punishable,
on conviction, by imprisonment for a period not exceeding 1 year.
How likely is it that my client will be prosecuted?
AFSA’s Regulation and Enforcement area (“R & E”) has primary responsibility for investigating
and referring alleged bankruptcy related offences to the Commonwealth Director of Public
Prosecutions (“CDPP”).
Prosecution action involves four steps:
1. The Trustee is required by Section 19(1)(h)&(i) of the Act to consider whether the
bankrupt has committed an offence under the Act, and if so, the Trustee is required to
refer the apparent offence to R & E. Failure to do so may constitute an error and breach
of a Trustee’s duty.
2. R & E examines the facts and circumstances involved and then makes a decision whether
to refer the alleged offence(s) to the CDPP. This process may involve investigation by R
& E, which could include the bankrupt being interviewed and providing a statement.
In some cases, R & E may decide that no further action is to be taken after giving the
bankrupt a “warning letter”
3. If the matter is referred to the CDPP, the CDPP will examine the matter and evaluate
the likelihood of obtaining a successful prosecution. In a number of cases a decision is
made not to proceed with prosecution action.
4. If the CDPP decides to prosecute, the matter goes before a Magistrate in a State Local
Court (or County Court, Magistrate’s Court or equivalent jurisdiction) who decides
whether to convict the bankrupt or not, and if convicted, the nature of the penalty.
The AFSA policy statement Referral Of Offences Under Section 271 of The Bankruptcy Act 1966
Rash and Hazardous Gambling Policy Statement,9 is very clear about the three cases in which
they will be likely to refer a case to the CDPP:
1. Clear criminality – For example, where a person gambles with the intention of depriving
creditors of money or property which would otherwise have become available for
distribution to creditors.
2. Complex offences – For example, where gambling is accompanied by offences such as
obtaining money by deception, or concealing assets from the trustee.
3. Ongoing allegations of repeat offending despite warning to the contrary – For
example, where a person has previously been bankrupt, there was possible evidence of
a breach of this section of the Bankruptcy Act, the person was given a warning letter
concerning this, and there is also evidence of gambling or hazardous speculation in the
current bankruptcy.
“This policy reflects the principle that the public interest is not generally served by prosecuting minor
incursions or by prosecuting persons who are suffering from a particular vulnerability or disadvantage.”
AFSA states that they will not refer a case if “it appears that the debtor could be classified as
having been a problem gambler and had not engaged in any associated criminal activity to
finance their gambling habit”. However, the policy statement emphasises that an allegation of
problem gambling will not prevent referral unless supported by evidence confirming that the
debtor is a sufferer.
Furthermore, if long-term offending and or repeat allegations are alleged, AFSA would expect to
see evidence of self-help having been undertaken by the bankrupt, or the matter would proceed
to investigation with prosecution action being recommended.
9
Insolvency and Trustee Service Australia, “Referral Of Offences Under Section 271 Of The Bankruptcy Act 1966 Rash and Hazardous Gambling Policy Statement”, Inspector General Practice Statement 6, updated January 2013
126
If you have a client who is being investigated for a potential breach of this provision and you
believe that the person is a problem gambler then you can advocate for your client by quoting
the AFSA policy statement and providing evidence to support your claim, including any report
from a relevant health professional and evidence of steps the client is taking to address the
problem (if any).
Overall, the number of referrals to the AFSA Enforcement Unit increased by 13%, and the number
of investigations commenced increased by 6% from 1 July 2010 to 30 June 2011. However:
■■
■■
■■
Gambling or speculation accounted for 3% of the causes of non-business related personal
insolvency for 2010 – 2011 (621 bankrupts)10
There were no prosecutions recorded for the offence under Section 271 for this period.11
For the period July 2011 to March 2012 there were 26 referrals made regarding
Section 271 offences, and one prosecution. 12
It is also interesting to note that the maximum term of imprisonment for most bankruptcy
offences increased from 3 to 5 years with the 2009 amendments to the Act but Section 271
remained unchanged at 1 year.
The provision is intended to punish and deter those who seek take advantage of the bankruptcy
system after expending their available financial resources on gambling activities instead of paying
their creditors, or those who become increasingly insolvent as a result of gambling, when it
appears likely (or inevitable) that they will become bankrupt.
Australian cases show that the prosecutor must be able to demonstrate all the elements of the
offence. In one case the defendant was acquitted because the conduct, while hazardous, was not
‘rash’. In another case the conduct had not been shown to have ‘materially contributed’ to the
bankrupt’s insolvency. There has, however, been one recent successful prosecution:
Example
On 27 March 2012, Mr Na who became bankrupt by sequestration order on 9 April 2009, pleaded
guilty in the Downing Centre Local Court to materially contributing to his insolvency by gambling.
Casino records revealed that Na regularly gambled on both gaming tables and poker machines.
Records show that between 2007 and 2009, Na wagered approximately $1,137,675 and during
this same period lost a total of $333,919.
Na filed his statement of affairs on 1 June 2009. On his statement of affairs he disclosed debts
to 17 unsecured creditors totalling to $798,500 and a secured creditor for a debt of $522,439. He
also disclosed the main cause of his insolvency was gambling.
He was convicted but released without a custodial sentence on condition that he be of good
behaviour for 3 years. Na was also ordered to pay recognizance of $2,500 plus court costs.13
In summary the likelihood of your client being prosecuted for breaching Section 271 of the
Act is not very high (unless the amounts involved are very high) and only a very small number
of matters that Trustees refer to AFSA result in a conviction. Your clients must, however, be
informed of the possibility where this is relevant.
10 Inspector-General of Bankruptcy, ‘Inspector-General of Bankruptcy on the Operation of the Bankruptcy Act Annual Report 10/11’,
Commonwealth of Australia (2011), p19 accessed at https://www.afsa.gov.au/about-us/annual-report/previous-annual-reports/i-g-annual-reports-from-previous-years/annual-report-2010-2011
11
“Annual Report 10/11” at p57
12 Personal Insolvency Regulator, Personal Insolvency Regulator Newsletter (Vol 10, Issue 2) (May 2012)
13
Extracted from ITSA media release April 2012 accessed at https://www.afsa.gov.au/resources/media-kit/resources/media-kit/
media-archive
Policy issues
Section 271 has been criticised by financial counsellors and other advocates. Concerns include:
■■
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Part 9:
The provision is effectively retrospective because it is the ultimate insolvency of the debtor
which criminalises conduct carried out up to 2 years previously that was not, in and of
itself, illegal at the time;
Uncertainty about how problem gambling is defined by AFSA and what evidence will be
sufficient to establish that the person is a problem gambler;
Potential under-reporting as a result of the potential to be charged with a criminal
offence – The AFSA Annual Report reports that only 3% of bankruptcies were caused by
‘gambling or speculation’14, whereas other reports indicate that the real figure is probably
significantly higher.15 This is an impediment to contributing useful data to public policy
debate about problem gambling.
Death and bankruptcy
Summary
The Bankruptcy Act provides for the administration of a bankrupt estate after the death of the
bankrupt. This can be at the instigation of creditors or the executor of the estate (for example,
as an alternative to the State based process in circumstances where there are more debts in
the estate than assets and the executor would like to hand the administration over to a Trustee).
A common concern of relatives of a deceased debtor is that they may be liable for the debts.
This is not the case, but there may be less money or property available (or none in the case
of a bankrupt deceased estate) for distribution under a will because debts must be paid out of
the estate prior to distribution.
Whether a deceased person’s share of a jointly owned property is available for creditors (whether
the deceased is bankrupt or not) will depend on whether the property is owned by the deceased
and another person (or people) as joint tenants or as tenants in common.
The administration of insolvent deceased estates
Part XI of the Bankruptcy Act allows for the administration of the estates of deceased persons
who were either insolvent when they died or when a deceased estate becomes insolvent due
to debts incurred by the legal personal representative of the deceased estate (for example, the
executor) after death.
Creditors can also apply for an administration order to be made against the estate of a deceased
debtor. There does not need to be an act of bankruptcy but there must be a debt or debts
totalling $5,000 as with any other Creditor’s Petition (See Chapter 10 – Help I’m being made
bankrupt!). A judgment debt or Bankruptcy Notice is not required.
Where there is an insolvent deceased estate it can also be administered under the appropriate
State and Territory laws. For example, the Probate and Administration Act 1898 (NSW) or the
Administration and Probate Act 1958 (Vic), provide for the proportional division of the estate
among creditors where there is insufficient funds to pay the debts in full. However, it will often
be easier for the executor or administrator to apply to the court for an administration order
under the Bankruptcy Act and allow the trustee to deal with the creditors and beneficiaries.
Administration of a deceased estate under Part XI of the Bankruptcy Act also gives the Trustee
the power to recover property that would not be available to creditors under State and Territory
probate laws due to the antecedent transaction provisions of the Bankruptcy Act (such as
14
Inspector-General of Bankruptcy, ‘Inspector-General of Bankruptcy on the Operation of the Bankruptcy Act Annual Report 10/11’,
Commonwealth of Australia (2011) 19
15
NSW Council on Problem Gambling, Statement of Policy, Found at http://www.pc.gov.au/__data/assets/pdf_file/0006/49812/
sub057.pdf 3 February 2012
128
undervalue transactions, preferential payments or transfers to defeat creditors). Once a State
based estates administration process has already commenced, the matter can only be dealt with
under the Bankruptcy Act with the leave of the court.
The Official Receiver’s Practice Statement 5 – Insolvent Deceased Estates (Part XI of the Bankruptcy
Act 1966), updated December 2012 gives information on the process.
As a financial counsellor the most likely scenario is where the executor of a deceased estate decides
to file for bankruptcy under Part XI of the Bankruptcy Act.
The connection with Australia rules apply with regard to the deceased at the time of death.
When an executor applies to make a deceased estate bankrupt, the petition must be presented to
the court (not the Official Receiver) and must be accompanied by a Statment of the Deceased
Person’s Affairs. The required paperwork is detailed in the above Practice Statement. Recent
changes to the regulations also require that the legal personal representative give the Official
Receiver a copy of the petition within 2 working days after the court endorses it.
What happens if the bankrupt dies before being discharged?
The administration of the bankrupt estate continues as far as practicable.
What if the debtor is served with a bankruptcy notice prior to death?
If debtor dies before service of Creditor’s Petition, the creditor is required to proceed and present
a Creditor’s Petition under Part XI of the Act.
What if the debtor dies after service of a Creditor’s Petition?
If the debtor dies after the Creditor’s Petition has been presented but before it is served, the
proceedings lapse and the creditor must commence new proceedings under Part XI of the Act.
If debtor dies after service of Creditor’s Petition but before the sequestration hearing the court can:
■■
Make order that estate be administered under Part XI
■■
Make an order to dismiss Creditor’s Petition (on the usual grounds – See Chapter 10).
Relatives and their liability for the debts of the deceased
When a person dies with debts, the relatives can be confused about the extent to which they
are liable for those debts. In some cases creditors may even pressure the relatives for payment
(or the relatives may perceive they are doing so because they are receiving phone calls or sorting
through mail intended for the deceased).
The deceased person’s estate is liable for the person’s debts but the relatives are not. This may
impact on the relatives if they receive less by way of inheritance than they otherwise would, but
it does not mean they are liable to pay the deceased person’s debts from their own funds.
If there is another person who owns property with the deceased (for example, their children or
their partner) what happens will depend on whether they own the property as joint tenants or
tenants in common (See Part 3 of this Chapter). If they own the property as tenants in common,
the deceased person’s share of the property (e.g. 30% or 50%) may be available to creditors. The
amount of the share should be clear from the title documents or a title search. If the property
is owned jointly, then the full amount of the deceased person’s share passes to the other joint
owners as a result of the doctrine of survivorship and none of it is available to creditors (unless
the joint owner is also a joint debtor or guarantor).
► see checklist for this chapter in Chapter11: Tools and Resources
Notes
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7
I’VE DECIDED — SO HOW DO I DO IT?
Contents
Part 1: Declaration of Intention to Present a Debtor’s Petition 131
Part 2: Completing the Debtor’s Petition 136
Part 3: Completing the Statement of Affairs
143
In the case of the Statement of Affairs the Chapter looks at:
Part 1:
■■
Why a question is asked (what will it be used for)?
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What to include in the answer
■■
What tricks and traps to look out for
Declaration of Intention to Present a Debtor’s Petition
➻➻ Note: See Chapter 5 for information about the consequences of entering a Declaration of
Intention to Present a Debtor’s Petition (“Declaration of Intent”) and the circumstances in which it
is appropriate.
You must ensure your client understands the importance of ensuring the information in this
form is complete and accurate. Blue or black pen must be used to complete the Declaration of
Intention to Present a Debtor’s Petition, Suspension of Creditor Enforcement form (“Declaration
of Intent”). Generally speaking financial counsellors should encourage clients to complete their
own paperwork to ensure they are fully engaged with the process and take responsibility for
their own information.
The client must be ordinarily resident in Australia, or be physically in Australia, or have a residence
in Australia, or have a business connection to Australia. Usually giving an Australian address
will be sufficient to establish this unless other information indicates there may be no Australian
connection – in that case the Official Receiver may initiate further enquiries.
From a practical point of view you should make sure the name(s) and other details on the form
match those being used by any current credit provider, particularly where there is imminent
enforcement action that the client is seeking to suspend by lodging the Declaration of Intent.
Always check the AFSA website (www.afsa.gov.au) to ensure that you have the latest version of the
forms. Processing you client’s Declaration of Intent may be delayed if they do not complete and
submit the latest forms. This may not only be inconvenient, but could have serious consequences if
your client is facing imminent enforcement action such as a garnishee, or writ for levy of property.
Authorised person
This section allows the debtor (client) to authorise a person to talk with creditors.
The completion of this section will put the authorised person in the position of having agreed
to negotiate with creditors during the stay period. Before doing this it is very important to
consider whether this is:
■■
Something the authorised person is qualified to do, and
■■
Something the authorised person has the time to do, and
■■
Something that is likely to produce results.
For many financial counselling clients the negotiation process may have already occurred.
If the debtor is only choosing to use a Declaration of Intent to stay enforcement action and to
give him or herself time to complete their bankruptcy paperwork this authorised negotiation
period is unlikely to be of any practical use to the debtor.
Using a Declaration of Intent to try to force negotiations is a risky strategy especially as it is an
act of bankruptcy and requires the debtor to complete a list of debts, income and assets that will
be made available to the trustee in the event of a subsequent bankruptcy. Using a Declaration
of Intent as a negotiation tool should only be done after legal advice has been sought. Usually
it should be reserved for those situations where bankruptcy appears otherwise inevitable. The
Declaration of Intent will not be recorded on the NPII.
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Your financial affairs, secured assets and other assets
In completing the sections in relation to the client’s financial affairs, the details need to be to the
best of the debtor’s knowledge and understanding. That is the debtor puts the amounts owing
to creditors, value of assets, level of income etc as they understand them to be, irrespective of
how accurate those figures may be.
It is most important that your client discloses accurate information about their creditors (to the
best of their knowledge) because this information will be used by AFSA to notify their creditors
of the freeze on enforcement action. Check the details against the client’s statements or contracts
if these are available, but do not delay the process if time is of the essence. Creditors do not get
a copy of this statement of affairs, only a summary of the details to enable them to assess the
debtor’s financial position and decide whether they should accept a proposal by the debtor as
to an alternative agreement or possible compromise.
You will note that the financial information required in the Declaration of Intent is very similar
to that required in the statement of affairs accompanying a Debtor’s Petition. You should warn
your client that this information will be available to the Trustee to compare to later information
if the client ultimately goes bankrupt (so any mismatch in debts or assets will be immediately
apparent and lead to further questions or investigation – see Chapter 6, Part 3 in relation to
antecedent transactions).
Note the explanation of related creditors in the section on completing the statement of affairs.
The accuracy of the details in this section is vitally important for stopping enforcement action.
When faxing or e-mailing the Declaration of Intent forms to AFSA, always request AFSA to
acknowledge receipt of the forms (particularly if enforcement action is imminent).
Your client must read and understand the prescribed information before signing and dating the
section below.
Assisting the client to complete the paperwork
Where the client is unable to read and complete the form due to language issues use of an interpreter
is essential. Where the client speaks English but is unable to write, then some services require
or encourage the use of a scribe (rather than the financial counsellor completing the forms).
Financial counsellors need to be seen to be presenting impartial advice and also acting as scribe
or interpreter could raise questions of conflict of interest and professional care. Completing the
paperwork also puts the financial counsellor in a more difficult position should the client later
insist that the financial counsellor did not faithfully reflect the client’s instructions.
Lodging the documents
The Declaration of Intent can be lodged with AFSA by email, fax or post. Where enforcement is
imminent (and usually it will be if this option is being used) then e-mail or fax are clearly preferable.
Email: [email protected]
Fax: 08 8112 4305
Post: GPO Box 1550, Adelaide SA 5001
What happens once a Declaration of Intent has been accepted?
If the Declaration of Intent is accepted (See Chapter 5 for reasons why a Declaration of Intent
may not be accepted), then the Official Receiver must give written notice of the acceptance of
the Declaration of Intent to each of the creditors disclosed in the debtor’s statement of affairs (s
54C). This is generally done within 2 working days of acceptance. The debts of your client that
would be provable in bankruptcy if the client proceeded to present a Debtor’s Petition are then
“frozen” for the stay period. The stay period begins on the day the Declaration of Intent is accepted
and ends after 21 days (including the day of acceptance) unless the debtor files a Debtor’s Petition,
enters a Personal Insolvency Agreement, has a Creditor’s Petition presented against him or her
or is subject to a sequestration order within that period.
➻➻ Important: A Declaration of Intent will stop court based enforcement action but it will not stop a
Creditor’s Petition! You are not permitted to lodge a Debtor’s Intent while a Creditor’s Petition is
pending.
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Once a debt is frozen, the creditor cannot commence or continue with any enforcement process
or remedy against the person or property of the debtor. The creditor can, however, commence
legal proceedings against the debtor, or take any step in legal proceedings, provided it is not to
apply for an enforcement process. The creditor is also given an extension of time equivalent to
the period of the stay in which to apply for any enforcement process after the period has expired
if the debtor does not proceed with the bankruptcy.
What if the Sheriff has already tagged or taken possession of
my client’s goods?
Once the sheriff receives a copy of the accepted Declaration of Intent, he or she must take no
further action. If the property of the debtor has been tagged but not taken, then it cannot be
taken during the period of the stay. If the sheriff has taken possession of property but not sold
it, then it must not be sold. If the property has already been sold, then the proceeds cannot be
given to the creditor. However, any person who has already purchased the goods in good faith
will not have to return them.
In extremely urgent cases, it would be prudent to contact the sheriff to verify that they have
received a copy of the accepted Declaration of Intent and acted on it. Whilst AFSA usually
emails the copy of accepted Declaration of Intent to sheriffs and paymasters, AFSA does not
follow up to check whether they have acted on it. If it appears that the sheriff or paymaster is
non-compliant (not refraining from taking enforcement action), AFSA should be contacted
immediately.
➻➻ Note: The practical effect of the Declaration of Intent provisions of the Act is that if a sheriff
has already taken action (e.g. taken goods in the morning prior to the receipt of the copy of the
accepted Declaration of Intent), the sheriff is not obligated to return the goods to the debtor during
the stay period. However, in some cases the sheriff may be able to be persuaded to release the
goods back to the debtor (the debtor would usually have to collect the goods at their expense).
How do I stop my client’s wages being garnisheed?
As stated above, AFSA usually notifies the paymaster of the accepted Declaration of Intent
by email, however AFSA does not follow up to check whether the paymaster has acted on it.
Therefore, it would be prudent to contact the paymaster to verify that they have received a copy
of the accepted Declaration of Intent and stopped the garnishee on the debtor’s wages/salary.
It should be noted here that garnishees issued by the Taxation Commissioner under s260-5 of
Schedule 1 to the Taxation Administration Act 1953 may not be affected by a declaration of
intent or bankruptcy because the ATO is treated as a secured creditor once the notice has been
issued. If your client is in this position you should refer them for legal advice.
What if my client does not proceed with the bankruptcy?
If the client does not come to some arrangement with creditors following the presentation of
the Declaration of Intent and does not present a Debtor’s Petition, they will leave themselves
vulnerable to enforcement action by their unsecured creditors after the expiry of the stay period
(for example seizure of their goods by the sheriff and/or garnishee of their wages/salary). If goods
have already been seized they will be sold, and any garnishee would recommence. A creditor may
also rely on the Declaration of Intent to apply for a Creditor’s Petition. If this occurs see Chapter
10 – Help I’m being made bankrupt! and encourage your client to seek urgent legal advice.
What if my client does proceed with the bankruptcy?
Goods seized by the sheriff.
The Act prescribes that upon the bankruptcy of the debtor, the sheriff is required to deliver to
the Trustee all the property that has been seized, and the property that is protected property
(for example household items, motor vehicles under the prescribed value, etc – See Chapter 6,
Part 2) which does not vest in the Trustee, is to be returned to the bankrupt by the Trustee. The
Act also prescribes that such items are subject to a first charge for the sheriff ’s enforcement costs.
However, in practice the Trustee will usually notify the bankrupt that the goods are available
for collection from the Sheriff who will release them upon payment of the enforcement costs.
In the case of say a Disability Support Pensioner, the sheriff may be amenable to a persuasive
request that the goods be delivered back to the bankrupt.
Garnishee on wages/salary.
Once the paymaster is notified by the Trustee of the employee’s bankruptcy, the paymaster is
required to cease enforcement of the garnishee. Any moneys held by the paymaster that have
not been paid to the creditor are to be repaid to the employee. The Trustee will decide whether
to take action to recover the moneys paid to the creditor by way of the garnishee as preference
payments under the provisions of Section 122 of the Act (See Chapter 6, Part 1 & 3).
➻➻ Note: again the exception for notices issues under the Taxation Administration Act 1953. Refer
your client for legal advice if necessary.
Part 2:
Completing the Debtor’s Petition
Checklists and file notes
In Chapter 13, Tools and Resources find a set of Bankruptcy Checklists. Checklists are important
to make sure you cover everything that is necessary each and every time. Even very experienced
people can occasionally forget something they know well as a result of the process becoming so
routine. However, using a checklist is not enough. Whatever tools you use, you need to end up
with a clear record for every client of:
1. The instructions you received from the client; and
2. What you told the client in response to those instructions.
In this way you will have a comprehensive record of the interview in the event of problems later.
Emphasise to your client that knowingly providing false and/or misleading information is an
offence under the Bankruptcy Act and penalties apply on conviction. The normal 3 year and
1 day period of bankruptcy can be extended to 5 or 8 years in certain circumstances for failure
to include information or providing false information. The time limits for the Trustee to take
action to claim property can also be extended as a result of non-disclosure.
It is best practice to get the client to fill in the forms, rather than doing it for them. Some services
even use a scribe where the client is unable to complete the forms, rather then the financial
counsellor doing it for them. Getting the client to complete the forms is one way of ensuring that
client takes responsibility for the information provided to AFSA. It also makes it more difficult
for a client to later allege that the financial counsellor has conveyed their instructions incorrectly,
or failed to take instructions in relation to a particular answer at all. This does not mean that the
financial counsellor can avoid any responsibility for any advice or information provided, either
about how to fill the forms, what to include or not include, and what the consequences of the
process will be for the client. You still need comprehensive file notes.
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Electronic lodgement
AFSA is currently working towards allowing Debtor’s Petitions to be lodged online. Financial
counsellors and consumer advocates have concerns about this process – particularly about clients
being able to file for bankruptcy too easily without appreciating the consequences or taking time
to think the decision through. An interested group has met with AFSA to discuss these concerns
and we hope that AFSA will consult extensively in the lead up to launching this facility.
In the meantime it is our understanding that the content of the questions will remain substantially
the same so the information in this Chapter should remain useful. If not, this Chapter may need to
be updated at that time to capture any significant changes in the content or order of the questions.
Fee for lodging a Debtor’s Petition
Between 1 April and 23 June 2014 a fee of $120 was payable to lodge a Debtor’s Petition.
This is no longer applicable thanks to successful lobbying by consumer advocates and financial
counsellors. Instead the government is likely to increase the realisations charge payable to AFSA
on amounts received by the Trustee for the benefit of the bankrupt estate (this charge also
applies to Debt Agreements, Compositions and PIAs). This will usually only affect bankrupts
in circumstances where they have sufficient funds to annul the bankruptcy, as this is one of the
costs of administering the bankruptcy. Regardless of the Debtor’s Petition fee, the realisation
charge increased on 1 July 2014 from 4.7% to 6%.
Who can lodge a Debtor’s Petition?
Section 55 sets out who can lodge a Debtor’s Petition:
The person must have the necessary connection to Australia, either –
■■
being personally present or ordinarily residing here, or
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having a dwelling house or place of business here, or
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carrying on a business here (including through an agent or manager), or
■■
being a member of a firm or partnership carrying on business here.
■■
■■
The person is not in a Debt Agreement (unless leave has been obtained from the court to
lodge a Debtor’s Petition)
The person has not executed a Personal Insolvency Agreement (unless leave has been
obtained from the court to lodge a Debtor’s Petition) except where the PIA has been set
aside, terminated or all the obligations discharged.
A search of the NPII will be done to determine whether the person lodging the petition is already
in a Debt Agreement or PIA.
The Official Receiver may also reject a Debtor’s Petition where:
■■
It is not substantially in the approved form
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It is not accompanied by a statement of affairs
■■
The statement of affairs accompanying the petition is inadequately completed
■■
■■
Where the debtor has been bankrupt on a Debtor’s Petition at least once already in
the past 5 years, or 3 times ever, AND it appears from the information provided in the
statement of affairs that he or she could pay his or her debts within a reasonable time.
Where it appears from the information provided in the statement of affairs that the
debtor could pay his or her debts within a reasonable time debts but is unwilling to pay
one or more of them.
Where a person is dissatisfied with the Official Receiver’s decision to reject his or her petition, an
application for review of the decision can be made to the Administrative Appeals Tribunal (AAT).
Where a Debtor’s Petition is rejected (either because of incomplete forms or any other reason)
it is not recorded on the NPII. A copy of the forms will be returned to the debtor with an
explanation of why they have been rejected. AFSA keeps a copy on its administrative system only.
The Official Receiver must refer a Debtor’s Petition to the court (for direction on whether or
not to accept it) where:
■■
■■
■■
■■
The debtor is one of a group of debtors against which a Creditor’s Petition is pending
(whether they are joint debtors or members of a partnership) [Section 55 (3B)].
One or more members of a partnership have lodged a Debtor’s Petition but not all the
members of a partnership [Section 56C (1)(a)].
There is a Creditor’s Petition pending against one or more but not all the members of a
Partnership (if the Creditor’s Petition is against all of them there is no need to refer the
matter to the court) [Section 56C (1)(b)].
Two or more debtors have lodged a joint Debtor’s Petition and at least one (but not all) of
them is subject to a pending Creditor’s Petition [Section 57(3B)].
Usually AFSA will contact the debtors to discuss whether they wish to withdraw the petition
before referring it to the court.
Mentally incapacitated debtors
A Debtor’s Petition cannot be lodged by someone else with the debtor’s Power of Attorney.
In NSW and WA, a person who has been appointed as the debtor’s guardian or administrator
to manage their financial affairs can lodge a Debtor’s Petition on behalf of that person. In other
States and Territories a specific order to this effect must be obtained from the relevant court
or tribunal.
Prescribed information
Before accepting a Debtor’s Petition, the Official Trustee must give the debtor the information
prescribed by the regulations. In practice this is included in the Forms. Financial counsellors
will in all cases have not only drawn the client’s attention to the prescribed information, but
also have explained the potential consequences (as outlined in Chapter 6) in significant detail.
Client authority
If you are lodging the forms on behalf of your client and wish to be contacted in relation to any
questions or follow up information required, AFSA now require an authority completed by your
client before they will disclose any information to you. For this reason you should get the client
to sign an authority as part of your standard bankruptcy interview practice and keep it on the
file in case you need it later in the process. There is a Third Party Authority form available on the
AFSA website – select Resources on the home page and then Financial counsellors.
Latest version of forms (see bottom left corner)
Always check the AFSA website that you have the latest version of the forms. Your client’s
bankruptcy may be delayed if they do not complete and submit the current forms. This may
not only be inconvenient, but could have serious consequences if your client is facing imminent
enforcement action such as a garnishee, or writ for levy of property. You can check whether the
forms you have are the latest forms by going to www.afsa.gov.au and selecting Forms and then
selecting Forms for debtors.
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Questions: From title to date of birth
Your client must use blue or black pen to complete the Debtor’s Petition and Statement of
Affairs. Clients should be encouraged to complete their own paperwork to ensure they are
fully engaged with the process and take responsibility for their own information. If they have
difficulty in doing this it is recommended that a scribe and/or an interpreter be involved in the
process. This is to ensure that the client feels in charge of the process and takes responsibility
for the accuracy of their own information.
➻➻ Remember: information on the debtor’s statement of affairs is to the best of their knowledge and
recollection.
It is very important that your client includes all names previously used in the last 10 years. For
women, remember to ask about the use of their maiden name, or any previous married name.
For clients from other cultural backgrounds who may have anglicised their name, check that you
have their traditional name also and be careful to distinguish family names from given names
as the order they are given varies from culture to culture (it may be wise to include the reversal
of the names as a previous name as creditors also get this wrong).
This is necessary for two reasons. Firstly, it is important that the Trustee is able to identify all
debts which should be included in the bankruptcy, regardless of the name used. Secondly, as
noted above, the bankruptcy may be extended if the Trustee forms the view that the debtor has
withheld pertinent information and lodges an objection accordingly. Intentional omissions
may lead to prosecution. It may be useful to obtain a copy of your client’s credit report in order
to determine whether the credit reporting agencies have any additional names associated with
your client.
Tip ►
Clients who are concerned for their own physical safety
If your client fears that his or her safety may be compromised by the inclusion of their address
on the NPII they can apply in writing to the Inspector-General to suppress the address only
(the name, date of birth and details of the insolvency process will remain). Evidence such as a
copy of any court orders or reports from police, a social worker, a medical practitioner or other
relevant professional should be supplied along with the request. Where your client is lodging
a Debtor’s Petition, then the request should be lodged at the same time to avoid unnecessary
publication.
A decision on the suppression of the debtor’s address will usually be made within 1 day and the
response supplied to the applicant in writing. Review by the Administrative Appeals Tribunal
is available if the client believes the request has been unreasonably refused.
Question: Relevant Australian connection
Section 55 of the Act prescribes that the debtor must have some connection with Australia,
the most common one being that they are present in Australia or they ordinarily reside here.
Australian citizenship is not a requirement. If you have any doubts in this regard contact AFSA
for further guidance.
If your client is on a visa, particularly any sort of business visa, check with the Department of
Immigration to determine whether there will be any impact on their immigration status.
The debtor is required to disclose all their debts, including debts incurred overseas. Whilst
bankruptcy will stop overseas creditors from taking enforcement action in Australia, if the
bankrupt returns to the country where the debt was incurred (e.g. New Zealand) the creditor
can take recovery/enforcement action against them in that country. In that case they may need
to seek advice on bankruptcy or any similar options available in that jurisdiction. It may also be
possible that debts in the other country will be enforced against any property of the bankrupt
located in that jurisdiction.
Question: Individual debtor, partnership or joint petition
Generally speaking your client will be ticking the first option above – “As an individual debtor”.
Where a couple both want to become bankrupt there are distinct advantages to petitioning
individually rather than jointly because each client will be able to keep a car below the threshold
value.
A further advantage which will appeal to your clients is that if they present a joint petition they
will need to complete three statements of affairs to accompany their Debtors’ Petition – that
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is a separate one for each of them plus a joint statement of affairs. So if they present separately
they will have one less statement of affairs to complete.
Section 56A of the Act provides that the majority of the members of a partnership (for example,
two of the three partners) can present a Debtors’ Petition against the partnership. This may arise
where one of the partners is overseas temporarily. Financial counsellors should be very wary
about getting involved in this area unless their client has obtained specialist advice and made
this available to the financial counsellor.
See also the introductory comments at the commencement of this section on Who can lodge a
Debtor’s Petition? about when a Debtor’s Petition must be referred to the court.
Question: Proof of identity
Whilst there is no obligation for financial counsellors to verify the accuracy of the information
being presented by clients, you do need to verify a sample of the client’s identification with critical
details (such name, address, date of birth, etc) for correctness. This is now an essential part of
the filing process for a Debtor’s Petition.
The instructions contain a list of acceptable forms of identification. While the client does not
have to provide a copy of the identification documents relied on to AFSA, you should sight these
documents and confirm that the details have been correctly transcribed.
Make sure your client adequately explains any different name appearing on identification documents
as compared to the Contact Details question above in the space provided.
Section: Declaration of person assisting with completion of
forms
If you are using an interpreter you need to ensure that they are qualified for the role and that
they understand about confidentiality. They will have to be prepared to sign the documents – if
they are not you will need to arrange an alternative interpreter.
If you do assist with completing the forms you should record the reason why (both on the
form and in your notes) – for example, the client does not read and write English, the client is
otherwise illiterate, or the client has a disability (such as a visual impairment). Carefully read
the instructions in the form in relation to completing the forms for persons who are physically
incapacitated or unable to read.
Using a scribe
Some services have a policy that financial counsellors never fill in the forms. If the client does
not have the capacity to complete the forms, then a scribe is used, either an associate of the
client or another staff member at the agency. In this way the delineation is clear – the financial
counsellor is providing advice and assistance and the client is taking responsibility for the
accuracy and completeness of the information (to the best of their knowledge) and the decision
to go bankrupt.
Section: Acknowledgement and Signature
Make sure the form is signed and dated in the correct format.
As your client is signing to say that they have received and read the prescribed information, it is
recommended that you talk through the prescribed information with your client again, even if
you have already discussed these things at a previous interview. Complaints about bankruptcy
often relate to misunderstandings about the potential consequences.
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Part 3:
Completing the Statement of Affairs
A question by question guide
The statement of affairs is an important document and should be completed very carefully. There
can be consequences of either omitting vital information and/or making misleading statements
in it. Accordingly you should go through the statement of affairs with the client question by
question, pointing out common problems related to some of the information requested in the
form. Sometimes the client’s answers to one or more questions may prompt you to warn them
about a potential consequence that may be serious enough to reverse their decision to go bankrupt.
Additional notes
There is a large space provided for additional notes on the back of the 1st page of the statement
of affairs which can be used to provide additional information that may assist the Trustee and
can save your client from responding to letters/phone calls from the Trustee seeking further
details and/or clarification of issues. For example, if the client’s home has been acquired with
the proceeds of a personal injury compensation claim (See Chapter 6, Part 2), details of the
payment and contact details of the solicitor who acted on the claim and purchase of the house
could be included here. Attaching copies of documents in that regard is also recommended (do
not attach originals).
If your client has a large number of unsecured debts and needs an additional page(s) to disclose
all their unsecured creditors, these are available on the AFSA website. It is good practice for you
to keep copies of additional unsecured creditors pages along with the rest of the paperwork.
Again, check you are using the latest forms.
Assisting clients who have been made bankrupt as a result of a
creditors petition
Usually your client will be completing the statement of affairs in order to lodge with a Debtor’s
Petition. However, you may also find yourself assisting clients to complete and lodge
their Statement of Affairs because they have already been made bankrupt by virtue of a
sequestration order made by the court. In these circumstances it can be even more difficult
for the client because the decision has been taken out of their hands. It might also be more
technically complicated to complete the forms because, unlike debtor’s who have opted for
bankruptcy, these clients may have considerable assets and complicated financial affairs.
Always make use of the resources available to you such as your supervisor, colleagues and
AFSA but remember that these clients have no choice – you are not advising them about
a difficult decision – you are just assisting them to complete the forms as accurately and
honestly as possible. Perhaps most importantly to the client, the time on their bankruptcy will
not start to run until the statement of affairs has been lodged, so it is important to encourage
them to get the forms in as soon as practically possible
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Part A
Part A of the Statement of Affairs is not available to creditors or the public, and it is used only
by AFSA and the Trustee.
Question 1: Personal contact details
Generally AFSA and Trustees correspond with debtors and bankrupts by email given its
convenience and low cost. If the debtor/bankrupt does not respond to email within a reasonable
time, a letter will then be sent. Accordingly, clients who wish to have their Debtor’s Petition
accepted quickly should check their emails regularly to see whether there is a query from AFSA
concerning the forms they have lodged. Clients should not supply an e-mail address if they do
not, or cannot, access it regularly. Providing an e-mail address with a supplier who may have a
provable debt in the bankruptcy (meaning the client is at risk of disconnection) is also a bad
idea as this may simply delay dealings with AFSA.
Question 1: Contact person
These details are required to enable AFSA and/or the Trustee to contact the debtor/bankrupt
if they are unable to reach the person directly. Accordingly, contact will only be made with this
person in the event that the debtor/bankrupt does not respond to direct approaches by AFSA
and/or the Trustee.
Question 1: Passport(s)
A bankrupt is not permitted to leave Australia without the written permission of the Trustee.
Whilst the Trustee can request the client to hand over their passport, they generally do not make
such a request unless they have genuine concerns that the bankrupt is a flight risk. Alternatively
the Trustee may apply to have the bankrupt listed on a Ports Watch List in these circumstances
so that they will be identified by immigration officials if they try to leave the country.
A bankrupt who wishes to travel overseas while bankrupt can seek the permission of the Trustee
to do so by lodging a written request for such permission (including by email). Usually permission
is granted if the travel is associated with the bankrupt’s employment or they are seeking to travel
on compassionate grounds. More information on travel restrictions is found in both Chapter
6, Part 5 and in Chapter 8 (including seeking permission to travel).
You should ensure that clients who need to travel for work, or who have overseas relatives, are
fully aware of the travel restrictions associated with bankruptcy and the penalties for travelling
without permission (See Chapter 8).
Question 1: Driver’s License
These details are used by the trustee in verifying the bankrupt’s identity. This may be useful if a
proof of debt is disputed by the Trustee. Also, if the Trustee cannot contact the bankrupt these
details are required for identification purposes when the Trustee engages the Federal Police to
locate the bankrupt. See Offences section in Chapter 8. Additional identity details are now
required as part of completing the Debtor’s Petition (see previous section).
Question 1: Demographics (ATSI, country of birth and language)
This information is required purely for statistical purposes and is used in compiling the AFSA
publication Debtor’s Profile which is released from time to time.
Questions 2 & 3: Accountant and Solicitor
The details are used by the Trustee for contact purposes to obtain copies of various documents
such as the financial records of the bankrupt’s former business, tax returns, and/or details of legal
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proceedings to which the bankrupt is/was a party. Quite often these professionals are creditors
of the bankrupt for unpaid fees and will not release the documents to the bankrupt, whereas
the Act empowers Trustees to compel the release of these records.
If these professionals are owed fees it is unlikely they would be willing to assist the debtor in
presenting their Debtor’s Petition.
Question 4: About your family
The main purpose in seeking these details relates to the process of assessing the bankrupt for
income contributions (See Chapter 6, Part 4). The information is needed to determine whether
the bankrupt is entitled to claim his/her spouse and/or children as dependants when determining
the level of after tax income that the bankrupt can retain before they become liable to pay income
contributions to the Trustee (See Chapter 6, Part 4).
Clients are often concerned about what this will mean for the non-bankrupt spouse: Will AFSA
notify them? Will they be pursued for the client’s unpaid debts? The bankruptcy may affect their
non-bankrupt spouse/partner in a number of significant ways:
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If the bankrupt and their non-bankrupt spouse jointly own property the Trustee will
usually ask the non-bankrupt spouse to purchase the bankrupt’s interest in the property
for an amount based on current market values (less any mortgage over the property). If
the spouse is unable to do this, then the Trustee will seek to sell the property and pay the
non-bankrupt partner his or her share of the equity (For more details on this topic See
Chapter 6, Part 3).
If there are joint loans, or the spouse/de facto partner is a guarantor for a loan of the
client, then the spouse/de facto will become solely responsible for payment of that
debt and the lender will probably pursue the spouse/de facto partner for the debt (See
Chapter 6, Part 1).
If the bankrupt has guaranteed the non-bankrupt’s spouse’s loan or overdraft (or de
facto spouse’s), the lender could respond by seeking additional security or calling in the
amount outstanding depending on the lender’s rights under the contract;
The spouse/de facto partner may be affected in other practical ways, such as the
requirement for the client to pay income contributions or the restriction on travel, or
difficulties obtaining credit or insurance jointly in the future (See Chapter 6, Part 5).
➻➻ Remember: There may also be positive impacts, for example, where the income of the family
available for living expenses is increased because of the prevention of recovery of provable debts
by creditors.
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The spouse/de facto may feel or experience some stigma by association.
It is ultimately the client’s decision whether to tell the spouse about the bankruptcy, but in most
circumstances their finding out is almost inevitable and the client needs to be aware of this. This
is especially the case where there is joint property or joint loans, or a situation where one spouse/
partner has guaranteed the other’s loan or loans.
Question 5: Child Support
The primary use of this information relates to assessment of the bankrupt for income contributions
(See Chapter 6, Part 4). If your client pays child support then that amount is deducted from
their income when assessing their liability for income contributions.
If your client receives child support that amount is not classed as income for contribution
assessment purposes. Also, child support payments being received by your client are to be included
in questions 9 & 10 which relate to present and future income.
Question 6: Family law proceedings
Insolvency and family relationship disputes are often closely linked. The information in this
section is required to put the Trustee on notice of any current family law proceedings which
may involve your client’s property and/or income. In 2005 amendments were made to both the
Bankruptcy Act and the Family Law Act whereby the Family Court can now make orders in
respect of property that has already vested in the Trustee of a spouse’s bankrupt estate. Also a
Trustee can now become a party to proceedings initiated by a member of the separating couple
in the Family Court, or can apply to have family law orders or agreements set aside in certain
circumstances. Accordingly, a Trustee needs to know whether any relevant family law proceedings
have taken place, are underway or likely. [See Chapter 6, Part 7 Family Law & Bankruptcy].
Question 7: Legal actions
Your client is required to disclose these details to enable the Trustee to decide whether to continue
the action (the bankrupt’s contractual rights, for example, vest in the Trustee). Generally a
bankrupt cannot continue civil proceedings in their own right with the exception of some claims
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for personal injury or wrong ). Whilst claims for personal injury to the bankrupt or a member of
their family are protected and can be continued by the bankrupt, they also need to be disclosed
here (See also Court Proceedings in Chapter 6, Part 5).
Criminal charges against the bankrupt will continue regardless of the bankruptcy, but it may be
useful for the Trustee to have notice of any impending fines or unavailability of the bankrupt
due to incarceration (in case it is misunderstood as a failure to cooperate).
If your client is subject to a Creditor’s Petition, details of the creditor and their solicitor should
be shown so that they can be contacted and advised of the Debtor’s Petition.
Question 8: Proceeds of Crime Orders
It would be very rare that your client would be subject to such an order as they are usually made
against people who have valuable assets (for example, houses, boats, planes, large amounts of
cash etc). If such an order has been made, the property subject to the order is not available to
the Trustee. Note there is a requirement to provide a copy of the order with the statement of
affairs if one does apply.
Question 9: Income in last 12 months
This information is used both by AFSA and the Trustee. AFSA uses the information for statistical
purposes such as the compilation of the booklet Debtor’s Profile. The Trustee uses the information
when determining the cause of your client’s insolvency and comparing your client’s current income
to their previous income to see whether there has been any significant change. This information
could be useful to the Trustee in determining what investigations may be warranted – is current
income being under-reported? (See Chapter 6, Part 4) Has the bankrupt sought to hide assets
or otherwise transacted to defeat their creditors (See Chapter 6, Part 3)?
➻➻ Note: The requirement to provide evidence. However if your client does not have such
documents or they are not readily available and they have an urgent need to become bankrupt,
AFSA will normally accept their Debtor’s Petition as long as there is an explanatory note attached.
Also it is a good idea to let your client know that the Trustee can investigate their financial affairs
going back a lot further than the past 12 months (See Chapter 6, Part 3).
Question 10: Expected income in next 12 months
These details are primarily used by the Trustee to undertake the initial income contribution
assessment (See Chapter 6, Part 4). If your client anticipates that nothing will change, they can
repeat the information from the previous 12 months in Question 9. However it is important
that your client does not underestimate their future income. If they do so, the Trustee may reassess their contribution liability at the end of the period which may result in having to make
back-payments of contributions from the first year in addition to the contributions assessed for
the following year.
If your client indicates that, whilst they are not currently receiving income from the estate of a
recently deceased person, they expect to receive a substantial amount of income from the estate
prior to their discharge, you may need to revisit the consequences of bankruptcy and the decision
to proceed (See Chapter 6, Part 3).
As the definition of income in the Bankruptcy Act is very wide, where a reverse mortgage provides
the borrower with periodic payments, those payments are usually classed as income for income
contribution calculation purposes. However, there are many varied forms of reverse mortgages
and you will need to examine the method by which the borrower receives the funds. Usually if
the ATO does not consider the payment(s) being received as being “taxable”, they would not
be classed as income.
You should inform your client that they must notify their Trustee of any changes in their income
as they occur during their bankruptcy. In addition, if they are assessed as a contributor at the end
of each year during their bankruptcy, they will be required to provide evidence of their income
(for example, Copy of PAYG payment summary, tax assessment) for the past year.
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Questions 11 & 12: Employment
This information is used to assess and verify income for contribution purposes (See Chapter
6, Part 4). It is also used for statistical gathering purposes, which in turn is used by various
organisations including the Australian Bureau of Statistics and various industry groups. You
should ensure that the details disclosed here align with the previous answers concerning income.
Any apparent anomaly should be explained in the blank space at the front of the statement of
affairs to minimise further enquiries of your client. Note the need to provide pay slips.
There is a specific question relating to salary sacrifice following at Question14.
A related entity includes any sole trader, partnership, company or other organisation that is owned
or controlled by the client’s relative or his or her spouse’s relative. It also includes any businesses,
companies or trusts in which your client, his or her spouse, or their respective relatives may have
an interest. For example, the client’s spouse may be a director of the company the client works for.
The Trustee will use this information if it appears to the Trustee that the client’s income is well
below the industry average for that type of employment. In certain cases, the Trustee can deem
the client’s income to be at industry average for income contribution assessment purposes. For
example, the client is employed as a full-time medical practitioner being paid an annual salary
of $35,000 by a company of which his brother is the beneficial owner.
You should explain to your client that there is no restriction as to the amount that they can save
from their income during bankruptcy. However such savings should be held in a bank account
(including an interest bearing deposit) and not used to buy an asset (for example shares, land,
house etc) as the Trustee may claim such assets as after-acquired property (See Chapter 6, Part
2 & Part 3).
Question 13: Private Health Insurance
This information is mainly used for statistical purposes. Also the Trustee looks at it when
considering a contributor’s hardship application based on excessive medical/dental expenses.
Question 14: Salary Sacrifice
Question 14: Salary Sacrifice
The Trustee requires these details for income contribution assessment purposes and uses the
grossed up income when calculating the client’s gross income before tax (See Chapter 6, Part 4).
You should inform your client that they can continue their salary sacrificing arrangement with
their employer, including any payment of additional voluntary super contributions, however
the income contribution payable to the Trustee will be based on the grossed up amount. In
circumstances where the client is using salary sacrifice to pay a car loan or home loan for example,
they should be warned that any equity they accumulate places the asset at greater risk of being
taken and sold by the Trustee.
Likewise if the client is having additional tax deducted so as to reduce their current income and
increase the amount of a subsequent tax refund, they should reconsider this arrangement as there
may be no real benefit – the tax refund is added to their income when calculating the next year’s
contributions. The only possible benefit would be if the client had a significantly lower income
in the subsequent year and therefore did not meet the income threshold in that year (even taking
into account the amount of the tax refund).
See also next question concerning Superannuation.
Question 15: Superannuation benefits
The purpose of this question is to ascertain details of contributions made to the client’s super
fund by a third party instead of the client’s employer. The Trustee would class such payments as
income for income contribution assessment purposes. However as the question refers to “any
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party”, for completeness sake it is recommended that details of the contributions made by the
client’s employer also be included and highlighting that it is the client’s employer making the
payments.
Question 16: Other benefits
The purpose of this question is to determine whether the client is replacing income and/or
repayment of a debt with other benefits and the information is used for income contribution
assessment purposes. Other benefits may be deemed to be income and affect the amount of the
contributions required (See Chapter 6, Part 4).
Question 17: Motor vehicle benefits
The purpose of this question is also to determine whether the client is receiving a benefit that
could be classed as income for income contribution assessment purposes. Only regular use
of a vehicle need be included – occasional borrowing is not relevant. Generally, ownership is
determined by way of registration unless other evidence is available. In some cases a relative will
make a vehicle worth more than the threshold amount available for use by the bankrupt. This
could result in the bankrupt being assessed as paying a higher income contribution because this
could be considered a benefit.
Examples would include:
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A car owned by a friend or relative but used by the bankrupt on a daily basis
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A company car available to the bankrupt for personal purposes
Question 18A: About your insolvency – non business related
Generally this question is used for statistical purposes. However, you should advise your client
to think carefully before selecting “gambling, speculation & extravagance in living” in this
question. The fact that the client has gambled, or does gamble, alone does not mean that the
gambling is the main cause of his or her financial difficulties. You should warn your client about
the possibility of prosecution under Section 271 (an offence potentially punishable on conviction
by imprisonment), but also that it would need to be a blatant case such as, for example, the client
gambled the proceeds from the sale of his house instead of paying his unsecured creditors, or
lost a large amount of money in the period prior bankruptcy.
Question 18B: Business-related
The details recorded in this question are collected mainly for statistical purposes but there are
some possible adverse consequences of ticking some options. For the risks associated with selecting
gambling or speculation, see previous question and Chapter 6, part 8.
Failure to keep proper books of account and costing records in the five years prior to the bankruptcy
or failing to preserve such records is also an offence under Section 270, potentially punishable on
conviction by imprisonment. There is a defence in both cases that the failure to keep or preserve
the books was “honest and excusable” (Section 270 (2)). The potential sentence increases where
the bankrupt has previously been bankrupt or entered another form of insolvency arrangement
such as a Personal Insolvency Agreement (covered in Chapters 5 & 12) or Scheme of Arrangement
or Composition (explained in Chapter 8). The likelihood of prosecution for such offences is
remote unless the client has been involved in other punishable conduct, and would usually be
taken in conjunction with other alleged offences (See Chapter 8 for information on offences
more generally, including examples of successful prosecutions).
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Section 18C: First difficulties experienced in paying debts
This is another question clients need to think carefully about. The answer gives an indication as
to when the client became insolvent which becomes relevant if the Trustee considers that there
has been a voidable transfer of property by the client in the 5 years before bankruptcy. One of
the things that the Trustee may need to establish to support such a claim is that the transfer was
for less than market value and that the bankrupt was insolvent when the transfer occurred (See
Chapter 6, Part 3).
It is also an offence to obtain credit within the two years before bankruptcy if the debtor had no
reasonable expectation of being able to repay the debt (Section 265(8)). If the date entered here
is prior to the last application for credit listed in the debts section of the statement of affairs,
this may be an indication that the client did not have the financial capacity to repay that debt
(or those debts) and may lead to further investigation. However, the amount involved would
need to be significant to trigger prosecution action (See Chapter 8 for information on offences
more generally).
Question 18D: Source of information about bankruptcy
This question is for statistical information only. Generally, only one option should be ticked.
Question 18E: Previous bankruptcy activity (Declaration of Intent, Debt
Agreements, PIAs and bankruptcies)
It is important that clients answer this question accurately as the information is recorded by
AFSA on the NPII and in the process of accepting or declining a Debtor’s Petition the Official
Receiver’s delegate will first search the NPI I to ascertain whether the client is already recorded
on the NPII.
You should warn your client that each subsequent bankruptcy (or formal alternative to bankruptcy)
increases the chances of their affairs being investigated and offences being prosecuted, especially
where the client has again become insolvent whilst currently undischarged from bankruptcy.
The client’s Debtor’s Petition may also be rejected if the Official Receiver forms the view that
the client can pay all their debts within a reasonable time AND either
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They have previously been bankrupt 3 or more times, or once in the last 5 years, or
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They are unwilling to pay one or more creditors, or creditors in general.
Part B
➻➻ Note: any information from this point on in the statement of affairs will be available to the public
Question 19: “About you”
This section is largely self-explanatory. You should inform your client of the importance of
including all the names they have used or have been known by, so that the creditors can readily
identify them when they receive notification of the bankruptcy from the trustee.
The question relating to whether the client is paying rent is again for statistical purposes but it
may also be linked to the Trustee’s assessment of the client’s income and benefits such as free or
subsidised rental accommodation, and /or the general investigation of whether the client owns
any assets divisible among creditors.
Question 19: Previous addresses
The main purpose of this question is for the Trustee to have information that will assist the client’s
creditors to identify the client. Details of properties previously owned by the client will also assist
the Trustee with their investigation into the client’s financial affairs (See Chapter 6, Part 3).
When completing the details of a previous address a physical address needs to be supplied. A
P.O. Box is not where the person lives, it is the postal address. Where a client is homeless they
will still have to supply a physical address – talk to AFSA.
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Question 20: Occupation and business activities
Both Question 20 and Question 21 are for statistical purposes with Question 21 assisting AFSA
categorise the type of bankruptcy. The nature of the client’s work may have an impact when
trying to protect their tools of trade. It is important that the answer to question 20 matches the
client’s answer to the later questions about tools of trade (for example, a person who has noted
their occupation as accountant will have trouble seeking to retain power tools as protected tools
of trade).
The question about whether the client has operated a business should be answered as accurately
as possible or your client could risk prosecution for providing false or misleading information.
Closed and failed businesses must be included if they were operational at any time in the previous
5 years.
Part C – Assets
Chapter 6 covers which assets/belongings may be protected in bankruptcy (Part 2) and which
will vest in the Trustee (Part 3).
Question 22: Cash
This question relates to “cash on hand” (in the client’s pocket, wallet, buried under chicken coop
in backyard etc) and money held in bank accounts which is also recorded in the next question.
Question 23: Accounts with Financial Institutions
While not expressly excluded in the Regulations from property available for payment of debts,
the Official Trustee recognises that a debtor becoming bankrupt should be able to access cash
to pay for reasonable living expenses and so will generally not take cash on hand and money in
bank accounts up to a maximum of $2000.
However registered trustees, who administer approximately 20% of estates, are not bound by that
policy and may not be so generous. The Act is silent on the issue, but most registered trustees
will permit the bankrupt to retain a reasonable amount to meet their ongoing living expenses.
It would be unusual for your client to have a large amount of cash or money in the bank when
they seek financial counselling assistance. If they do you will need to warn them that they will
not be permitted to retain it. (See also Chapter 8 in relation to frozen accounts). If your client
has no primary form of transport but some money in the bank (for example, over $2,000) they
may wish to acquire a car worth less than the prescribed amount prior to going bankrupt.
Question 24: Tax refunds
It is a good idea for the client to have any outstanding tax returns lodged prior to applying
for bankruptcy because the ATO is notified of all new bankruptcies and upon receipt of such
notification will check its records to ascertain whether there any outstanding returns. If there
are outstanding returns the ATO will then require the bankrupt to lodge those returns. It is not
essential if the bankruptcy is urgent. In that case you should inform the client that they should
start organising the lodgement of the outstanding returns so as to avoid getting into trouble
with the ATO.
➻➻ Note: Any refunds due to the client for tax payable prior to the date of the bankruptcy are classed
as assets in the bankrupt estate, irrespective of when the refund becomes payable. Refunds
received for periods after the date of the bankruptcy are considered income and will not vest
in the Trustee but will be included in the income contributions assessment. Where a tax refund
covers a period both before and after bankruptcy, it will be apportioned with the part attributable to
the period prior to bankruptcy vesting in the Trustee and the remainder being counted as income
for the relevant income contribution assessment period. However if the client has a debt owing to
any Commonwealth agency (for example the ATO, Child Support Agency, Centrelink) the ATO will
usually deduct those debts from the refund, which it is entitled to do (See Chapter 6, Part 3).
If the client gets a substantial refund prior to bankruptcy and spends it in lieu of paying their
creditors they will need to fully explain the reasons for their actions. Failure to do so could lead
to an objection being lodged against their discharge and/or prosecution action. If paid to one
creditor it could be considered a preferential payment and be clawed back by the Trustee. Other
antecedent transactions provisions may also be relevant (See Chapter 6, Part 3).
Question 25: Tools of trade
Tools of trade up to a prescribed value are protected and, in addition to normal work tools, include
such items as computers etc used by the self-employed (see Chapter 6, Part 2). Ensure the tools
of trade claimed are consistent with the occupation listed at Question 20.
➻➻ Note: Home computers are now considered to form part of household items (and therefore
protected) provided the equipment is not excessive for a normal household of the applicable size.
The reference to resale value can be interpreted as being auction value (or garage sale value), which
is normally less than private sale value and certainly less than replacement value. Clients need to
be careful not to over-value their equipment. They should not use the replacement value. Most
equipment depreciates very quickly, particularly if in daily use.
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➻➻ Remember: only equipment valued below the relevant threshold ($3,600 as at January 2014,
for current amount see www.afsa.gov.au and select Indexed Amounts) can be retained in
bankruptcy, although the trustee will take into account the estimated cost of selling the goods.
Also the tools of trade that are protected include only those that relate to the client’s current or
usual occupation. If for instance the client had $3,600 worth of tools for a trade that he was no
longer physically capable of carrying on, those tools would not be protected. Similarly, tools or
equipment which the client could not use (because he or she did not have the relevant skills or
qualifications) would not be protected.
Question 26: Superannuation and life insurance policies
Funds held in a superannuation fund at the date of bankruptcy are generally protected in
bankruptcy as long as it is in an eligible superannuation plan as defined in Section 116 (2) of
the Act. Likewise any moneys withdrawn from such a fund after the client becomes bankrupt
are protected. Any property purchased with those moneys where the whole, or substantially the
whole, of the purchase price comes from those protected moneys, is also protected. However
funds withdrawn from a superannuation fund before bankruptcy are not protected. Accordingly,
clients should not withdraw their superannuation and then go bankrupt! If they have recently
withdrawn money from their superannuation fund, then you need to warn them that this, or any
assets purchased with it, will vest in the Trustee and be available for distribution to creditors. The
Trustee has extensive power to claw back money or assets placed into superannuation accounts
to defeat creditors (See Chapter 6, Part 2). Even if your client has not nominated a lump sum
payment in this section of the statement of affairs, you should warn them of the Trustee’s powers
just in case they are withholding information, or have forgotten something significant. If they
have transferred a lump sum from their superannuation (to someone else) within the last 5 years
then you need to give this warning in greater detail and keep comprehensive case notes.
The final question refers to amounts that would in normal circumstances be protected under the
Act. This information may nonetheless be of interest to the Trustee in investigating the client’s
financial affairs.
➻➻ Note: Whether payment under Total and Permanent Disability claims paid out under an insurance
policy attached to a bankrupt’s superannuation are protected is currently a vexed issue. The most
recent advice suggests that whether it is protected or not will vary depending on the nature and
wording of the policy and the nature of the disability. Other legal advice, however, says that a TPD
payment should be treated as a payment from a superannuation fund under Section 116(2)(d)(iv)
and is protected regardless of the cause of the disability. Regular payments will be recorded as
income and will not vest in the Trustee but will affect the client’s income contribution assessment.
Lump sums may not be protected and you should get specific, detailed legal advice for your client.
Question 27: Vehicles
This question refers to vehicles which the client owns or has an interest in. Where the vehicle
is covered by a loan or lease it is important that the information entered matches that in Q38
Secured Debts including the registration number.
Make sure you have advised your client that any vehicle worth more than the prescribed limit
(including the costs of selling the vehicle) could be taken and sold by the Trustee ($7,350 as at
January 2014). Any proceeds of sale up to the prescribed limit will be refunded to the client for
the purpose of purchasing another vehicle to serve as a primary means of transport. However as
the Act does not specify that those moneys are to be spent on purchasing another vehicle, the
client will not breach the Act if the moneys are not spent on another vehicle.
Second vehicles will also be sold unless the combined value of the vehicles is less than the
prescribed amount.
Where the bankrupt is paying off a secured motor vehicle loan the decision whether or not to sell
the vehicle will depend on the amount of the bankrupt’s equity. The creditor cannot repossess
the vehicle while the client is meeting the repayments but the Trustee may reassess whether to
sell the vehicle if the client’s equity increases considerably due to repayments made. Of course the
vehicle will also depreciate over time. See Chapter 6, Part 2 for more details on the treatment
of motor vehicles, including those that are subject to finance.
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Question 28: Real Estate
Usually your client will have a reasonably accurate estimate of the value of their property. They
should include their best estimate based on any information available to them (for example,
an informal valuation provided by a real estate agent, the sale price of similar properties in the
area). Subject to the following, any real estate will vest in the Trustee and is likely to be sold for
the benefit of the bankrupt’s creditors.
If the property was acquired with personal injury compensation paid to your client (or other
protected money), clear reference should be made to this fact because the property may be
protected. If substantially the whole of the money paid for the property was protected money
then it cannot be sold. If a proportion of the purchase funds were made up of protected money,
then the property can be taken and sold by the Trustee, but the bankrupt should be refunded
an amount equivalent to the current value of the protected contribution, provided it can be
adequately traced through appropriate documentation or other evidence (See Chapter 6, Part 2).
While there is no designated space for providing this information, your client should make a
note at the bottom of this page and in the general comments on page 2. The Trustee will most
certainly require documentation to verify your client’s assertion, so if possible copies of the
requisite documents should be attached to the forms or a note to say that documentary evidence
will be sent to the Trustee as soon as it is obtained.
➻➻ Note: It is only property purchased wholly or substantially with personal injury compensation or
other protected money paid to the bankrupt that is protected. Property owned or partially owned
by the bankrupt, but purchased with compensation paid to another person, such as the bankrupt’s
spouse is not protected. This means that the bankrupt’s share of such property would be available
to the Trustee (See Chapter 6, Part 2).
Details as to whether the property is occupied or vacant and who resides in it are required to
assist the Trustee in insuring and selling the property.
The name and address of the person collecting the rent includes a real estate agent managing
the property. If the rental being collected is paid to the holder of a mortgage over the property,
details to that effect should be noted on the form.
If the client does not know the exact age of the building and/ other details about it then all they
need do is provide approximations in that regard as in practice very little turns on this disclosure.
Normally the Trustee will inform the tenants of the property of the bankruptcy and will probably
require them to pay their rent to the Trustee. The client should be warned about this.
Where the property is already listed for sale or auction with an agent, the Trustee will usually
continue with that agent unless the Trustee has grave concerns about the agent’s capacity to obtain
a realistic price for the property. All fees and commission payable to the agent will be paid from
the sale proceeds. Should the Trustee for some reason replace the agent, any debt owing to the
replaced agent will become a debt provable in the bankruptcy.
If property has already been surrendered to the mortgagee, this is recorded as part of Question
38 relating to secured creditors.
Explain to the client that the Trustee is likely to sell the property if the client’s equity is sufficient
to produce a surplus after deducting the costs of the sale. The client should understand that even
if the Trustee does not wish to sell the property now (usually because the client has very little
equity) this could change in the future. The Trustee has many years in which to sell property
(at least 6 years from discharge when the property has been promptly disclosed) and can choose
to do so long after discharge a by extending the re-vesting period in writing. However with the
family home, usually the Trustee will give the bankrupt first option to buy back their equity in
the property when discharged. Should your client be considering the strategy of attempting to
buy back the equitable interest in the property at discharge, it is advisable to state this at the
time of going bankrupt. Your client should be warned that there are risks associated with this
plan (See Chapter 6, Part 3).
If there is another person who has an interest in the same property (for example a current or former
spouse or de facto spouse, or another family member), and that person is not going bankrupt,
the Trustee will usually give the co-owner(s) the opportunity to buy out the equitable interest
of the bankrupt person (See Chapter 6, Part 3). If the co-owner(s) are unable to do this, the
property is likely to be sold and the equivalent of the non-bankrupt owner’s share returned to
him or her. You should ensure that your client understands that this will happen, although it is
his or her decision whether they discuss this with the co-owner(s).
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If the client has an interest in more than one property, then this page should either be copied
prior to completion, or additional pages downloaded from www.afsa.gov.au. If your client does
have an interest in multiple properties you should discuss with your client why they have not
been sold, or the client’s share sold to a co-owner for example, in an effort to repay the debts (of
course if the client has been made bankrupt by a Creditor’s Petition they may not have had an
opportunity to do this and it is too late now).
Question 29: Shares
Normally the Trustee will generally sell the shares that are not subject to any restrictions to
obtain moneys for creditors. If “R” applies (that is that there are restrictions) add details in the
additional notes section on page 2.
Question 30: Investments
The Trustee will sell these assets to obtain moneys for the creditors.
Question 31: Money owed to the debtor/bankrupt
This section will assist the Trustee in deciding whether to take action to pursue any of the above
amounts for the benefit of the bankrupt estate (creditors plus Trustee’s fees & expenses). Where
the client considers that a debt is recoverable they should include notes about the debt and the
debtor, including current contact details, financial status and any supporting documentation to
assist the Trustee recover the debt. See also Chapter 6, Part 5 section titled Legal proceedings
by your client for a discussion of the types of claim that may not vest in the Trustee.
Child Support Arrears need not be included because they do not vest in the Trustee.
➻➻ Note: Any Child Support paid to the client during the bankruptcy can be retained by the client and
the payments are not included as income when the client is assessed for income contributions.
Question 32: Wills and deceased estates
Your client must understand that any interest they have in a deceased estate in respect of a person
who dies either before or during the period of bankruptcy (for example, money, shares,
real estate etc) will vest in the Trustee (that is, will be taken to pay the debts plus the costs of
administering the bankruptcy). This applies even if the executor does not make the distribution
until after the date of discharge. The date of death is the critical date, not the date of distribution
(See Chapter 6, Part 3).
Where the inheritance is in the form of income (usually for a prescribed amount of time for
example, 5 years) then the client is entitled to receive the periodic payments of the income during
bankruptcy, however this will be included as income when assessing the client for liability for
income contributions.
Where your client thinks that it is at all likely that they will receive an inheritance in the next 3
years (including from someone who is already dead) they should explore other options thoroughly
before choosing bankruptcy. They should also understand that it will not be a simple matter
of paying the debts later to annul the bankruptcy – they will need to also pay the Trustee’s fees
& expenses which can be substantial (potentially up to thousands or even tens of thousands of
dollars) (See Chapter 8).
If the inheritance is significantly more than the amount owed, including the amounts payable
in Trustee’s fees and expenses and interest, the surplus will be returned to the client and the
bankruptcy annulled.
If the client knows that they are named as a beneficiary in a person’s will and that person is still
alive, the client has the option of letting him or her know about the imminent bankruptcy. The
person could then decide whether to change their will (for example, by way of a codicil to the
effect that should a beneficiary be an undischarged bankrupt when the person dies, the client’s
inheritance will be paid to another named person, or divided between any other beneficiaries).
Again, it is entirely up to the client whether to make this disclosure.
➻➻ Warning: Be careful not to be seen as giving legal advice on this issue. The person with the will
should seek their own legal advice.
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Question 33: Sales, transfers or Gifts (in the last 5 years)
This section is designed to assist the Trustee in the investigation of the client’s affairs, particularly
with a view to identifying transactions that may be void against the trustee. Such transactions
mainly relate to those where the client sold a property but did not receive the full market value for
it. For example, the property had a market value of $500,000 and a mortgage debt of $400,000
but the purchaser only paid out the current mortgage debt and did not pay the client for the
$100,000 equity. This is commonly known as an undervalue transaction. Transfers to defeat
creditors are also void against the Trustee.
The Act empowers a Trustee in certain circumstances, to either claw back the property from the
person who received it (such as your client’s partner, ex-partner, relative or associate) or require
that person to pay the Trustee the amount representing the difference between the actual market
value of the property and the amount that the bankrupt received for it. In the case where the
property is transferred back to the Trustee, the Trustee is required to refund the amount paid
by that person, if anything. The Trustee can undo transactions going back a number of years
(see Chapter 6, Part 3).
In completing the section, the first five columns are self-explanatory. The sixth and final column
simply records the amount you received after any costs associated with the sale (including for
example paying the mortgage, outstanding rates, legal or conveyancing fees, auction fees and
real estate commissions).
Clients should remember that there are penalties for false and misleading information including
omissions. However, they should also be careful not to overvalue any assets, as this could result
in unnecessary investigation. Advise your client to be realistic.
Question 34: Assets in the possession of others
Any unprotected asset (for example, cars, boats, antiques, jewellery, real estate etc) of the bankrupt
will vest in the trustee regardless of the fact that it is in the possession of another person at the
time of the bankruptcy. The client should tell the 3rd party that they have disclosed the asset
to the Trustee and that the Trustee will be contacting them regarding the asset. Normally the
Trustee will give the person the first option to acquire the asset from the Trustee.
Care should be taken where a car being driven by the client’s teenage child is registered in the
client’s name to reduce the insurance premiums, as RTA registration is considered to be prima
facie proof of ownership. Other evidence will be required to establish that the vehicle does not
belong to the bankrupt. [There may also be ramifications of misleading the insurance company
about the ownership of the vehicle or the identity of the regular driver such as refusal to pay a
claim and cancellation of the insurance policy].
Question 35: Assets to which the debtor/bankrupt has contributed or
helped to purchase
Again this information is to assist the Trustee in locating any divisible property of the bankrupt.
If the client has contributed towards the acquisition of property held by another person (usually
a relative) the Trustee has a number of options available. If the client considers that the moneys
they provided were a “gift” to the other person, in certain circumstances the Trustee may claim
those moneys from the other person by way of an undervalue transaction or transfer to defeat
creditors. If it was not by way of a gift, the Trustee may either claim that the moneys were loaned to
the other person so the amount is now a debt payable to the Trustee or the Trustee may claim that
client has a beneficial interest in the property by way of a resulting trust (See Chapter 6, Part 3).
Likewise, you should remind the client that they are required under the Act to make a full and
proper disclosure of all their financial affairs, and if they make a disclosure in this section they
should consider informing the affected third party of the disclosure.
Question 36: Assets transferred or money paid as a result of pressure for
payment
The question asks for any amounts paid or assets surrendered or transferred which equated to
more than $1,000 over a normal repayment due.
Under the Act, the Trustee is empowered to recover certain payments made to the bankrupt’s
creditors in the period leading up to the bankruptcy, commonly known as preference payments,
especially where the creditor was “pressing” for payment because they realised that the debtor
may be insolvent. Pressure could include frequent requests for payment, other forms of debtor
harassment, or normal enforcement procedures. Where that is the case, the client may want to
notify the person of the possibility of the Trustee seeking to recover the money paid.
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This is particularly common with business failures where creditors (such as suppliers) have to
be paid to try and keep the business going. When a business is failing or closed and the debtor
is looking to pay debts they need to be mindful of preferential payments.
Property or money received by creditors in the period leading up to the bankruptcy under
enforcement action (such as a writ or garnishee) must also be paid to the trustee less the costs
of enforcement. If the relevant property would have been protected in bankruptcy then it must
be returned to the bankrupt (See Chapter 6, Part 2 for what property is protected).
Question 37: Other items of value
The client should be advised to place a realistic market value (that is, not the insured or replacement
value) on any such items, especially jewellery which they have inherited from a relative and has
a great sentimental value to them. As Trustees normally sell such assets by public auction, the
client can use an auction or garage sale value.
Part D – Liabilities
See Chapter 6, Part 1 to find out whether particular types of debt can be pursued during
bankruptcy and whether the client will be released from particular types of debt after discharge
from bankruptcy. There is no point in the client going bankrupt unless he or she will be released
from a significant portion of their debts by value (enough to make a material difference to their
situation).
Question 38: Secured Creditors
This is where the client lists their secured debts such as home loans and secured motor vehicle loans.
Under the Act, a secured creditor is defined as a creditor that holds a charge (for example, mortgage,
lease, hire purchase etc) over the property of the bankrupt. Accordingly, if the creditor holds a
mortgage over another person’s property as security for a debt owed by the client, that creditor is
an unsecured creditor for bankruptcy purposes and should be shown in the Unsecured Creditors
section below instead. Likewise, if the client has been notified (or is aware) that the mortgagee
has sold their property and there was a shortfall (that is the sale proceeds were not sufficient
to pay the full amount of the secured loan) this debt should also be shown in the Unsecured
Creditors question. It may be helpful to the Trustee to give details of the extinguished secured
loan on page 2 of the statement of affairs.
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The Trustee requires this information to notify the creditors of the bankruptcy and to calculate
whether there is any equity in the property .This will determine whether it will be sold by the
Trustee (the Trustee has a long period in which to opt to sell).
As with all the information in the statement of affairs, it is to the client’s best knowledge and
belief and accordingly, approximate dates, valuations and amounts can be shown.
The need to disclose whether the creditor is a related creditor is mainly to assist the Trustee’s
investigations into transactions between relatives that may be subject to a challenge by the
Trustee under the antecedent transactions provisions (undervalue transactions, transfers to
defeat creditors etc).
Question 39: Equity loans
The purpose of this information is to assist the Trustee to investigate the bankrupt’s past financial
dealings. In particular, the Trustee will be looking to see whether the client had significantly
decreased the equity in their property prior to bankruptcy by mortgaging it (or extending the
mortgage) and used the additional funds obtained to either acquire an asset, make gifts to family
members, or paid the moneys into a superannuation fund with the intention of defeating their
creditors (or simply as undervalue transactions) – See Chapter 6, Part 3.
Question 40: Unsecured Creditors
This can be the most difficult section to complete for many clients, particularly where they
have a lot of debts spanning many years. You may need to prompt the client to assist with the
recollection process.
Creditor: This can be confusing to complete where the loan has been outsourced to a debt
collector or assigned (sold). Clients are usually unsure whether the debt collector is an agent
or has purchased the debt. Sometimes, if the debt is particularly old, they are unsure who the
original creditor was. The Trustee will contact the creditor listed so if the debt is with a collection
agent but the original lender is listed on the form, the debt collector may not be informed as
promptly that the debtor is bankrupt.
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One solution is to list the debt under the original creditor’s name but note that it is being
collected by a collection agent and include the agent’s name and address also. Alternatively, the
debt collector could be included as the creditor with the original creditor listed in the nature
of debt column alongside the type of debt (for example, Creditor – Creditcorp, Nature of
Debt – Westpac credit card).
Where there has been a motor vehicle accident it is good practice to list the other driver(s), the
owner(s) of the vehicle if different and known, any insurance company involved and any debt
collector. This will mean all potential parties are notified of the bankruptcy and will reduce the
likelihood that any of them contact the debtor later (instead of the Trustee). Please read the
section on Unliquidated debts in Chapter 6, Part 1, before assisting a client to go bankrupt
for a motor vehicle accident debt. If the debt is still unliquidated then it will not be provable
in the bankruptcy and the client will continue to be liable for the debt despite the bankruptcy.
Nature of debt: This may include, for example, credit cards, personal loans, charge cards, unsecured
motor vehicle loans, shortfalls on secured motor vehicle loans, home loan shortfalls, tax, energy
(electricity or gas), water, fines (note potential loss of license/rego for non-payment), loans from
friends or relatives, education fees (note unassessed HELP/HECS not provable), unpaid rent
from previous premises, other continuing credit such as interest free purchases, store accounts and
associated credit accounts such as Certegy Ezi-Pay, legal fees, costs owing from legal proceedings,
unpaid medical bills and more. You should ask your client whether they have any of these.
Mth/Yr incurred: Clients will often have trouble remembering this for their older debts. If they
do not have the relevant paperwork, they will need to estimate. Assist them by suggesting time
significant events that the loan may have been before or after – for example, the World Cup or
Olympics, a significant birthday, marriage or divorce, the birth of a particular child.
The answer to this question may have some relevance to whether the client is guilty of the offence
of incurring a debt they had no reasonable expectation of paying within the two years prior to
bankruptcy. The date a debt is incurred is a factual matter that can usually be independently
verified in most cases and the client should try to be as accurate as possible. Prosecution on this
count would be very rare without other offences.
Related Party: A related entity includes any sole trader, partnership, company or other organisation
that is owned or controlled by the client’s relative or his or her spouse’s relative. It also includes
any businesses, companies or trusts in which your client, his or her spouse, or their respective
relatives may have an interest. For example, the client’s niece may be a director of the company
where the client works.
Joint Debt: This will tell the Trustee whether the creditor has recourse against another party.
Your client should understand that if the other co-debtor is not also bankrupt, the creditor can
and probably will pursue the co-debtor for the entire debt remaining (not half !). If the co-debtor
pays out the debt in full, the co-debtor can then claim as a creditor in the client’s bankruptcy
for 50% of the debt (but they will only receive money back when there is sufficient money in
the bankrupt estate). Where you have a couple going bankrupt, each person should show the
total amount of the joint debt owing as it is most likely that they are jointly and severally liable
for the debt.
Forgotten Debts
You should reassure your client that although the objective is to remember as much information
as possible, if a debt is genuinely forgotten it can be included later by notifying the Trustee.
Likewise, if a creditor for a provable debt is omitted from the statement of affairs, the creditor
is still bound by the bankruptcy (that is the creditor cannot take any recovery action against
the client).
There will be cases where your client was in a partnership business with their spouse and they
have now separated and the other spouse has all the business records. Accordingly, your client
will probably have little recollection, if any, of the business debts. The client is only expected
to disclose what s/he can recall and if business creditors appear later, the client can advise the
Trustee accordingly.
As the Official Receiver is unaware of the extent of your client’s debts, their Debtor’s Petition will
not be rejected if your client has inadvertently omitted a creditor (or creditors). It is stressful
for the client, however, when other debts pop up later. If the bankruptcy is not urgent, a copy of
your client’s credit report may provide clues to forgotten debts, remembering that the current
credit provider may no longer be the original credit provider if the debt has been assigned (sold).
Whilst it is an offence under the Act to intentionally exclude a creditor from the statement of
affairs it would be unlikely that AFSA would take prosecution action. Such action is more likely
to be taken where there is a distribution to creditors from the sale of assets and/or contributions
and it can established that the creditor was deliberately omitted in an attempt to exclude it (or
him or her) from receiving a dividend from the bankrupt estate.
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Part E – Business details
Warning for financial counsellors: Business bankruptcies can be quite tricky, especially if
the business is still operating. Be careful not to take on something that is beyond your level of
expertise and always seek guidance from your supervisor and/or AFSA.
If the client is trying to save a failing business rather than close it down, then it is inappropriate
for a financial counsellor to be involved (from both a public funding and a risk management
perspective). This is not to say that a self-employed client cannot go bankrupt in relation to debts
which are unrelated to the business provided they are aware of the limitations of bankruptcy
(such as the ban on being a director of a company, the likely winding up of any partnership, the
rules about trading in another name, and the obligation to disclose the bankruptcy in certain
circumstances – See Chapter 6, Part 6).
If the sole cause of the client’s bankruptcy is these business debts then it is important to establish
that the client is personally liable for the debts. Where this is not clear your client should seek
legal advice before proceeding with the bankruptcy. Where the client has received legal advice
to the effect that they are personally liable, or that the costs and risks of disputing liability are so
great as to make it impractical, then keep a copy of the advice on the file and/or make a detailed
file note.
Question 41 A – C: Sole trader/partnership
See Chapter 6, Part 6 for general information on Small Business and bankruptcy.
As mentioned above, your client may have very little by way of records and/or recollection
of their business, especially if it closed say 4 years ago. They should disclose as much as they
can recall , however you should give them some prompts to help them recall by asking them
questions about the nature of the business etc. Sometimes they may need a lot of prompting if
the failure of their business has a lot of bad memories for them or, alternatively, they will go into
long descriptions of all the people/circumstances that they blame for the failure of the business.
Encourage them to move on.
Where there are reasons why the client cannot obtain the information (domestic violence for
example) a note of this should be entered on page 2 of the statement of affairs.
The information in this section is used by the Trustee when investigating the bankrupt’s past
financial dealings. The information is also gathered for statistical purposes and used by various
bodies such the Australian Bureau of Statistics and industry groups.
You should endeavour to obtain all available business documents, accounts, ABN, information
on winding up etc from your client before proceedings with these questions.
Question 41 D: What is the nature of the business?
Where a partnership business is still operating and the other partner is not going bankrupt,
then the partnership will usually come to an end (that is it will be dissolved) when your client
becomes bankrupt unless there are more than two partners. The partnership deed will determine
what will happen in the event of one of the partners becoming bankrupt and dissolution is
less certain for partnerships of more than two people. In a two person partnership the other
partner, who is usually referred to as the “solvent partner”, will be responsible for winding up
the partnership and accounting to the Trustee of your client’s bankrupt estate. Depending on
the nature and financial state of the business the solvent partner can do an “actual” winding up
where the partnership assets are sold and the liabilities paid and the client’s share of any surplus
remaining is paid to the Trustee. Should the solvent partner (or partners) wish to carry on the
business, a notional winding up can be done whereby the partnership assets are valued and the
liabilities determined and the solvent partner (or partners) pay the Trustee for the bankrupt’s
share of the notional surplus (See also Chapter 6, Part 6).
The partnership agreement is an important document as it will detail the proportions in which
the partners hold an interest in the partnership (that is their respective shares) and should detail
how the surplus in a winding up is to be distributed.
Where the other partner is also going bankrupt it is preferable for them to go bankrupt together
but on separate Debtor’s Petitions. Usually, one partner will have a better understanding of how
the partnership was structured and operated, and usually holds the records.
Question 41 E & F: Beginning and end of the business
This information is also used by the Trustee for investigation purposes and statistical purposes.
Question 41G: Business assets previously sold (or businesses sold as
going concerns)
This information is used by the Trustee when looking for undervalue transactions and/or transfers
to defeat creditors (See Chapter 6, Part 3) and determining the reasons why the client became
insolvent.
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Question 41 H: Business assets (not sold)
This information assists the Trustee in locating and selling any divisible property to obtain
moneys for the creditors. Also, if the assets are stored in rented premises, the Trustee will take
steps to have the assets removed so that the landlord can regain occupation of their premises.
➻➻ Remember: Tools of trade are protected in bankruptcy (up to the prescribed value) but Plant
and Equipment is not. Advise your client to get legal advice or talk to AFSA if this is a grey area,
keeping in mind that AFSA cannot give legal advice.
Questions 41 I & 42 A & B: Recently ceased businesses
These questions are asked to assist the Trustee to ascertain whether there are any asset related issues
requiring attention, such as contacting the creditor who appears to have a charge over the assets.
Question 42 C: Commercial leases
The Trustee requires these details so that the Trustee can contact the landlord urgently to ascertain
details of the occupancy and whether the Trustee needs to disclaim the lease to avoid becoming
personally liable for the ongoing rent.
Question 42 D: Sold the business?
The Trustee will require this information for a number of reasons, including, for example
determining whether the business has been sold for market value, and tracing the proceeds of
any sale. It may also be helpful in valuing the business if it has not yet sold.
Question 42 E: Business records
The financial counsellor may need to prompt the client about the whereabouts of the business
records.
Failure to keep proper books of account and costing records in the five years prior to the bankruptcy,
or failing to preserve such records, is an offence under Section 270, potentially punishable by
imprisonment. There is a defence in both cases that the failure to keep or preserve the books was
“honest and excusable” (Section 270 (2)).
ITSA would only take prosecution action in this regard where there was a very substantial
amount owing to creditors of the business and/or it appeared that it had a very high turnover,
but no records were kept (possibly to avoid paying tax).
Question 42 F: Person/entity responsible for preparation of financial
statements and tax returns
The Trustee will use these details to contact the person and obtain copies of the business records
that they are holding. Where the client owes the person money for preparing the records then
they are unlikely to willingly hand the records over. The Act gives Trustees power to obtain the
records without the payment of any unpaid fees.
➻➻ Note The requirement to attach a copy of the latest available financial statements.
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Question 43 A: Companies
These questions are to assist the Trustee to investigate the affairs of the bankrupt.
Where your client is currently a director of a company, you should inform her/him that they should
resign as a director when they become bankrupt because it is an offence under the Corporations
Act to be a director whilst being an undischarged bankrupt. Once they are discharged from
bankruptcy they can be a director again (See Chapter 6, Part 5 for more information and the
forms that need to be lodged with ASIC).
Whilst the same applies to a debtor who enters into a PIA under Part X of the Act, it does not
apply to a debtor who enters into a Debt Agreement under Part IX. Where your client wants to
continue in a director’s role and otherwise meets the criteria for a Debt Agreement, they might
want to consider a Debt Agreement as an alternative – See Chapter 5.
Question 43 B – D: Companies in liquidation or Administration
This information assists the Trustee to contact the administrator/receiver/liquidator to ascertain
details of the administration and whether there is any likelihood of any distributions or other
money owing to the bankrupt that would be payable to the bankrupt estate.
If there is any question mark over whether your client may have engaged in insolvent trading
(See Chapter 6, Part 6) the company debts might also need to be listed in the statement of
affairs. The client can simply list that these are company debts in the notes section on page 2
with a note to the following effect: “These are debts of a company of which I was a director (or
sole director). I do not believe that I am personally liable for these debts but the conmpany is
currently in administration/liquidation (whichever applies).”
If there are debts of the company for which your client is personally responsible as a result of
a personal guarantee these should be included in the list of debts in the statement of affairs.
Question 43 E: Shares in the company (presently owned or in the last 5
years)
This information assists the Trustee to determine whether your client has any proprietary interest
in a company, which has a realisable value and can be sold by the Trustee. It will also assist with
the financial investigation to determine whether there have been any undervalue transactions
or tranfers to defeat creditors.
Question 43 F: Assets transferred to the company
This information assists the Trustee to determine whether your client has disposed of any assets
undervalue and/or to defeat creditors and whether those assets can be recovered by the trustee
(See Chapter 5, Part 3).
Question 43 G: Person/entity responsible for preparation of the
company’s financial statements and tax returns
This information is used by the Trustee to contact the person and obtain the records if the
person is not willing to give them to your client. This is likely to be the case if the person has
not been paid and is a creditor in the bankruptcy. The Act empowers Trustees to obtain the
records from these persons.
➻➻ Note: The requirement to attach a copy of the latest available financial statements.
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Question 44 A & B: Trusts
This is a very tricky area. Financial Counsellors are encouraged to proceed with great care.
Clients should be told to seek legal advice in relation to any relevant trust. Brief information
about trusts and the circumstances in which apparent trust property may be accessible by the
Trustee is included in Chapter 5, Part 3.
Where a client has a trust the financial counsellor should make it clear that they do not give
advice on trusts and that if the client wishes to proceed with the bankruptcy without seeking
advice, or in contravention of their legal advice, that they will have to fill in that part of the form
themselves without guidance from the financial counsellor. One solution is to put the client in
touch withAFSA and let AFSA guide the client through the completion of that section, noting
that AFSA cannot give legal advice.
The financial counsellor should make detailed notes of any advice obtained.
Where the client has obtained legal advice on how to complete the Trust section the financial
counsellor should obtain a copy of that advice.
➻➻ Note The requirement to attach a copy of the latest available financial statements.
Question 44 C & D: Trusts
The Trustee will also review this information with a view to uncovering potential undervalue
transactions, transfers to defeat creditors, potential income and other matters of relevance to
the administration of the bankrupt estate.
Question 44 E, F & G: Trusts
Declaration
Stress to your client that this is a legal document and there are penalties under the Bankruptcy
Act for providing false or misleading information.
The debtor must sign and date the forms no more than 28 days prior to receipt by the Official
Receiver. Forms dated earlier than this will be rejected. Accordingly the debtor should not sign
until all the required information has been located and the forms are complete and ready for
lodgement.
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Assisting the person to physically complete the statement of affairs may not be advisable. Where
the client is unable to read and complete the form due to language issues the use of an interpreter
is essential. Should the client speak English but is unable to write then the use of a scribe can be
considered. Financial counsellors need to be seen to be presenting impartial advice and should
not be both the advice giver and scribe/interpreter. This could raise questions of conflict of
interest and professional care. Completing the paperwork also puts the financial counsellor
in a more difficult position should the client later insist that the financial counsellor did not
faithfully reflect the client’s instructions.
Checklist
The main purpose of this section is to ensure that the client has fully completed their statement
of affairs and attached all the requisite documents. The financial counsellor should inform the
client that the more information they show in their statement of affairs the less likelihood there
will be of the AFSA and/or the Trustee having ongoing contact with them which normally will
please them. Where the client does not have ready access to some or all of the documents, they
should make a note to that effect plus an undertaking that they will provide the documents as
soon as possible.
The reference in the forms to the “blacking out “of tax file numbers is related to the Privacy Act
and is for your client’s protection in the event that the statement of affairs and accompanying
documents could be subpoenaed in legal proceedings (such as Probate, Family Court etc). The
collection of TFNs is also contrary to the Tax Administration Act, as would be their further
disclosure – noting that Part B of the statement of affairs is publicly accessible.
Part 4 – Lodging the paperwork
When the client is ready to lodge their Debtor’s Petition and accompanying statement of affairs
they can do so by sending the documents by post to AFSA, or by e-mailing scanned copies
([email protected] or GPO Box 1550, ADELAIDE SA 5001). The client should keep a
copy of everything they send to AFSA so that they can refer to it later if it is queried or more
information required. This will also be very useful in the unlikely event that the documents
disappear in the post!
If you wish to be able to follow up on the forms on the client’s behalf, make sure you have a client
authority addressed to AFSA on the file in the event it should be required. There is a Third Party
Authority form available on the AFSA website – select Resources on the home page and then
Financial counsellors.
➻➻ Remember: The forms must be signed and dated by the Debtor no more than 28 days prior
to lodgement (receipt by the Official Receiver – not for example the date of posting). If they are
dated prior to 28 days prior to lodgement they will be rejected but a copy of the forms will be
retained on the administrative file.
It can take up to 2 – 3 days from when AFSA receives the documents for them to be processed
which involves the documents being firstly scanned into the AFSA computer, then an AFSA
officer checking to verify that all the pages are present and where applicable, all the questions
have been answered and the documents signed and dated where required. As AFSA now operates
nationally, the AFSA officer processing the documents may be located in another capital city.
Where there is an urgent need to have the Debtor’s Petition accepted (because of pending
enforcement action) e-mailing scanned copies of documents is the best way to speed up the
process. Make a very clear request in the covering e-mail that the petition be accepted urgently,
supported by the reason(s) for such urgency. Also include telephone contact numbers of relevant
parties (for example, paymaster, sheriff etc).
➻➻ Remember: A Declaration of Intent could be lodged, as long as the client meets the criteria,
to get the client time to complete the statement of affairs (but heed the warning contained in
Chapter 5, Part 1 and earlier in this Chapter).
Where creditors continue with enforcement action after bankruptcy any amounts/property
taken can be recovered by the Trustee. If the property was protected, it will be returned to the
bankrupt. If not it will be retained by the Trustee for the benefit of the bankrupt estate. If it is
the client’s income (taken pursuant to a garnishee) it should be returned to the client (unless
is it is a statutory garnishee such as a notice issued by the Commissioner of Taxation). If it is
a bank account that has been garnisheed, an amount for immediate living expenses should be
returned to the client if they have no other funds (how much that is will vary from Trustee to
Trustee – AFSA would normally allow a client to retain about $2,000).
Where there are omissions or errors on the statement of affairs or Debtor’s Petition (for example
not signed or dated, insufficient income or creditor information), the forms will be returned with
a letter or e-mail indicating the omissions or errors that need to be corrected to allow successful
lodgement and acceptance by the Official Receiver (AFSA). This could have serious implications
if the client does not have the protection of bankruptcy in place to counter debt enforcement
proceedings. Should the situation be urgent then the use of a Declaration of Intent may need
to be considered while the Debtor’s Petition/statement of affairs is corrected.
Where forms are rejected, the debtor is not bankrupt and there is no record on the NPII.
It is most unusual for a Debtor’s Petition to be ultimately rejected and usually the AFSA officer
will make e-mail or telephone contact to discuss the matter with the debtor before a final decision
to reject is made by a senior officer. If your client’s Debtor’s Petition is rejected (for a reason other
than missing information that can be supplied) and they are dissatisfied with that decision, they
can make an application to the Federal Court of Australia or the Federal Circuit Court for a
review of the decision. However you should warn the client that they should obtain legal advice
as there a strong possibility that their application will fail and they will be ordered to pay the
Official Receiver’s legal costs of the proceedings. For reasons why a Debtor’s Petition may not
be accepted refer to Part 2 of this Chapter.
182
8
WHAT HAPPENS NOW?
(LIFE IN BANKRUPTCY)
Content
Part 1: Life in bankruptcy 184
Part 2: The light at the end of the tunnel – getting out of bankruptcy
209
Summary
Life as a bankrupt comes with some obligations and restrictions. Clients must now:
■■
■■
■■
■■
Cooperate with the Trustee
Notify the Trustee of all material changes of circumstances (income increases or
decreases, property acquired, money inherited or won)
Inform the Trustee in writing of any change of name
Complete paperwork or possibly attend creditors’ meetings (rare for financial counselling
clients)
■■
Provide the Trustee with access to records and information
■■
Possibly pay income contributions
■■
Disclose their bankruptcy if they borrow money, enter lease or hire purchase
agreements, offer to supply goods and services, or pass cheques worth more than the
threshold amount.
Part 1 includes:
■■
Obligations and Offences (page 185)
■■
Freezing of accounts (page 189)
■■
Income Contributions – hardship & enforcement (page 190)
■■
Permission to Travel (page 196)
■■
Provable debts (collection attempts) (page 197)
■■
Secured loans (page 198)
■■
Insurance claims (page 200)
■■
External Dispute Resolution (page 203)
■■
Early release of super (page 205)
■■
Other issues (page 208)
Part 2 includes:
■■
Automatic Discharge (page 209)
■■
Objections to Discharge (page 209)
■■
Annulment by payment (page 211)
■■
Annulment by the Court (page 211)
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Compositions or arrangements (page 213)
■■
Trustee’s Fees (page 213)
Sample letters are included where applicable. A handout for your client to help them remember
their obligations and where to go for help is also included.
Part 1:
Life in bankruptcy
For bankrupts who have been under intense pressure from creditors and have felt the need to
be very defensive about their personal information to avoid recovery action this change to a
regime of disclosure can be very difficult. Bankruptcy can be a great reliever of stress and allow
the client to move on with their lives. However, if the undischarged bankrupt is unprepared for
what will happen while they are bankrupt they may encounter a whole new range of stresses.
It is important that the role of financial counsellor doesn’t necessarily end with the lodgement
and acceptance of the bankruptcy. The client may continue to experience significant practical
and emotional problems as a consequence of the bankruptcy. They may need assistance to fill
in any forms the Trustee may require, or to advocate in relation to what constitutes protected
property. They may want help to develop strategies to minimise the likelihood they will become
bankrupt again in the future (remembering that this is always possible due to events beyond
their control). They could face difficulties paying income contributions, seeking permission to
travel, or have ongoing problems paying secured loans.
Once the bankruptcy has been accepted the undischarged bankrupt’s affairs are now under
the control of the appointed trustee in bankruptcy (The Trustee). The job of the Trustee is to
ensure that any income or assets not protected in bankruptcy are made available to the creditors.
The Trustee may be someone from AFSA or a private registered trustee (any reference to “the
Trustee” includes AFSA where the Official Trustee is administering the estate). In some cases,
the Official Trustee is the initial trustee and then the estate is transferred to a private trustee.
The client has no say in such a transfer.
While a lot of information about bankruptcy centres on the relief it provides to debt-burdened
debtors, often little mention is made of the creditors’ perspective. The main role of the Trustee
is to obtain funds for distribution to creditors from:
■■
The sale of assets that are not protected in bankruptcy; and/or
■■
The recovery of property that was transferred to third parties before bankruptcy; and/or
■■
Income contributions.
For many financial counselling clients this will have no relevance because they have no assets
and very limited income. For others, it is very significant.
During the bankruptcy the Trustee may seek further information from the undischarged bankrupt
including proof of income, financial statements, contracts and so forth. It is the undischarged
bankrupt’s responsibility to supply this information and to keep the Trustee informed of any
change in their personal circumstances including income, relationship status or place of residence.
Also, the Trustee’s investigations may involve transactions between the bankrupt and their
relatives and/or friends which could involve those persons being required to appear in Court
and give evidence about their dealings with the bankrupt.
During the period of bankruptcy the bankrupt will be regarded as an undischarged bankrupt.
This is three years and one day from the date on which the statement of affairs is filed, unless
the period is extended by the Trustee lodging an objection. When the person is discharged from
bankruptcy, they will become a discharged bankrupt, sometimes referred to as a “former bankrupt”.
The restrictions discussed in Chapter 3 and Chapter 6 will apply while the person is an
undischarged bankrupt and they will need to comply with the bankruptcy laws and regulations
and co-operate with the Trustee. Failure to do so can result in a breach of the Bankruptcy Act
leading to potential extension of the period of bankruptcy for up to 8 years and/or the possibility
of prosecution .
While some of this Chapter might sound intimidating, the vast majority of the time no serious
problems occur. Clients need to understand that as long as they are completely honest and
184
forthcoming with information for their Trustee, the process should run smoothly. If they withhold
information, or attempt to hide assets or money, or otherwise deceive the Trustee in any way,
they are likely to be in serious trouble.
Any decision of a Trustee is potentially reviewable, although repeated unsubstantiated complaints
will not assist in influencing the Trustee to exercise their discretion in the bankrupt’s favour in
future. This Chapter contains information about seeking a review or making a complaint in a
couple of specific areas – hardship in relation to income contributions and seeking a review of
the Trustee’s remuneration and expenses. If you wish to assist your client to complain about,
or seek a review of, another aspect of the Trustees conduct/decision-making the same contact
information and principles apply.
For genuine complaints and disputes write to:
AFSA Regulation and Enforcement
■■
■■
■■
Phone – you can contact AFSA on 1300 364 785
Online – you can lodge your complaint online by completing the ‘Contact us’ form
or AFSA’s preference would be for you to use the complaints form [PDF 201KB] on
the AFSA website which asks all of the necessary information needed to assess your
complaint.
Post/Fax – you can send your complaint by post or fax:
Region
Postal Address
Facsimile
QLD, WA & NT
PO Box 10443, Adelaide Street, BRISBANE 4001
(07) 3360 5402
VIC, TAS & SA
GPO Box 2851, MELBOURNE 3001
(03) 8631 4840
NSW & ACT
GPO Box 548, SYDNEY 2001
(02) 8233 7805
Reporting and other obligations of bankrupts
Obligations to the Trustee and the court
The following must be given to the Trustee “forthwith” after becoming a bankrupt (Section 77):
■■
All books/financial records of the bankrupt’s examinable affairs; and
■■
The bankrupt’s passport (if he or she has a current passport).
In many cases the Trustee will not want the passport to be physically handed over so the client
should wait to see if it is requested. Passports and financial records should NOT be lodged with
the Debtor’s Petition and/or statement of affairs.
Throughout the bankruptcy the bankrupt must:
■■
■■
■■
■■
■■
Attend the Trustee whenever the Trustee reasonably requires (Section 77);
Give the Trustee any information about his or her conduct or examinable affairs that the
Trustee requires (Section 77);
Notify the Trustee as soon as practicable after becoming a bankrupt of any material
change in his or her position since the lodgement of the statement of affairs (Section 77);\
Notify the Trustee of any further material change in position as soon as practicable after
that change occurs (Section 77) for example, an increase in income;
Attend a meeting of the creditors whenever the Trustee requires and give such
information at the meeting in relation to his or her conduct or examinable affairs that the
Trustee requires (Section 77);
Execute such instruments and do whatever is required in relation to his or her property
to give effect to the requirements of the Bankruptcy Act, the Trustee or any orders of the
court (Section 77);
■■
■■
Disclose to the Trustee any property received or acquired (that would be divisible among
creditors) as soon as practicable after it is received or acquired (Section 77) [for example,
tell the Trustee about an interest in a deceased estate (inheritance), major lottery prize etc
received during the bankruptcy];
“Aid to the utmost of his or her power” in the administration of his or her estate (Section
77);
If the bankrupt is prevented by illness or other reasonable cause from doing any of the above, they
may have a defence (although such failure should be corrected as soon as it is practical to do so).
A person’s examinable affairs are defined as:
a. The person’s dealings, transactions, property and affairs; and
b. The financial affairs of an associated entity of the person, in so far as they are, or appear to be,
relevant to the person or to any of his or her conduct, dealings, transactions, property and
affairs.
A material change is defined as:
“A change in the particulars contained in the bankrupt’s statement of affairs, where the change
could reasonably be expected to be relevant to the administration of the bankrupt’s estate. “
Case study
A bankrupt’s only asset was a caravan. The Trustee had indicated her intention to sell the
caravan. The bankrupt had been living in the caravan but had received an offer of rental
accommodation in share housing arrangement that suited his needs and income. The Trustee
strongly suggested that the bankrupt should stay in the caravan until a buyer had been located.
The bankrupt did not want to do this because a suitable rental opportunity might not be available
at a later date. Although the bankrupt should aid the Trustee to the utmost of his or he power in
the administration of the estate, this does not extend to being required to live in a particular place.
The bankrupt is free to take up the offer of rental accommodation.
The bankrupt must notify the Trustee immediately in writing of any change in the bankrupt’s
name, address (of the bankrupt’s principal place of residence) or in their daytime telephone
number (Section 80). If the bankrupt in fact assumes or begins to use a different or additional
name, this will be deemed to be a change of name and must be notified in writing. Failure to
comply with this section is a strict liability offence carrying a penalty of 6 months imprisonment.
The client is unlikely to be prosecuted if this is their only offence – prosecution would be most
likely to occur in the context of a other offences having been committed, possibly involving
trying to hide income or assets using the alternative name. Clients should nevertheless be told
the seriousness of the obligation.
A bankrupt can be summonsed to court to be examined in relation to their affairs (including
after they have been discharged from bankruptcy) upon the application of a relevant creditor,
the Trustee or the Official Receiver (Section 81). A person who fails to appear in accordance
with such a summons can be arrested.
Offences
Where a bankrupt, or a person subject to a Bankruptcy Notice or Creditor’s Petition, does any
of the following they can be arrested and brought before the court and in some cases imprisoned
(Section 78):
■■
186
Absconding, or being about to abscond (run away or hide) with a view to avoiding his or
her debts or delaying bankruptcy proceedings against him or herself;
■■
■■
Removing or concealing his or her property, or being about to remove or conceal it, with a
view to preventing or delaying possession being taken by the trustee under the Bankruptcy
Act;
Removing, concealing or destroying books or other financial records relevant to his or her
examinable affairs, or being about to do so.
In such cases the court can also order that books, records or property be seized and delivered
into the custody of a particular person.
Where a bankrupt (as opposed to a person subject to a Bankruptcy Notice or Creditor’s Petition)
does any of the following, he or she can also be arrested and brought before the court and in
some cases imprisoned (Section 78):
■■
■■
Concealing or removing any of his or her property without the permission of the trustee;
Neglecting or failing to comply with any order of the court or other obligation under the
Bankruptcy Act without good cause.
Other offences include:
■■
Failing to disclose property
■■
Disposing of or creating a charge over property with intent to defraud the creditors
■■
Making a false declaration (including but not limited to in the statement of affairs)
■■
■■
■■
■■
■■
■■
■■
■■
Failing to keep proper books of account (or failure to preserve such books of account) in
the 5 years prior to bankruptcy (except where such failure was honest and excusable)
Gambling and hazardous speculation as covered in detail in Chapter 6, Part 8
Leaving Australia prior to bankruptcy (in the 6 months before or after presentation of a
Petition) with the intent to defeat or delay creditors (see Note below)
Leaving Australia while bankrupt without the Trustee’s written permission
Failing to disclose the person’s bankrupt status when doing any of the following for an
amount above the relevant threshold ($5,333 as at June 2014, for current amount go to
www.afsa.gov.au):
–– obtaining credit
–– obtaining goods or services from a person:
• by giving a bill of exchange or cheque drawn, or a promissory note
• by giving 2 or more of the above which add up to more than the threshold
–– entering into a hire-purchase agreement, or entering into a contract or agreement for
the leasing or hiring of any goods
–– obtaining goods or services on credit
–– promising to supply goods, or render services
Running a business in a name other than the name used in the bankruptcy documentation
(for example under an assumed name, in the name of another person or, either alone or in
partnership, under a firm or business name)
Failing to keep books explaining income and other transactions during bankruptcy unless
notified in writing that this is unnecessary
Having incurred a debt within the 2 years prior to becoming a bankrupt without having
any reasonable or probable expectation of being able to pay.
Minor technical breaches are unlikely to be prosecuted and in many cases the option of extending
the bankruptcy (see below) will be preferred to the rigorousness of mounting a criminal prosecution.
However, Trustees have an obligation to report any apparent offence to AFSA, who will then
investigate and assess whether the matter is worthy of a report to the Commonwealth Director
of Public Prosecutions (“CDPP”). The CDPP will then conduct its own analysis of whether
there is sufficient evidence to proceed to prosecution. Finally, the court will decide the matter
on the evidence.
➻➻ Note: Simply travelling overseas within the 6 months before bankruptcy is not an offence. It
must be with the intent to defeat or delay creditors. There must be evidence that the client did not
intend to return, did not return, or was in some way divesting him or herself of assets in the course
of the journey.
Examples of recent successful prosecutions:
Case 1
Sixty-four year old Le Bron had previously been bankrupt between 2002 and 2005, during which
time he purchased and sold real estate and obtained and used a credit card from Citibank to
incur a debt of $21,000. Le Bron did not advise his Trustee of the purchase and sale of the
real estate and failed to disclose his bankruptcy status to Citibank as part of his obligations as
an undischarged bankrupt. Le Bron went bankrupt again in June 2009, listing Citibank as an
unsecured creditor.
Le Bron was charged with signing false declarations in his statement of affairs for both
bankruptcies by not disclosing bank accounts, previous names used and the purchase, ownership
and sale of real estate. Le Bron was also charged with obtaining credit from Citibank without
disclosing that he was an undischarged bankrupt.
On 19 January 2012 Mr Le Bron of Western Australia was convicted and sentenced to a term of
12 months imprisonment, to be released after 6 months upon entering into a recognisance in the
sum of $2,000 to be of good behaviour for 2 years.
Source: The Personal Insolvency Regulator Newsletter, May 2012 – Volume 10, Issue 2
Case 2
Thirty three year old, unemployed Ms Sedano filed for voluntary bankruptcy in June 2007 with
debts of $71,000.00. During her bankruptcy, Ms Sedano received sale proceeds of $147,000
from the sale of property. Ms Sedano removed $67,800 of the proceeds instead of making them
available to her creditors.
Following an investigation, Ms Sedano was charged with failing to comply with her obligations as
a bankrupt to fully and truly disclose to her trustee the $147,000 she received from the sale of the
Cranbourne property. Ms Sedano was also charged with removing the $67,800.
On 20 April 2012 Ms Sedano of Victoria was sentenced in the Magistrates Court after pleading
guilty to offences against the Bankruptcy Act 1966. Ms Sedano was convicted and placed on a
Community Corrections Order to complete 120 hours of unpaid community work over a 15 month
period.
Source: The Personal Insolvency Regulator Newsletter, July 2012 – Volume 10, Issue 3
188
Case 3
Mr. Assy of NSW was convicted in the Local Court on 7 June 2012 for offences against the
Bankruptcy Act 1966. Assy, who became bankrupt on 7 January 2010 by way of a Debtor’s
Petition, was charged with two counts of disposing of property within twelve months of becoming
a bankrupt with the intent of defeating creditors, and one count of knowingly signing a false
declaration.
The September prior to going bankrupt Mr Assy purchased a boat and a trailer for a total
purchase price of $37,405.00 with finance for about $34,000 and a mortgage over the goods.
Both items were originally registered in the name of Assy but both were transferred to third parties
within a month or so. The boat was transferred again to yet another third party 2 days after the
Debtor’s Petition was lodged.
No payment was ever made on the loans and the whereabouts of the boat and trailer were
unknown at the date of the hearing. Mr Assy answered “no” to the questions “have you sold,
transferred or given away any assets worth over $1,000 in the previous five years?” in his
statement of affairs.
He was convicted, and was ordered to serve 150 hours community service in relation to each of
the two offences (although the penalty is to be served concurrently). He was further ordered to
have his fingerprints taken and placed on record.
Source: The Personal Insolvency Regulator Newsletter, July 2012 – Volume 10, Issue 3
Freezing of accounts
If your client has an account with funds in it over the allowed threshold ($2000 when the estate
is administered by AFSA but potentially lower when handled by a registered trustee – about
$1000), it is likely to be frozen by the Trustee as any funds held at the date of the bankruptcy vest
in the Trustee. Your client should make sure they have an account with less than this amount in
it from which to live. All direct debits, if any (such as for rent, secured loans, utilities etc), should
be set up from this account only. This should be the same account into which the bankrupt’s
wages or Centrelink benefits are paid. It is prudent to get a balance of the account on the day
Debtor’s Petition is lodged.
Your client is allowed to accumulate money (savings) from earnings after the date of the bankruptcy
(subject to any assessed income contributions), but should be able to trace the origin of the
funds clearly in the event of a dispute with the Trustee. If the money is directly deposited by
their employer there should be a clear audit trail, provided these funds have not been mixed
with others. Income should NOT, however, be used to purchase assets (including shares) until
after discharge from bankruptcy, as such assets will vest in the Trustee as after acquired property.
Occasionally, an overzealous registered Trustee may freeze accounts with even small amounts
in them. In the event that your clients account(s) have been frozen and they have no money on
which to live, they should contact their Trustee in the first instance. If they are unable to resolve
the matter directly with the Trustee, you may be able to advocate for them. You will need to
show that either:
1. They need the funds to cover essential living expenses and are suffering genuine hardship
as a result of their inability to access them; and/or
2. That the funds (or a portion of them) have been saved from income since the date of the
bankruptcy. A balance of the account at the date of bankruptcy will assist in this process.
If the Trustee will not release the funds you or your client can complain to AFSA Regulation
and Enforcement (see contact details on p185).
➻➻ Note: It may be that the Trustee is seeking to recover funds the bankrupt has wrongly retained
(for example, the proceeds of an insurance claim in relation to loss or damage in relation to
property which has vested in the Trustee). In that case your client may need legal advice as the
Trustee may have a genuine claim against funds accumulated from earnings.
Income contributions
If your client earns income above the applicable threshold amount as disclosed in the statement
of affairs, they will usually receive an Assessment Notice within a week or two of lodging their
statement of affairs, provided the required evidentiary information is attached. The Assessment
Notice should contain:
■■
The basis of the calculations
■■
Who the bankrupt should contact at the Trustee’s office if they have questions
■■
Their appeal rights and the applicable procedure
■■
Their hardship rights and the applicable procedure.
Prior to the completion of each Contribution Assessment Period (“CAP” – 12 month periods
commencing from the date of the bankruptcy) the bankrupt will receive an Income Statement
to complete. The bankrupt must then provide evidence for their actual income received in the
current CAP and the expected income for the subsequent CAP.
There are penalties for failure to supply this information. Further the bankrupt risks the Trustee
drawing his or her own conclusions. As already emphasised in Chapter 6, clients would be well
advised to notify the Trustee of any significant change in their circumstances during a CAP
or face the possibility of either paying too much, or accumulating significant arrears when the
evidence of actual income is supplied at the conclusion of the CAP.
The Trustee is entitled to take into account a wide range of other sources of information if they are
dissatisfied with the information supplied with the statement of affairs or Income Statement, or
they have uncovered inconsistent information as a result of their investigations of the bankrupt’s
affairs. At the end of each CAP, the Trustee compares the bankrupt’s actual after-tax income
to the projected figure used in the income contribution assessment for the CAP. If there is a
significant variation, a reassessment is done. If during the CAP, the bankrupt’s income increases
or decreases significantly, a reassessment is done. A reassessment can be done at any time even
after the bankrupt has been discharged from bankruptcy.
Bankrupts who have no apparent capacity to pay contributions at the outset of the bankruptcy
may not always be sent Income Statement forms. They should nonetheless notify their Trustee
(this will be AFSA if the bankruptcy is being administered by the Official Trustee) if there is a
significant increase in their income.
The appeal rights of the bankrupt if they are dissatisfied with the Trustee’s assessment of
contributions are covered in Chapter 6, Part 4.
➻➻ Note: for more information on any aspect of income contributions see also Official Trustee
Practice Statement 1 Income Contributions Issued I 7 February 2008 Updated August 2013
available at www.afsa.gov.au.
190
Hardship
Section 139T of the Bankruptcy Act provides that the bankrupt can apply to the Trustee to
increase the applicable income threshold (effectively reducing the income contributions payable)
if payment of the assessed contributions would cause the bankrupt hardship for one or more of
the reasons set out in the Act.
The reasons include:
■■
The bankrupt (or a dependent of the bankrupt) has expenses for ongoing medical
attention or the supply of medicines as a result of an illness or disability
■■
The bankrupt has child care costs which enable the bankrupt to continue in employment
■■
The bankrupt lives in private rental accommodation and pays rent
■■
The bankrupt incurs substantial expense travelling to and from work
■■
The spouse of the bankrupt, or another member of the bankrupt’s household, who
ordinarily contributes to the household expenses cannot do so due to unemployment,
illness or injury.
The Act provides for other reasons to be included in the regulations but to date none have been
added.
There is no section saying “any other reasonable cause”. However, if your client does have a really
good reason not related to any of the above, it can’t hurt to put that reason to the Trustee. You
will need to warn the client that, technically, they have no grounds.
In all cases the client must have evidence of the alleged expenses, must be responsible for paying
the expense from their own income, and must be able to show that this expense, when viewed
in the context of the client’s contributions and remaining living expenses will cause “hardship”.
High expenses alone will not justify a change if there is no hardship as a result.
Case study – hardship and contributions
Consumer Credit Legal Centre’s (“CCLC”) client had declared bankruptcy in March 2009 (without
advice or assistance) over her ex husband’s gambling debts for which she was a joint-borrower.
She was a government employee earning $82k per annum and was required to make income
contributions. She had two dependent children at the time she declared bankruptcy, so her
assessed income threshold amount was increased by 27% and she was required to contribute
$150 per fortnight during the first year of bankruptcy. During the second year of bankruptcy, her
children turned 18 years old and were no longer considered “dependant”, so her contributions
were increased to $380 per fortnight.
She applied for a higher income threshold on the grounds that she suffered financial hardship
because she had to pay for her rental accommodation. Her Trustee refused her application
stating that the rental she chose to pay for a four-bedroom house in an affluent suburb of Sydney
was discretionary and that her other expenses could be curtailed. She sought a review by the
Inspector-General who upheld the Trustee’s decision. She then sought a review of the InspectorGeneral’s decision by the AAT and argued that it was necessary for her to live in that suburb
because the rental was towards the lower end of the spectrum for the suburb; rental in other less
affluent suburbs was not much cheaper; and the house was located near the residence of her
elderly parents and the places of employment of herself and her family. CCLC agreed to assist in
order to test the hardship provisions in relation to rental payments.
The Inspector-General suggested a settlement whereby the bankrupt pay $250 per fortnight
until her assessed liability was finalised (which would take about 8 years) but she would still
be discharged from bankruptcy at the expiration of the 3 year period (March 2012). The AAT
indicated that although it was accepted that her rent was not discretionary, her other expenses
could be curtailed and she did not suffer “severe financial hardship”. The client was advised to
give serious consideration to the Inspector-General’s offer.
The process of applying for relief on hardship grounds in relation to income contributions is
to write to the Trustee. A sample letter is provided below. You must include the evidence of
the expense plus an income and expenditure statement showing the resultant hardship. Other
expenses may need evidence also, depending on whether they appear out of the ordinary (or if
requested by the Trustee).
If your client’s bankruptcy is being administered by the Official Trustee then the letter is addressed
to the Official Trustee, care of AFSA. AFSA may assist the client to prepare this letter if you
are not able to do so.
The Trustee must then make a determination whether or not to raise the applicable threshold.
If the Trustee is satisfied that the bankrupt will suffer hardship, he or she may determine that
a higher actual income threshold amount (”AITA”) applies for the relevant CAP. The Trustee
must then make a new income contribution assessment for the relevant period and notify the
bankrupt in writing.
If the trustee is not satisfied that the bankrupt will suffer hardship, then the Trustee must refuse
the application. In that case the Trustee must write to the bankrupt setting out the following:
1. The Trustee’s decision;
2. The evidence or other material on which the decision was based;
3. The reasons for the decision;
4. A statement to the effect that the bankrupt may request the Inspector-General to review
the decision.
If the Trustee does not respond to the bankrupt’s application within 30 days, then the Trustee
is taken to have refused the application and the bankrupt may apply to the Inspector General
for a review.
There is no time limit on making an application to the Trustee on grounds of hardship. Once
the decision has been made (or arguably the 30 days have passed) then the bankrupt has 60 days
in which to lodge a request for a review with the Inspector-General.
The Inspector-General has 60 days to make a decision on the Review. That decision may include:
•
Upholding the Trustee’s decision;
•
Setting aside the Trustee’s decision and making a fresh assessment of the application.
The bankrupt must be notified of the decision, the reasons for the decision, and the right to appeal
to the AAT. An appeal to the AAT must be lodged within 28 days of the bankrupt receiving
written notice of the decision from the inspector-General.
192
Sample letter – Application for variation of income threshold on grounds of
hardship
To: [insert Trustee’s name and address]
Dear Sir/Madam
Re: Income Contributions of [insert client’s name and bankruptcy number] – application for
Hardship under Section 139T
I am assisting [insert client’s name]. I attach my client’s authority.
My client is suffering/ will suffer [delete whichever is not applicable] hardship as a result of paying the
income contributions required in your assessment dated [insert date of assessment notice received
by the client] as a result of:
[List the reasons, paying particular attention to the list on page 191 above, but also including any
additional factors you consider relevant, for example
1. My client pays private rent of $......... dollars
2. My client suffers from: give details of disability or medical condition
3. My client cares for his or her elderly parent including paying for......]
I have included an income and expenditure statement for my client which shows that after paying
ordinary living expenses, the specific items above, and the assessed contributions, my client will have
a deficit of $[insert dollar amount] per fortnight [or month – choose the same period the contributions
are payable]. I submit that my client can afford contributions of no more than $[insert dollar amount].
[Alternatively, if supported by the evidence, you could include I submit that my client cannot afford
to make any income contributions at this time.]
I also include the following evidence:
[List the evidence you will attach, for example:
1. Rental receipts
2. Medical reports/ certificate
3. Receipts/invoices for medications or consultations/operations
4. Partner’s separation certificate and/or Centrelink details
5. Child care invoices or receipts
6. Travel tickets or petrol/vehicle maintenance expenses
7. Evidence of address of place of work.
Include any evidence that is relevant to the reasons you have given].
I look forward to your written response within 30 days.
Yours faithfully
[Insert signature, name, position and contact details]
This letter can also be written for the client to send on his or her own behalf.
Whether the Trustee agrees to the request will not only be affected by the severity of the client’s
hardship and the quality of the evidence, but also the relationship that the bankrupt has had
with the Trustee to date. This will be affected by, among other things, whether the bankrupt
has been communicative, complied with requests for information and/or paid contributions to
date. If your client has been less than flawless on any of these counts but has a good reason – for
example, a disability or mental health condition, or a personal trauma – which has made them
exhibit problematic behaviour, or have difficulty communicating effectively, you should include
this explanation in your letter (with your client’s consent).
If the Trustee refuses, you may also need to assist your client to apply to the Inspector-General.
If the Trustee does not respond, follow up. If a response is still not forthcoming you can use the
alternative variation of the Sample Letter below.
Sample letter – Request review of the Trustee’s decision to refuse
hardship
The Inspector General in Bankruptcy
Australian Financial Security Authority
Dear Sir/Madam
Re: Income Contributions of [insert client’s name and bankruptcy number] – application for
Review of Hardship Decision under Section 139T
I am assisting [insert client’s name]. I attach my client’s authority.
On [insert date of original letter to Trustee] I assisted my client to apply/my client applied [delete
whichever is not applicable] to his/her trustee in bankruptcy for a review of his/her bankruptcy
threshold on grounds of hardship. I attach a copy of that application and the accompanying evidence.
On [insert date you or client received Trustee’s decision] I/my client [delete whichever is not applicable]
received a response from the trustee dated [insert date on the response] which I also enclose.
(Alternatively
I have not/my client has not [delete whichever is not applicable] received a response from the trustee
and more than 30 days have passed since he/she [delete whichever is not applicable] would have
received the application, being posted/e-mailed/faxed on [delete whichever is not applicable] [insert
date].)
I request the Inspector-General to review the trustee’s decision.
In conducting your review I ask the Inspector General to take into account the following:
1. The evidence supplied by my client in the attached application
2. [List any response you may have to the Trustee’s reasoning – for example, why your client
has to live in a particular area, or incur a particular expense the trustee finds excessive]
3. The following additional evidence [only include this if there is additional evidence that has
come to light, or that is required to respond to the Trustee’s reasons. List each document here
and include in the attachments.]
I look forward to your response within 60 days.
Yours faithfully
194
If you don’t receive acknowledgement from AFSA you should follow up to check the application
has been received.
If the response is to uphold the Trustee’s decision, or there is no decision within 60 days, you
should refer your client for legal advice. In the latter case you may wish to follow up with AFSA
first to see if the decision is likely to be forthcoming shortly.
Trustee’s options for pursuing unpaid income contributions
If your client falls behind in their contributions the Trustee has a number of options for recovering
the arrears. A notice will be sent to the bankrupt requiring rectification of the arrears. This notice
will usually give the bankrupt 14 days to pay the arrears or enter into a repayment arrangement.
If the bankrupt does not pay, the Trustee has a number of options:
■■
Applying to the Official Receiver to issue a 139ZL Notice on the bankrupt’s employer
or other 3rd party, requiring money or property owed to the bankrupt, to be paid to
the trustee to cover the bankrupt’s liability for income contributions. This can work as a
garnishee on the bankrupt’s wages (where it is the employer), or require the transfer of
physical property or its value from another third party.
■■
Lodging an objection to discharge
■■
Instructing a debt collection agency
■■
■■
Registering the arrears as a court order and using the usual court enforcement processes
(including a further sequestration order if necessary).
Requiring the bankrupt to set up a supervised account in accordance with the Act. This
means that the bankrupt would have to have all income paid into a particular designated
account and the Trustee would supervise any withdrawals from that account.
Most of the above will not be pursued where the arrears are less than $1,000, with the exception
of objection to discharge. The bankrupt’s history of payment and cooperation will influence the
Trustee’s choice of enforcement method. Clients should be encouraged to contact their Trustee
and make arrangements to pay arrears whenever possible.
Trustees, and debt collectors acting on their behalf, must comply with the ASIC/ACCC Guidelines
in relation to debtor harassment.
Objection to discharge is a very common result of unpaid income contributions. Bankrupts
need to understand that this will result in a fresh assessment for a new CAP for each additional
year of bankruptcy (unless the entire debts and expenses of the bankrupt estate have been paid
in full, including interest).
Subsequent hardship – the bankrupt could afford the contributions at the
relevant time but did not pay and now can’t afford the arrears
In some cases the original assessment may have been valid, but the bankrupt did not pay and is
now in genuine hardship. This is a difficult situation not envisaged by the Act.
As a first step the bankrupt should try writing to the Trustee setting out his or financial position
in detail. Try using the same hardship process and letter above. If there are significant arrears,
there is also a good chance that the relationship with the Trustee in bankruptcy is not good and
this may not work. Things can be further complicated if the Trustee has already commenced
one or more of the enforcement options listed above.
The bankrupt can also write to the Inspector-General requesting a review, as set out above, but
again, it is not clear that the Act has this particular scenario in mind, so the response may not
be helpful. If there is a court judgment in place, then only the court or the Trustee can reverse
it (by for example, getting the judgment set aside by consent).
If all else fails, the bankrupt may have to file another Debtor’s Petition in relation to the arrears
(and the whole process starts again). This can be done, but in that case the person risks further
assessments of contributions during the subsequent bankruptcy should their financial position
improve.
Seeking permission to travel during bankruptcy
As noted in earlier chapters, a bankrupt is not permitted to leave Australia (or even prepare to
leave Australia) without the written permission of their Trustee (Section 272). To do so is an
offence potentially punishable by imprisonment. It is also a reason to extend the bankruptcy.
Permission to travel will usually be given provided that:
■■
It is necessary to earning the bankrupt’s income; OR
■■
The bankrupt has compassionate reasons; AND
■■
It will not interfere with the administration of the estate; AND
■■
The bankrupt is not considered a “flight risk” – that is, likely to never return.
If the bankrupt has been assessed as being required to make income contributions, the Trustee
will usually expect any contributions payable during the trip, plus any arrears (if any), to be paid
up prior to departure.
If the bankruptcy is being administered by the Official Trustee, there is a form for completion on
the AFSA website currently at https://www.afsa.gov.au/resources/forms/request-for-permissionforms. AFSA have also recently announced a fee of $150 to apply from April 2014 for processing
applications for permission to travel. Submissions were made to the effect that this process should
include an opportunity for bankrupts to apply for a fee waiver in appropriate cases (particularly
where permission to travel is requested for compassionate reasons) but to date there has been no
commitment to providing a fee waiver process. Check the AFSA website for the latest fee details.
In other cases the Trustee should be supplied with the bankrupt’s:
■■
Reasons for departing Australia
■■
Dates of departure and return
■■
Details of the itinerary and any overseas contact details
■■
Particulars about who will fund the travel costs
■■
■■
Any documentary evidence supporting the request, for example, confirmation by an
employer of the need to travel, confirmation of payment of costs by a third party
How any contributions due in the bankrupt’s absence will be paid (the Trustee may
require these to be paid prior to departure).
The Trustee may refuse consent where the bankrupt’s presence is necessary for the proper and
efficient administration of the bankruptcy.
The AFSA request form states it must be lodged 14 days prior to your planned departure date. In practice
you should lodge your request with AFSA or your Trustee as early as possible, and preferably prior to
paying for your travel arrangements. There is no guarantee that the travel arrangements will be approved.
If consent is granted, the Trustee must provide this in writing before departure. The bankrupt
should carry this letter on them just in case they have been placed on an alert list with the
immigration officials and the Federal Police.
The Trustee may also impose conditions on travel which must be strictly adhered to – for example,
for the bankrupt to deliver his or her passport to the Trustee within 7 days of returning to
Australia. If for any reason the bankrupt will be unable to comply with a condition for reasons
beyond his or her control (illness, disruption to transport services etc), then the Trustee should
be informed as soon as possible.
If permission to travel is refused, the bankrupt should contact the Trustee to determine whether
196
there is any room for negotiation. Perhaps permission would be approved for a different time
or if certain prerequisites were met.
If this is unsuccessful the bankrupt can contact Regulation & Enforcement at AFSA by contacting
1300 364 785 and asking to be referred.
If the permission is still refused then the bankrupt’s only option for review is an application
to the Federal Circuit Court of Australia or the Federal Court of Australia (Section 178). It is
recommended that legal advice be obtained before an application is made to the court.
My client is being chased for a provable debt
If your client is being pursued for a provable debt, you or the client should inform the creditor
that the client is bankrupt and give the creditor the date of the bankruptcy and the bankruptcy
number. If the debt has not been included in the client’s statement of affairs (because the client
forgot it existed, for example), then the Trustee should be notified in writing.
Section 58 of the Bankruptcy Act stipulates that a creditor cannot enforce any remedy against
the person or property of a bankrupt in relation to a provable debt (Section 58). Further, a
creditor can only commence proceedings in relation to a provable debt, or take a fresh step in
proceedings in relation to a provable debt with the leave of the court on such terms as the court
thinks fit (Section 58 (3)).
Unfortunately some debt collectors contact clients during bankruptcy and offer discounted
amounts to clear provable debts. Whilst an undischarged bankrupt is able to make voluntary
contributions to their creditors, they should not be harassed or misled into doing so (intentionally
misrepresenting that a debt is legally enforceable against the debtor when this is not the case may
amount to unconscionable conduct). Should this occur the client should immediately contact
their Trustee and should inform the debt collector that the debt was listed in the bankruptcy.
➻➻ Remember: An unsecured creditor with a provable debt should not be contacting an
undischarged bankrupt directly – they should be contacting the Trustee.
Sometimes this contact will happen because the debt has been assigned (sold) but the original
creditor has not informed the purchaser of the debt (the debt collector) about the bankruptcy.
This can also happen when the client is no longer paying and is preparing to go bankrupt. This
is why it is important where possible to indicate on the statement of affairs all the parties who
may be pursuing the unsecured liability in addition to the original creditor (for example, debt
collectors, insurance companies in the case of car accidents, other drivers etc).
If inappropriate contact by a creditor or debt collector continues, contact:
■■
■■
The Trustee
Consider lodging a complaint in an External Dispute Resolution scheme (such as the
Financial Ombudsman Service) for harassment if there is a scheme of which the creditor/
debt collector is a member.
➻➻ Remember: The Telecommunications Industry Ombudsman and the Energy and Water
Ombudsman schemes may also be relevant.
■■
Consider complaining to the appropriate regulator about debtor harassment (The
Australian Securities and Investments Commission for credit and financial services debts
and the Australian Competition and Consumer Commission for debts arising from
contracts for other goods and services).
If your client receives a Statement of Claim or Summons or other document initiating court
proceedings, the Trustee must be notified and sent a copy of the relevant documents. The plaintiff
should also be notified of the client’s bankruptcy, including the date and bankruptcy number. If
the Trustee indicates he or she has no intention to defend the proceedings, then the client can
notify the court of the bankruptcy, the restrictions imposed under Section 58 and the Court’s
powers under Section 60.
Letter in relation to legal proceedings in relation to a provable debt
[Insert details of court]
Dear Sir/Madam,
RE: [insert details of court proceedings as per the Statement of Claim or other initiating document]
I refer to the matter currently before the Court. On [insert date] I presented a Debtor’s Petition and
am currently bankrupt. My bankruptcy number is [insert number]. The debt currently being claimed
by the plaintiff is listed as an unsecured debt in my bankruptcy.
The details of my bankruptcy trustee are as follows: [insert details]
In my view, by virtue of s58(3) of the Bankruptcy Act leave of the Federal Circuit Court is required
to proceed with this claim in the [insert name of court e.g. “Local”] Court.
I have defended the action and denied the claims made against me, but due to my bankruptcy I can no
longer continue with this defence. I respectfully submit that this action should be permanently stayed.
Kind regards,
Client’s signature
Client’s name
[Insert contact details]
If the court proceedings are not in relation to a provable debt, or the client is unsure, refer the
client for legal advice. Chapter 6, Part 1 contains information about what is and is not a provable
debt. If the entity who has issued the court proceedings (the plaintiff ) is in an EDR scheme, your
client may be able to lodge a complaint in EDR (See section later in this Chapter).
Dealing with secured loans during bankruptcy
In some cases a bankrupt may continue to pay off secured loans during bankruptcy. There is
extensive information on this issue contained in Chapter 6, Part 1, and also specifically in
relation to Motor Vehicles in Part 2 and Houses/Real Estate in Part 3.
If your client is paying off a secured loan, then the fact of bankruptcy alone cannot be used
by the creditor to repossess the car, house or other security for the loan. Section 302 of the
Bankruptcy Act provides that a provision in a bill of sale, mortgage, lien, charge or PPSA security
agreement which purports to allow the agreement to be modified, or for any power or remedy
to be exercised, just because the debtor under the agreement becomes bankrupt, or enters a PIA,
is void. Similar restrictions are contained in Section 301 for hire purchase or property leases. If
your client receives a notice threatening to repossess a car or home for this reason, you can write
to the lender quoting the appropriate section.
Of course if the client is not meeting their repayments, or is in default under the contract in
some other way, enforcement action can happen as usual.
198
Sample letter
Dear Sir/Madam
RE: [Insert client’s name and a contract reference]
I am assisting [insert client’s name] and enclose my client’s written authority.
I note that in your letter/notice of [insert date] you have indicated your intention to repossess my
client’s [insert description of security property]. While my client is a bankrupt, s/he is completely up
to date with his/her repayments and is not otherwise in default to the best of my knowledge.
Please be aware that the Bankruptcy Act renders void any provision of a contract, mortgage, lien,
bill of sale, lease, hire purchase agreement, or PPSA security agreement, which purports to give
the lender or lessor the power to enforce or otherwise vary a contract as a consequence of the
borrower’s bankruptcy.
Please confirm in writing that you will not be taking enforcement action in relation to this contract,
or clarify the nature of my client’s default.
Yours faithfully….
If the car or property has already been repossessed you should refer your client for immediate
legal advice.
If the lender is a member of the Financial Ombudsman Service or the Credit Ombudsman
Service, you may be able to lodge a complaint with the appropriate External Dispute Resolution
service– see later section in this Chapter, Lodging a complaint with the Financial Ombudsman
Service or the Credit Ombudsman Service during bankruptcy.
In some cases the lender may have taken security over the client’s personal belongings, especially
for small fringe loans. If those possessions are necessary household goods that would be protected
in bankruptcy, then they are also prohibited securities under the National Credit Code. You can
lodge a complaint in the lender’s EDR scheme and/or seek legal advice.
What if my client is having difficulty paying their secured loan during
bankruptcy?
Your client should first revisit the decision about whether to continue with the contract or
surrender the security. Any shortfall on the contract should be provable in the bankruptcy,
provided the contract was entered prior to the date of the bankruptcy.
If the client wishes to try to continue paying the loan (and can reasonably afford to do so in the
longer term), then the case can be dealt with like any other loan where the client is in financial
difficulty. If the loan is consumer credit it is likely to be covered by the National Consumer
Credit Protection Act and your client will be entitled to apply for a hardship variation (detailed
information on this topic is available in the Credit Law Toolkit and in the fact sheets and sample
letters at www.financialrights.org.au). You should try negotiating with the lender. If that fails
your client may be able to lodge a complaint with the appropriate External Dispute Resolution
scheme – this is covered later in this Chapter.
Insurance claims
Whether a client gets to keep the proceeds of an insurance claim depends on the nature of the
insurance and the type of property or risk covered. Basically claims fall into 4 categories:
•
Claims which are specifically protected by the Bankruptcy Act
•
Claims which are in relation to property which is security for a loan
•
Claims which are in relation to property that is/was itself protected under the Bankruptcy Act
•
Claims which are in relation to property which has vested in the Trustee.
Claims which are specifically protected by the Bankruptcy Act
The Bankruptcy Act specifically protects the proceeds of policies of life assurance or endowment
assurance in respect of the life of the bankrupt or the spouse or de facto partner of the bankrupt
provided they are received on or after the date of the bankruptcy. If received prior to the
bankruptcy, then the proceeds, and any property purchased with those proceeds, will vest in
the Trustee. The date the claim is received is crucial and a claim may be interpreted as received
on the day it is approved, as opposed to when the funds clear in the insured person’s account. If
there is a dispute on this point legal advice will be required.
What constitutes a policy of life assurance is not clear as it is not defined in the Bankruptcy Act.
The Life Insurance Act 1945 defines policies of life insurance to include term life, continuous
disability, investment and annuity policies.
The types of policies offered by Australian life insurance companies include income protection,
trauma, life, total and permanent disability (“TPD”), investment, endowment and whole of life
policies. Many life insurance policies offer “bundled” or multilevel benefits. Some are pure risk,
some are investment only and others are risk policies with investment components.
Some life insurance policies are sold by life insurance companies to individuals and others are
sold as group insurance policies to employers or entities on behalf of their employees or members.
Many life insurance policies are sold as group insurance policies to trustees of superannuation
funds on behalf of the members of the fund (TPD claims associated with superannuation are
covered specifically later in this section).
If the proceeds of a life assurance or endowment policy are paid by way of annuity or pension,
then they do not vest in the Trustee but they are counted as income for the purpose of assessing
income contributions payable.
This is a complex area of law. When contemplating making a claim on a life insurance policy after
the date of bankruptcy, the safest course of action is to contact the Trustee first to ensure that
the Trustee is of the view that the proceeds of the claim will be protected. Ask for confirmation
of this in writing. If the Trustee is of the view that the proceeds of a claim on a particular policy
will not be protected, then your client will need legal advice.
200
Total and Permanent Disability Insurance
The Bankruptcy Act specifically exempts from property divisible by creditors the interest of a
bankrupt in a regulated superannuation fund or Retirement Savings Account. A payment to the
bankrupt from such a fund received after the date of the bankruptcy (except a superannuation
pension) (Section 116(2)(d)(iii) and (iv)).
The Bankruptcy Act also exempts the right of the bankrupt to recover damages or
compensation for personal injury or wrong done to the bankrupt and any monies paid to the
bankrupt from such a right, whether paid before or after the date of the bankruptcy (Section
116 (2) (G)).
There is some controversy as to whether certain life insurance payouts, particularly lump sums
for TPD and income protection paid from superannuation funds are quarantined from vesting in
the bankrupt estate. AFSA has suggested that the insurance proceeds from a superannuation
fund for TPD may not be protected unless they are paid in respect of injury (as opposed to
illness or non-trauma related disability), suggesting that the source of the protection is section
above in relation to compensation for personal injury. However other legal advice suggests
that any lump sum paid out of a superannuation fund is protected, whether it originates from a
group insurance policy held by the fund on behalf of its members not.
Again, it is advisable when contemplating making (or continuing with) a TPD or lump sum
income protection claim after the date of the bankruptcy is to contact the Trustee first to ensure
that the Trustee is of the view that the proceeds of the claim will be quarantined from creditors.
Ask for confirmation of this in writing. if the Trustee is of the view that the proceeds may not be
protected, your client should get legal advice.
If the client can wait until after discharge to lodge a claim, this would put the issue beyond
doubt, but clients may be in dire immediate need, or have a limited remaining lifespan. Another
option may be to have the amount paid into the superannuation funds allocated pension
fund (if it has one) and paid as income – this would then count towards the client’s assessed
income contribution liability but would not vest in the Trustee (income contributions are
covered in Chapter 6, part 4)
Claims in relation to property which is security for a loan
If the property that has been lost or damaged is the subject of a mortgage or other form of
security then the proceeds must be paid to the lender up to the value of the amount payable
under the contract. So, for instance, if your client’s secured vehicle is written off in an accident,
then the proceeds of the insurance claim must be paid towards the amount outstanding on the
loan. If the car is only damaged, then the car will be repaired as per usual, in order to retain the
value of the security.
Similarly, if your client has retained a mortgaged home into bankruptcy, and there is damage
to the building as a result of fire or storm for example, the proceeds of the claim will need to be
used to repair the security property. Usually the lender will insist on being noted on the policy
and the proceeds will usually be paid directly to the lender. The bankrupt will then need to
convince the lender to release the funds for the requisite repairs.
Where the value of the insurance claim exceeds the amount owed to the lender, then what
happens to the residual amount will depend on whether the property insured has vested in the
Trustee or not (See Claims in relation to property which has vested in the Trustee below).
Claims in relation to property that is/was itself protected under the
Bankruptcy Act
If an insurance claim is in relation to property which is protected under the Bankruptcy Act, and
there is no secured creditor, then the claim proceeds can be retained by the bankrupt in order to
replace or repair the lost or damaged property. Common examples of protected property include:
■■
Necessary household contents
■■
A car worth up to the threshold amount (currently $7,350 as at January 2014)
■■
Tools of trade worth up to the threshold amount (currently $3,600 as at January 2014)
■■
A home bought substantially wholly with compensation for personal injury, or other
protected money (for example superannuation funds withdrawn on or after the date of
the bankruptcy.
Example
A bankrupt has a car insured for $10,000. There is no loan secured over the vehicle. The car
is written off in a car accident. It is the bankrupt’s only vehicle. The bankrupt claims on her
comprehensive insurance policy. The first $7,350 can be retained by the bankrupt to purchase
another primary means of transport. The remaining $2,650 must be paid to the Trustee for the
benefit of the bankrupt estate.
Claims in relation to property which has vested in the trustee
The proceeds of any claim for property which had already vested in the Trustee, or would have
done so had the property still existed at the date of the bankruptcy, also vest in the Trustee. This
money cannot be retained by the bankrupt and the Trustee can take action to recover the money
if the bankrupt has disposed of it.
For example, if the client‘s car was stolen prior to or during bankruptcy, then the client can only
retain the threshold amount from the proceeds of the claim. Similarly, if the client’s home burns
to the ground prior to, or during the period of the bankruptcy, and there is no mortgage, then the
proceeds of the claim must be paid to the Trustee unless there is some argument that the home
is protected (or partially protected – See Chapter 6, Part 2). It is the Trustee’s decision what
to do with the proceeds but it is highly likely that if the home has been completely destroyed or
substantially damaged that the land will be sold without rebuilding/repairing and the proceeds
of both the sale and the insurance policy paid directly into the bankrupt estate.
➻➻ Remember: Vested bankruptcy property does not re-vest in the bankrupt upon discharge. A claim
paid post discharge will still vest in the Trustee if the property covered by the policy had already
vested in the Trustee during bankruptcy.
Example: Official Receiver v Prince [2006] FMCA 1917 (15 December 2006)
Ms Prince became a bankrupt on 23 May 2003. At some point after that and prior to discharge she
received a payout on her home building and contents policies with Allianz after her home in Tasmania
burnt down. In total she received $63,900 for contents and $63,000 for the building.
She did not pay any of this to the Trustee, being the Official Trustee in this case. She bought new
contents to the value of $18,540 and she bought a car for her mother for $26,200. She repaid a
vendor finance contract to the value of $43,500. On 15 December the Official Receiver obtained
orders from the Federal Magistrate’s Court for Ms Prince to pay the Trustee $45,700 plus interest at
6% and costs, this being made up of the $26,200 used to purchase the mother’s car and $19,500,
being the balance of the building claim less the amount used to repay the vendor finance contract.
The court ruled that the newly purchased household contents were protected under Section 116
of the Act as necessary household property. The mother’s car could not be characterised as “the
primary means of transport” of the bankrupt and that amount was therefore not protected. The
house and land had vested in the Trustee and the Official Receiver was therefore entitled to the
proceeds of the building policy claim after payment of the vendor finance contract. There was an
unaccounted for balance of the proceeds of the contents claim of $19,160. The Official Receiver
did not pursue that amount.
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Summary – Insurance claims while bankrupt
Category of claim
Proceeds paid
to
Reason
1. Claims which are specifically protected under the Act – for example, life
assurance and endowment policies
Bankrupt
Section 116 (2)
2. Claims for property that would itself have been protected under the
Bankruptcy Act (for example, necessary household property under Contents
Policy, or Building Insurance where the house was purchased substantially
wholly with personal injury compensation funds)
Bankrupt
Section 116 and
case law
3. Claims for property which is security for a loan (such as where there is a
mortgage over a car or house and the secured property is destroyed by fire)
The lender (up to
the amount owing
under the secured
contract)
Section 58 & 117
4. Claims for property which had vested in the Trustee (or would have but
for its destruction or loss)
The trustee in
Bankruptcy
Section 58
Lodging a complaint in external dispute resolution during
bankruptcy
■■
■■
Both the Credit Ombudsman Service (“COSL”) and the Financial Ombudsman Service
(“FOS”) will consider complaints from bankrupts but only in limited circumstances.
Where the trustee has given permission (FOS has a specific Authority Form, COSL does
not have a form at present but will accept written or in some circumstances oral consent
from the Trustee); and
Either:
–– The amount of compensation sought from the member (lender or insurer, for
example) would exceed the total of debts owed in the bankruptcy; or
–– The service is satisfied that payment of compensation would result in some other
specific benefit to the bankrupt personally.
OR
■■
Complaints for non-financial loss, such as for debtor harassment, can be made without the
consent of the Trustee because the right to obtain damages for personal injury or wrong
does not vest in the Trustee.
The relevant provisions for COSL are the COSL Guidelines 4th Edition, clauses 25.11-25.14
and Position Statement Issue 2 – Financial Hardship, clauses 16.1-16.3. Similar guidelines
applied for the Banking and Financial Services Ombudsman and have apparently carried over
to FOS, although they have not been explicitly included in the current Guidelines to the Terms
of Reference. See also Banking & Finance Bulletin 47 October 2005 & Bulletin 54 June 2007
about contact with debtors after bankruptcy (including after the sale of debts to third parties).
Common examples of complaints which are unlikely to be objected to by the Trustee would
include:
■■
■■
■■
■■
A hardship complaint in relation to a loan that the borrower is paying out of their income
during bankruptcy (this will often be a loan secured over a house or car that the bankrupt
is trying to retain)
A complaint about inappropriate or illegal threats of repossession, or actual illegal
repossession of the loan security (prior to judgment being given in a court)
A complaint about debtor harassment (including the client being pursued for provable
debts) – in this case the Trustee’s permission not required in any event.
An insurance dispute about a claim for protected property (or partially about protected
property)
In relation to financial hardship complaints, the Trustee may object or wish to be actively involved
if there is equity in a secured property that could potentially be eroded to the detriment of the
unsecured creditors.
A suitable authority form for completion by the Trustee is as follows:
Bankruptcy Authority
TO: [insert name & contact details of the EDR scheme to which the lender or insurer belongs]
Either Financial Ombudsman Service Limited (“FOS”)
GPO Box 3
MELBOURNE VIC 3001
Or
Credit Ombudsman Service Limited (“COSL”)
PO Box A252
Sydney South NSW 1235
TO: [insert name of lender or insurer]
CASE NO:
I
_____________________________________________________
Trustee of the bankrupt estate of [insert name of client]
Ref. [insert bankruptcy ref number]
of
_____________________________________________________
_____________________________________________________
(Address)
Tel. No. _(______)____________________
I am the trustee of the bankrupt estate of [insert name of client] and authorise [insert name of client]
to lodge a dispute with FOS about [insert name of lender].
I require that any offers of financial compensation resulting from the Ombudsman’s consideration of
[client name]’s dispute be referred to me.
I hereby confirm that I authorise [insert name of lender or insurer] to release all documents and other
material relevant to [client name]’s dispute to FOS, and for FOS to release all documents and other
material relevant to [client name]’s dispute to [name of lender or insurer].
Signed:
Date:
204
________________________________________________________
____/____/____
Disputing an Insurance Refusal in Court (Life Insurance, TPD
etc)
Legal proceedings commenced by a person who is, or subsequently becomes, bankrupt against an
insurer or a superannuation fund trustee would also be caught by the stay provisions of Section 60
of the Bankruptcy Act and would therefore be subject to the election of the Trustee to prosecute.
The only exception would be if the action was in respect of a personal injury or wrong done to
the bankrupt.
In practice, many Trustees will elect to continue with proceedings, particularly if they are being
conducted on a no win/no charge basis or if the adverse costs risks are being funded. If the
proceeds of any claim are protected in bankruptcy, there may be an argument that the bankrupt
can commence or continue proceedings without the election of the Trustee, but this is not entirely
clear and would require legal advice. The bankrupt should get advice in relation to whether the
proceeds of any proceedings would be protected or vest in the Trustee in any event in order to
clarify their own expectations.
Applying for early release of superannuation while bankrupt Releasing superannuation whilst an undischarged bankrupt is a viable option but the release
is still determined by the rules of the individual superannuation funds. Simply being bankrupt
will not be regarded as sufficient grounds.
➻➻ Remember: : Superannuation accessed prior to bankruptcy is NOT protected. The trustee is
likely to seek clarification of what was done with any funds released and spent prior to bankruptcy.
Where the money has been spent on a divisible asset belonging to the bankrupt, the asset will
vest in the Trustee and the funds will be effectively lost to the bankrupt.
Where the money has been given to a relative (or someone else) to improve their asset, or assist in
purchasing an asset, it may be deemed an undervalue transaction or a transfer to defeat creditors
and may be claimed by the Trustee.
Where the money has been spent paying debts, the Trustee may consider these payments to be
“preferential” and consequently, take recovery action against the creditors.
Where the money has been spent on medical expenses (or something similar) this should be
explained to the Trustee and a paper trail produced to support this if at all possible.
Where the money has been used to pay mortgage arrears it will not be protected (where withdrawn
prior to bankruptcy), but whether the Trustee will take action to recover it will depend on the
amount of equity in the home. The Trustee has many years in which to take action to sell the
home. Once the bankrupt is discharged he or she can negotiate with the Trustee to buy back
any equity if the property has not already been sold.
The types of superannuation release available are:
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Financial hardship
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Compassionate grounds
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Over 55 and meeting Centrelink requirements
Financial hardship
An undischarged bankrupt will need to fulfil the criteria of their superannuation fund. Please
note that some funds do not allow applications for release on hardship grounds.
To be eligible for early release the client needs to have received Commonwealth income-support
payments continuously for 26 weeks and be unable to meet reasonable and immediate family
living expenses. The bankrupt will need to prove a shortfall in their living expenses to get the
release (without including the debts that have been accepted into the bankruptcy).
Only one lump-sum payment can be made in any 12 month period per fund. The minimum amount
that can be released is $1,000 (unless your superannuation interest is less than this amount) and
the maximum amount available is $10,000. Tax will be deducted at 21% from your payment.
Compassionate grounds
Application for release of superannuation funds on compassionate grounds is now handled by the
Department of Human Services. This means that an undischarged bankrupt will need to meet
the relevant criteria and to complete the appropriate paperwork. The grounds for compassionate
release are quite narrow and the paperwork is quite complex and requires cooperation from
doctors etc. The final decision for release will still rest with the individual superannuation fund.
The grounds for compassionate grounds release are:
For palliative care or funeral expenses where
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The client or a dependent has a terminal illness and needs palliative care, or
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The client needs assistance to meet the cost of a dependent’s funeral expenses, and
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The client lacks the financial capacity to pay for the expenses without accessing
superannuation.
If the client has a terminal illness, he or she may be eligible to access superannuation benefits
without submitting this application. Contact should be made with the superannuation fund
directly to discuss this option.
For modification to your home or vehicle and/or the purchase of disability aids where
■■
■■
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The client or his or her dependent suffers from a severe disability, or
The client needs assistance to meet the cost of modifying their home or vehicle to
accommodate a severe disability, and
superannuation.
The final decision for release will still rest with the individual superannuation fund.
For medical expenses where
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■■
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The client or his or her dependent suffer from a life threatening illness or injury, acute or
chronic pain or an acute or chronic mental illness, and
The client needs assistance to meet the costs of treatment for the condition which is not
readily available through the public health system or covered by insurance, and/or
The client needs assistance to meet the costs of transport in order to receive treatment,
and
superannuation.
The final decision for release will still rest with the individual superannuation fund.
206
Mortgage assistance
The amount that can be withdrawn is limited to 3 months repayments and 12 months interest. Tax
of 21% will also be payable on the amount withdrawn.
Mortgage assistance is available to prevent the client’s mortgage lender or Council taking action
to sell the client’s home for mortgage arrears or unpaid rates respectively. This is a complex and
potentially difficult area if the client is bankrupt and the home has vested in the Trustee. If the
client wishes to try this they will need to understand that:
■■
■■
There is no guarantee they will succeed
Paying off the arrears may increase the equity in the home or create equity in the home,
prompting the Trustee to take action to sell it. While superannuation withdrawn on
or after the date of the bankruptcy is protected money, a direct link will need to be
established between the protected money and the percentage of the equity attributable to
this source. Any additional equity will vest in the Trustee.
Clients have succeeded in accessing superannuation on this ground while bankrupt, but this does
not mean it is necessarily a good idea, or that another client will be successful. Clients should
get independent advice on the implications before proceeding.
Over 55 and meeting Centrelink requirements
If you are over the preservation age and have received Centrelink payments for 39 cumulative
weeks since turning 55 you can apply for the release of your super.
Link to forms/information
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http://www.humanservices.gov.au/customer/services/centrelink/early-release-ofsuperannuation
–– Early Release of Superannuation on Specified Compassionate Grounds – Mortgage
Assistance (8106)
–– Early Release of Superannuation on Specified Compassionate Grounds – Request for
review of a decision form (8940)
–– Early Release of Superannuation on Specified Compassionate Grounds Proof of
Identity Reference and Guidance form (8938)
–– Early Release of Superannuation on Specified Compassionate Grounds – Home or
Vehicle Modifications (8105)
–– Early Release of Superannuation on Specified Compassionate Grounds – Medical,
Dental or Transport (8104)
–– Early Release of Superannuation on Specified Compassionate Grounds – Palliative
Care or Funeral Expenses (8103)
–– Early Release of Superannuation on Specified Compassionate Grounds – Report by
Medical
Forgotten debts
On rare occasions a client will have lodged their Debtor’s Petition and then find themselves
being pursued by a creditor who they had failed to list in their statement of affairs, even though
the debt was incurred before the date of lodgement, through oversight or a memory lapse. These
debts can still be referred to the Trustee to request that they be retrospectively included.
Other common issues
See Chapter 6 for more information on the following:
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■■
Secured loans – The bankrupt can continue paying these if they so choose but the Trustee
can opt to sell the asset at any time should there be sufficient equity to make it worthwhile
doing so (see Part 1 and Part 3).
■■
Income tax debts and tax returns (See Part 1)
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Debts you need or may want to keep paying (See Part 1))
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Joint debts – In the overwhelming majority of cases, especially for consumer debts, any
non-bankrupt joint debtor remains liable for the whole debt including interest as a result
of joint and several liability (Part 1)
Income contributions from wages, including salary sacrifice and other fringe benefits
(See Part 4)
Compensation for personal injury – The bankrupt can take proceedings for personal
injury and any compensation paid is protected (See Part 2 & Part 5))
Conducting disputes/proceedings in Court – It is up to the Trustee to initiate or
continue such proceedings although there are exceptions (See Part 5)
Loans taken out/debts incurred after bankruptcy – These are the responsibility of
the undischarged bankrupt. They must be paid unless a subsequent bankruptcy occurs
and non-payment can lead to enforcement of the debt in the courts. It is important for
undischarged bankrupts to understand the disclosure rules in relation to getting credit
once bankrupt (see Part 5).
Impact on being able to rent a property – An undischarged bankrupt may have had
no rental arrears or rental debts but finds that when they try to rent property they get
knocked back. They check their tenancy database listing and find there is no reference
to the bankruptcy on it. Real estate agents may also check the credit report, which will
include the bankruptcy. Many rental agreements/ applications include a list of agencies
that you authorise the real estate/landlord to check. This can seem very unfair when the
client has had no rent arrears issues and it is very important to make sure that clients
considering bankruptcy are made aware of this potential issue. This can be especially
difficult if someone is moving from a country area where they are known and have good
references to a major city in search of employment and a new life.
Action by the Trustee over preferential payments or undervalued transactions – The
bankrupt’s affairs may be investigated and money recovered from past transactions in
some circumstances (See Part 3)
Employment – Some professional rules/association and licensing bodies may impose
restrictions on bankrupts continuing in their current trade/occupation (See Part 5)
Lump sum termination/redundancy payments – These are treated as income and may
affect the bankrupt’s liability to pay income contributions (See Part 4).
Acquiring assets during bankruptcy which are not protected (after-aquired assets).
Where the undischarged bankrupt purchases or otherwise acquires assets while bankrupt
(that are not otherwise protected under the Act) they will vest with the Trustee (for
example, shares or real estate). This applies even if the items were bought from income
after contributions have been paid. The income received after the date of the bankruptcy
would be able to be retained while it remained in the bankrupt’s transaction account but
as soon as it is converted into an asset, it vests in the Trustee (Part 3).
■■
■■
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■■
■■
■■
■■
Part 2:
Wills – When an undischarged bankrupt inherits money from a deceased estate that
money/property will vest in the Trustee. Where the inheritance is sufficient for the
Trustee to pay out all debts and fees the bankruptcy will be annulled and the surplus
inheritance will be returned to the bankrupt. There are no restrictions imposed by the
Bankruptcy Act regarding a bankrupt being an executor of a Will. Annulment is covered
later in this Chapter.
Gifts – When an undischarged bankrupt wins money, or is given money or property
during the period of the bankruptcy, then that money/property will vest in the Trustee.
Where the gift/winnings are sufficient for the Trustee to pay out all debts and fees the
bankruptcy will be annulled and the surplus returned to the bankrupt. Annulment is
covered later in this Chapter.
Savings – Money can be saved from income while a person is bankrupt but the bankrupt
will need to prove that it came from income declared to the Trustee. This may require a
clear paper trail to show the source of the income.
Impact on getting insurance – Some insurance can be difficult to obtain while bankrupt
(and even afterwards), or special conditions could be imposed (See Part 5).
Connection to utilities – This can be problematic, particularly where there is no other
member of the household in whose name utilities can be put. A security bond may be
required.
Difficulties obtaining credit – The bankruptcy will be listed on the National Personal
Insolvency Index forever and on the bankrupt’s credit report for 5 year from the date of
the bankruptcy or 2 years from discharge or annulment. This will make it more difficult to
get credit, or to get credit on reasonable terms. Clients must also disclose their bankruptcy
status if they apply for credit above a specified amount (See Part 5).
Complaints about other services – It is not uncommon for bankrupts to complain about
information or advice they may have received (or not received) from other services prior
going bankrupt. In some cases these complaints may be justified. In others the client may
have been told the correct information and simply misunderstood or refused to listen.
They may have withheld important information from the adviser, or given misleading
instructions. The best course of action in such cases is to assist the client with their current
questions and needs but refer him or her to the appropriate regulator or professional
association to complain about other services. Your client may also need legal advice.
The light at the end of the tunnel – getting out of
bankruptcy
Can it go on longer than 3 years?
The period of a bankruptcy is 3 years and one day from the date the bankrupt’s statement of
affairs is filed. However this period may be extended by an objection lodged by the Trustee
(Sections 149A and 149D).
Objections may potentially extend the bankruptcy to 5 or 8 years in duration.
The bankruptcy may be extended to 5 years from the date of filing the statement of affairs if a
bankrupt:
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■■
Made a void transfer against the Trustee because of Sections 120/122 of the Bankruptcy
Act (undervalued transactions and preference payments)
Continued to manage a corporation
■■
Engaged in misleading conduct and the amount exceeds the prescribed threshold ($5,333
as at June 2014 – See www.afsa.gov.au for indexed amounts)
■■
Fails to disclose to the Trustee, a liability that existed at the date of bankruptcy
■■
Fails to notify a change of address or daytime telephone number
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Fails to advise the Trustee of any material change to the information disclosed on their
statement of affairs
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Fails to attend a creditors’ meeting without written approval from the Trustee
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Fails to attend an interview or examination
■■
Fails to disclose any beneficial interest in any property
To 5 years from the date of returning to Australia if a bankrupt:
■■
Leaves Australia without the written permission of the trustee and has not returned
To 8 years from the date of filing a statement of affairs if a bankrupt:
■■
■■
■■
Made a void transfer against the trustee because of Sections 121,128B and 128C of the
Bankruptcy Act (transfers to defeat creditors)
Fails to provide details of property and income when requested
After the date of bankruptcy, the bankrupt deliberately provided false or misleading
information to the Trustee
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Fails to disclose details of income or expected income
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Fails to pay contributions as assessed
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Fails to adequately explain how money was spent or assets were disposed of
■■
Fails to disclose to the Trustee, a liability that existed at the date of bankruptcy
■■
Fails or refuses to sign a document when required
■■
Intentionally fails to disclose a beneficial interest in a property to the Trustee
To 8 years from the date of returning to Australia
■■
Fails to return to Australia when requested to do so by the trustee
The bankrupt will be notified of the objection and has 60 days to apply to the Inspector-General
for a review. The Inspector – General can also review a Trustee’s decision to lodge a Notice of
Objection on the Inspector – General’s own motion.
If the Inspector-General upholds the objection, the bankrupt can seek a review by the Administrative
Appeals Tribunal. Legal advice should be obtained before doing so.
Can I get out earlier than 3 years?
Once a person has been made bankrupt there are only four ways to get out:
1. Pay out the debts, interest and costs of administering the estate and have the bankruptcy
annulled
2. Complete the bankruptcy term (complying with the rules, cooperating with the Trustee
and paying any assessed income contributions) and get discharged
3. Challenge the bankruptcy in Court (either by way of review or appeal in the case of a
sequestration order – or by application for annulment by the court – See Chapter 10)
4. Have your creditors pass a special resolution to accept your offer of Composition or
Arrangement under Section 73 of the Act, which will annul your bankruptcy.
210
Annulment as a result of payment of debts and costs
Section 153A of the Bankruptcy Act provides that if the Trustee is satisfied that all the bankrupt’s
debts have been paid in full, then the bankruptcy is annulled on the date on which the final
payment was made. “Paid in full” includes interest payable until the date of final payment. “All
the bankrupt’s debts” means all debts that have been proved in the bankruptcy, including interest
where applicable, plus the costs, charges and expenses of the administration of the bankruptcy,
including the remuneration and expenses of the Trustee.
The costs, charges and expenses of the estate can add up to tens of thousands of dollars. A detailed
section on what the Trustee can charge by way of remuneration, and applying for a review of
those charges is found at the end of this Chapter.
Common scenarios where annulment is sought include:
■■
■■
■■
The bankrupt inherits property or money during the period of bankruptcy which is
sufficient to pay the debts in full
The bankrupt wins money or property during the period of the bankruptcy which is
sufficient to pay the debts in full
The bankrupt was made bankrupt by creditors in his or her absence and can afford to pay
the debts and costs to date (note that if the sequestration order is relatively recent the
bankrupt should get legal advice in relation to a potential set aside application also – See
Chapter 10 and below).
Annulment by the Court
If the court is satisfied that a sequestration order ought not to have been made or, in the case
of a Debtor’s Petition, that the petition ought not to have been presented or ought not to have
been accepted by the Official Receiver, the court may make an order annulling the bankruptcy
(Section 153B).
Where the bankruptcy was initiated by a Debtor’s Petition possible grounds might be that the
debtor did not have the mental capacity to file a Debtor’s Petition, or that the debtor did not in
fact file the Debtor’s Petition (fraud by another party).
The reasons for establishing that a sequestration order should not have been made are the same
as for seeking to have the order set aside as covered in Chapter 10 (solvency for example, or less
than $5,000 owed). Usually, if the bankrupt has any hope at all in such proceedings the primary
aim would be to have the sequestration order set aside, with annulment being sought in the
alternative. In cases where a fair amount of time has passed since the sequestration order (months
or even years) and the Trustee can demonstrate a considerable amount of work has already gone
into administering the estate, then the Court will usually prefer to annul the bankruptcy rather
than set aside the sequestration order – this will have the benefit to the Trustee of securing his
or her fees and of validating anything properly done in the administration of the estate to date.
Where your client is in a position to annul the bankruptcy by payment of the debts and costs,
they should obtain legal advice prior to applying to the court, particularly if the time for appeal or
review of the sequestration order has already passed (See Chapter 10). If the case is not strong it
may be cheaper to simply negotiate with the Trustee for an annulment under Section 153A above.
Example: Nguyen v Lion Finance Pty Ltd & Anor [2012] FMCA 880 (31
August 2012)
Mr Nguyen sought to set aside a sequestration order some 4 months after it was made, or in the
alternative, have the bankruptcy annulled under Section 153B. His reasons for seeking these
orders were in summary:
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■■
He had not been served with the original Statement of Claim which led to the judgment debt
on which the Bankruptcy Notice was based;
He had been served with the Creditor’s Petition (including a copy of the judgment) but thought
it was a mistake because he had never heard of Lion Finance (his original debt being to GE)
He had a home and was solvent.
The Federal Magistrate refused to make either order on the basis that:
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■■
■■
■■
The applicant had not adequately explained the several months delay after being informed of
the sequestration order
The applicant did not dispute that he had been served with the Creditor’s Petition
The applicant had not taken any steps upon finding out about the Local Court judgment to
have it set aside and did not appear to dispute his indebtedness as claimed
The applicant had not fully disclosed his debts on his statement of affairs. His solicitor had
found an additional overdue debt on his credit report and the Trustee had been contacted by
yet another creditor who lodged a proof of debt but had not been included in the statement
of affairs. As a result the Federal Magistrate did not think the court could make a finding of
solvency with any confidence.
Mr Nguyen would still have been able to approach the Trustee to seek annulment under Section
153A, but only once the Trustee was confident that all debts had been disclosed and that the
property was sufficient to pay out the debts, interest, legal fees and costs of administration of the
estate. Unfortunately, those costs would now be higher as a result of the proceedings.
Effect of annulment
Where a bankruptcy is annulled (Section 154):
1. All acts done (sales made, distributions of dividends, payments made etc) by the Trustee
prior to the annulment remain valid
2. The Trustee can retain the costs, charges and expenses of the administration of the
bankruptcy, including the remuneration and expenses of the Trustee (if not already paid)
from the vested property
3. Any remainder must be repaid to the former bankrupt (unless there is an application by a
person claiming a better interest in the property or a claim is pending under a proceeds of
crime law and an application is made by an appropriate authority under that law).
4. Any surplus divisible property remaining re-vests with the former bankrupt.
Where there is insufficient property in the estate to pay the Trustee’s expenses etc (such as where
the bankruptcy has been annulled by the court rather than by payment of debts, remuneration
and costs), then the amount of the deficiency is a debt due by the former bankrupt to the Trustee
and is only recoverable by the Trustee by court action against the former bankrupt.
➻➻ Note: Where there is clearly going to be sufficient funds to annul a bankruptcy (because of
an inheritance perhaps) but the undischarged bankrupt urgently needs money (for example,
for medical expenses or housing) they can apply to their Trustee to have a portion released. A
financial counsellor can advocate to the Trustee in these circumstances to assist in establishing
both the need for the money and that there is likely to be a surplus in the estate.
212
Compositions or arrangements
A bankrupt may not have sufficient funds to pay their debts in full, including interest and the
costs of administering the estate, but still wish to propose an arrangement which will benefit
creditors and bring the bankruptcy to an end. Section 73 provides for the bankrupt to make
such a proposal in writing to the Trustee. The Trustee must then call a meeting of creditors
and provide a report to the creditors indicating whether the proposal would benefit creditors
generally. The Trustee does not have to call a meeting if the proposal does not make adequate
provision for payment to the Trustee of accrued fees that are owing to the Trustee to date. The
proposal can be amended by the bankrupt at the creditors’ meeting provided the provision for
the Trustee’s fees is not amended.
The Trustee of the bankrupt estate is usually also appointed the trustee of the composition or
arrangement. However, another trustee may be appointed if creditors so desire. Creditors can
indicate their agreement or otherwise to the proposal to the Trustee prior to the meeting in
writing. In that case they are deemed to have been present and to have voted as indicated.
The composition or arrangement must be accepted by special resolution (at least 75% in value
of the creditors present or deemed present who voted on the proposal and those creditors must
represent at least 51% in number of the creditors who voted). If the special resolution is passed
then the bankruptcy is annulled on the date the resolution is passed (Section 74).
The Trustee can later propose a variation to creditors with the consent of the bankrupt. In practical
terms, it is usually the bankrupt who seeks the variation (for example, an extension of time in
which to make the requisite payments) and the Trustee who conveys the variation proposal to
the creditors for their consent.
A composition or arrangement can be set aside by the court for a variety of reasons (for example,
omission of material particulars), and terminated by the Trustee or creditors for non-payment.
The same rules apply as for setting aside Personal Insolvency Agreements.
Trustees’ fees
Trustees’ fees will differ depending on whether there is a private trustee appointed or the Official
Trustee performs the role of trustee in bankruptcy.
Generally it will be creditors who have an interest in whether a Trustee is claiming reasonable
remuneration and other charges. However, there are two circumstances where the level of fees
and charges becomes critical to the debtor/bankrupt:
■■
■■
Where there is an attempt to set aside a sequestration order made pursuant to a Creditor’s
Petition (See Chapter 10)
Where the bankruptcy is to be annulled on the basis that the debts and costs of the
administration of the estate have all been paid.
Registered Trustees’ remuneration and other costs (such as valuations, searches, legal fees etc)
can amount to very large sums of money and bankrupts are often shocked when they are told
the amount required to annul the bankruptcy.
Where the Official Trustee is appointed the estate is administered by officers within AFSA and
the Official Trustee’s Fees and Charges as published on the AFSA website apply.
Currently (as at March 2014) the Official Trustee’s fees and charges for bankruptcies are $4,000
+ 20% of money received (See www.afsa.gov.au for current amounts – select fees and charges
in Quick Links). Where a bankruptcy administration includes the management of a debtor’s
business, an additional fee of $50 per 15 minutes applies for time spent in managing the business
(different amounts apply for PIAs and pre-bankruptcy control orders). No money is charged to
the bankrupt personally – it is only recovered from the estate. However, if the bankrupt wishes
to annul the bankruptcy, then the Official Trustee’s full fee must be paid along with the debts
(including interest) and costs of the administration.
The following applies to estates administered by Registered (private) Trustees. It sets out the
process for setting the Registered Trustee’s remuneration (briefly), the notices the bankrupt
should receive, and the process for seeking a review of the Trustee’s fees and charges. Generally,
Registered Trustees charge their remuneration on a time costing basis (similar to a solicitor).
Consequently, the Official Trustee rates cannot be used as a guide to determining what a Registered
Trustee will charge because of the vastly different methods of calculating the remuneration.
Registered Trustees – what can they charge?
The Trustee’s remuneration and other costs of administering the estate (plus the costs of the
petitioning creditor) are priority debts which can be paid out of the estate before any other
creditor is paid (Section 109, Reg. 6.01 and Schedule 3 of the Regulations).
Section 162 of the Act covers the fixing of remuneration of the Trustee (for the purposes of
this section in relation to fees only, “the Trustee” means private Registered Trustees and not the
Official Trustee). The remuneration may be:
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■■
Fixed, from time to time, by resolution of the creditors or, if the creditors so resolve, by
the committee of inspection (this can be done at a creditor’s meeting in accordance or by a
properly executed creditor’s resolution without a meeting).
Be the subject of an application to the Inspector-General in certain circumstances (such
as where a creditor’s meeting has rejected a remuneration proposal or where the size of the
estate is so small that the expense of arranging a resolution cannot be justified –see Reg
8.09).
Section 161B provides for minimum remuneration of $5,000 (or another amount fixed by the
regulations). This amount can be claimed from the bankrupt estate without a resolution of the
creditors but must still be reasonably and necessarily incurred.
The remuneration may be fixed in the form of a commission but this is rare for Registered
Trustees. The maximum amount of commission is set by the regulations and varies according
to the amount received (administered) by the Trustee (See Reg 8.07). Much more commonly
remuneration will be fixed in the form of a range of hourly rates for the Trustee and possibly
for various associates/employees likely to assist in the administration. The creditor must also be
given an estimate of the total amount of the Trustee’s remuneration and an explanation of the
likely impact of that remuneration on the dividends (if any) to creditors. The bankrupt does
not have any say over the rate of remuneration.
Commission or additional payment for running a business is covered in Section 162(3) and
Reg 8.08.
Remuneration claimed by Trustees should be “necessary, reasonable and proper”. Trustees
should “handle the assets with a view to achieving the maximum return from the assets to satisfy
the claims of the creditors and to provide the best surplus possible for the bankrupt” (Mannigel v
Aitken, quoted in Inspector General Practice Direction No 6.2 – Remuneration entitlements of a
Registered Bankruptcy Trustee – PD 6.2). The Trustee is entitled to a full indemnity of his or her
costs, charges and expenses from the estate where properly incurred and will not be penalised for
“mere errors in judgment which fall short of negligence or unreasonableness” (PD 6.2).
Bankrupts should also note that there are certain tasks that the Trustee is required to do by law
for which he or she is entitled to be remunerated despite the fact that they do not generate any
additional funds for the estate (for example, reporting to creditors, lodging statutory records
with AFSA and maintaining accounts).
214
Of particular interest to bankrupts is the expectation of the Inspector-General that where
the bankrupt is solvent or has the resources to pay out all debts the Trustee should identify
this early and give the bankrupt an opportunity to pay and take advantage of Section 153A
before incurring any unnecessary expense. In 2011-12 AFSA undertook a review of a sample
of administrations that were annulled pursuant to Section 153A of the Bankruptcy Act. The
majority of these estates included debts that are relatively small (less than $20,000). The review
examined the relevant administrations of 38 Registered Trustees with a view to ensuring only
necessary expenses were incurred and that the Section 153A annulment outcome was achieved
by the Trustee as expeditiously as possible. As a result of this review the fees required to be paid
to obtain an annulment on one estate were reduced by $10,000 and in another case the debtor
received a refund of $3 000 (Source: AFSA Annual Report 2011-2012– p 37).
What notices must the bankrupt receive in relation to Trustee’s
remuneration and other costs?
➻➻ Warning: The following process only applies to bankruptcies (and Personal Insolvency
Agreements) commencing (executed in the case of a PIA) on or after 1 December 2010. For older
bankruptcies the old taxation system still applies. Ask AFSA for more details.
The bankrupt should receive two notices in regard to the costs of administering the estate:
1. An initial remuneration notice in accordance with Reg. 8.12A
2. A remuneration claim notice in accordance with Reg. 8.12C
Initial remuneration notice
This must be sent within 28 days of the trustee’s receipt of the bankrupt’s statement of affairs, or
if no statement of affairs has been provided within 60 days of the date of the bankruptcy, within
7 days after the end of that 60 day period.
The notice must contain:
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The method by which the trustee seeks to be remunerated; and
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The rate of remuneration; and
■■
An estimate of the expected amount of the trustee’s remuneration.
The notice must also include a brief explanation of the types of methods that could be used to
calculate remuneration; specify the method the Trustee proposes to use to calculate remuneration;
and explain why the method is appropriate.
If the Trustee proposes to charge on a time-cost basis, the notice must include details about
the respective rates at which the remuneration of the Trustee and the other persons who will
be assisting, or will be likely to assist, the Trustee in the performance of his or her duties are to
be calculated.
Remuneration claim notice
This notice must be sent within 14 days of the remuneration either reaching the amount fixed by
the creditors, or determined by the Inspector-General, or if the amount claimed is the statutory
minimum amount ($5,000) or less – reaching that amount. If the fixed amount is never reached,
then the notice must be sent at the time a final dividend is declared, or in the absence of a
dividend, when the estate is finalised.
This notice must contain:
■■
■■
■■
The total remuneration claimed
Details of –
–– the work performed for which remuneration is claimed
–– the names of the persons who performed the work
–– the number of hours charged by, or in relation to, each person for the work
–– the hourly rate charged by, or in relation to, each person for the work
–– an explanation of any variation from the amounts (or other details) set out in the
initial remuneration notice
A statement advising the bankrupt that they may, within 28 days after receiving the notice,
request the Inspector-General to review the amount of remuneration claimed by the
Trustee.
The review process
References to PS 16 in this section refer to: Inspector-General Practice Statement 16 – Reviewing
Remuneration of Trustees and Costs of Third Party Service Providers, Released 1 December
2010, Updated 1 August 2013.
The review is a two stage process
1. Should the application for review be accepted?
2. The conduct of the review (if the application is accepted)
The application must be made by:
■■
A bankrupt
■■
A creditor
■■
■■
A person subject to a Section 188 authority or in a Personal Insolvency Agreements
(“PIA”) – See Chapter 5 & 12 in relation to PIAs.
The application for Review must be lodged within 28 days of receiving a remuneration
claim notice from the Trustee under regulation 8.12C (Reg. 8.12E (2)).
The Inspector-General may extend the period before or after the end of the 28 days if it is
satisfied that:
■■
■■
The applicant and the Trustee have been engaged in an alternative dispute resolution
process to try to resolve the matter; or
It is appropriate, in all the circumstances, to extend the period. Reg 8.12E(3)
Either the applicant or the Trustee can seek a review by the AAT (the applicant for failure to
extend, and the Trustee because the extension was granted) – Reg. 8.12E (5) & (6).
The Inspector-General must refuse to accept an application where (Reg. 8.12F(1)):
■■
■■
The applicant has not adequately particularised the issue giving rise to the review
■■
The application is frivolous or vexatious
■■
216
The applicant has no interest in the outcome of the review (eg the debtor is the applicant
and the bankruptcy is not being annulled)
The Inspector-General is not satisfied that either
–– The Trustee’s remuneration has been fixed in a manner inconsistent with the Act and
Regulations, or
–– The Trustee has acted improperly or without due care and diligence in the
administration of the estate.
Despite the above, the Inspector-General may accept an application for review if satisfied that
there are exceptional circumstances which would justify the review (Reg 8.12F(2).
An “interest in the review” means in this context a realistic expectation of a receiving a dividend
in the case of a creditor, or a surplus in the case of a bankrupt or person in a PIA (PS 16, para 3.6).
Where there is no hope of a surplus even if the remuneration is reduced, then the application
will be rejected.
“Exceptional circumstances” – may include but is not limited to (PS 16, para 3.7):
■■
■■
■■
Evidence provided of errors on the part of Trustees or their staff requiring remedial action
including work done poorly and having to be reworked
Systemic and justified complaints made to AFSA Regulation about conduct which
indicates Trustee or staff have been performing unnecessary work or work not properly
executed
Evidence of inefficiency or inappropriate billing practices having been discovered (either
by applicant or AFSA Regulation staff upon investigation) e.g. giving routine work to
expensive senior staff, charging for communication with regulator or inordinate delays
without explanation in the distribution of the estate.
The Inspector-General may refuse to accept an application if the Inspector-General is satisfied on
reasonable grounds that it was appropriate in all the circumstances for the applicant to attempt
to resolve the matter without seeking a review under this Subdivision and the applicant did not
do so without reasonable explanation (Reg 8.12 F(3)).
Form of application
The application must be in writing and a form is available on the AFSA website: Application
for Review of Trustee Remuneration at https://www.afsa.gov.au/resources/forms/form-28application-for-review-of-trustee-remuneration. If you are searching via the menu you select
Forms on the AFSA home page and then proceed to Forms for creditors and select Form 28.
The claim is required to be particularised to a fair level of detail – claims which say only general
phrases like “remuneration appears excessive” or “every item of work is disputed” will not be
considered adequate to justify a review. This particularisation will be very difficult for unrepresented
bankrupts to do. Annexure A of Practice Statement No. 16 includes some principles and examples
from the IPA Code and IGPD6 Remuneration Principles which may be helpful. The Performance
Standards for Trustees which appear as schedule 4A of the Bankruptcy Regulations may also
be useful to refer to.
The application will only be accepted, if at all, after all the relevant supporting information has
been provided.
AFSA Regulation staff may do any of the following before making a decision to reject or accept
an application:
■■
Interview the applicant
■■
Interview the Trustee
■■
Inspect the Trustee’s administration file.
If the Inspector-General refuses to accept the application, the applicant (and the Trustee) must
be given written notice of the refusal within 14 days of that refusal including reasons for the
refusal (Reg. 8.12 G).
What will be taken into account in the Review if the application is
accepted?
AFSA Regulation will take into account the Schedule 4A Performance Standards, InspectorGeneral Practice Direction 6 “Remuneration entitlements of a registered bankruptcy trustee”,
Inspector-General Practice Statement 15 “Assessment by the Inspector-General of a Trustee’s
remuneration approval request” and Inspector-General Practice Direction 18 “ Trustee
remuneration notifications”.
The following are the types of considerations that will be taken into account:
■■
Was the work performed within the scope of the Trustee’s powers?
■■
Was the work performed prior to the appointment of the Trustee?
■■
■■
Did the Trustee undertake a proper assessment about whether a particular cost was
reasonable given the value and complexity of the administration? (Keep in mind that
the fact that certain expenses may appear pointless in hindsight – because little or no
additional funds were recovered for the estate – but this is not sufficient to render the
original decision to undertake the action/cost unreasonable.)
Were there instances of double billing for essentially the same tasks? – obvious
inefficiency, incompetency (e.g charging for organising an invalid creditor’s meeting),
billing at senior staff rates for routine, non-complex tasks.
■■
Did the Trustee behave appropriately and properly manage any conflicts of interest?
■■
Did the Trustee properly record work done and costs incurred?
■■
Did the Trustee drag out the administration unnecessarily (incurring additional costs)
once the bankrupt indicated a willingness and ability to pay out all debts and expenses?
The outcome
The Inspector-General must complete the Review and make a decision within 60 days of deciding
to accept the application for review (Reg 8.12N(1)). At the conclusion of the review the InspectorGeneral may (Reg 8.12J(2)):
■■
Affirm the amount claimed by the Trustee
■■
Disallow all or part of the claim
■■
Substitute another amount for all or part of the amount claimed
■■
Dismiss the application
Within 14 days of making the decision (Reg 8.12N(3)) the Inspector-General must provide the
applicant and the Trustee a written statement (Reg 8.12N(2))setting out the:
■■
Decision
■■
Reasons for the decision
■■
Findings on any material question of fact
■■
Evidence on which the above findings are based
■■
Partys’ appeal rights.
The appeal rights are contained in Section 167 (6) of the Act – the Trustee, the bankrupt or a
creditor of the bankrupt may appeal to the court from a decision of the Inspector-General in
relation to the review (for a third party costs review – the third party may also appeal). Whilst
there is no specified time limit for making an application to the court, such an application should
be made sooner rather than later.
218
If the Inspector-General finds that the Trustee has overcharged, then the amount in excess of the
appropriate amount is a debt due to the bankrupt estate (Section 167 (4) and Reg 8.12O) and, if
necessary, can be recovered by the Inspector-General in a court of competent jurisdiction (Section
167 (5)). When the Trustee receives the statement setting out the outcome of the Review, any
amount owing as a result will be required to be repaid to the bankrupt estate by a certain date.
➻➻ Important Note: Clients should be made fully aware that where a bankrupt does not co-operate
with a Registered Trustee and the Trustee is required to spend additional time and resources to
obtain the requisite information and/or realise assets, then the Trustee’s legitimate remuneration
will increase substantially. Likewise if they engage in excessive communications with the
Registered Trustee and/or make unsubstantiated/unwarranted complaints about the Trustee to the
Inspector-General which the Trustee will have to defend, the Trustee’s legitimate remuneration will
increase accordingly.
► see client handout for this chapter in Chapter 13: Tools and Resources
Notes
220
9
IT’S ALL OVER, OR IS IT?
POST BANKRUPTCY
Content
Part 1: What are the ongoing consequences after discharge from bankruptcy
221
Part 2: Debts allegedly incurred by fraud – dealing with Centrelink demands
223
Summary
This Chapter covers what happens after discharge. While bankruptcy officially ends at discharge
there are some ongoing ramifications:
■■
■■
■■
■■
The client may experience ongoing difficulties getting credit and goods and services
because of the listing on their credit report/NPII
In some cases there may continue to be employment ramifications
Any property that vested in the trustee as a result of the bankruptcy will remain so for
a certain period unless the client has made arrangements with the Trustee to buy the
property back – vested property may still be sold or otherwise dealt with by the Trustee
Investigations into past transactions may be continued or re-opened if new information
comes to light, potentially resulting in claims for money or property from third parties
■■
Undisclosed property could still be identified and vest in the Trustee
■■
Undisclosed income could result in a reassessment of contributions owed
■■
■■
The Trustee could take enforcement action against the former bankrupt to recover
unpaid contributions
The discharged bankrupt has an ongoing obligation to cooperate with the Trustee in
relation to any of the above.
The former bankrupt is released from most provable debts BUT:
■■
■■
ebts incurred by fraud may still be enforced against the debtor (unless there is a
D
judgment or repatriation order for the debt which predates the bankruptcy)
The former bankrupt is not released from bail and recognisance debts, maintenance or
child support, or debts incurred after the date of the bankruptcy.
This Chapter contains information on responding to recovery action by Centrelink in relation
to allegedly fraudulently incurred debts.
Part 1:
What are the ongoing consequences after discharge
from bankruptcy
The Official End
When your client’s bankruptcy is finished, normally after 3 years and 1 day from the date the
statement of affairs was filed unless the bankruptcy has been extended, he or she will be discharged
from bankruptcy. However there are some things that will continue to affect your client’s life in
the near and long-term future.
When your client is discharged he or she may not receive any notification from the Trustee. If
the Trustee does not notify your client of their discharge and they want documentary evidence
for some particular purpose, an application can be made for a fee to AFSA for a NPII Extract.
This is a document containing details of when the bankruptcy began and when the client was
discharged. The charge for this document was $45 as at July 2013. This fee can be waived or
remitted in circumstances where it would cause undue hardship or exceptional circumstances apply.
Ongoing ramifications
After discharge from bankruptcy a record will remain on the client’s credit report for five years
or more1 (in total from the beginning of the bankruptcy) and there will be an NPII record for
the rest of your client’s life. This means that even though the client is now a discharged bankrupt
he or she may still encounter difficulty in obtaining credit, insurance and some other services in
the near future (due to the credit listing) and possibly in the long-term (due to the NPII record).
Any unpaid income contributions will remain payable and may be pursued as a debt despite
discharge (if your client is lucky enough to be discharged with outstanding contributions payable).
Non-payment of contributions is grounds for objection to discharge.
Where there has been a failure on the part of the client to disclose accurate information about
income or assets during the bankruptcy then the Trustee may decide to take action to recover
property or reassess income contributions even after discharge.
Where the client has property that vested in the Trustee but has not yet been sold or transferred,
then this will continue as per the timelines and guidelines detailed in Chapter 6 of the toolkit.
The property does not revert back to the bankrupt unless transferred by the Trustee (or it
eventually revests in the bankrupt in accordance with the time limits in the Act – See the final
page of Chapter 6, Part 3). In fact the discharged bankrupt is obligated by Section 152 of the
Act to give such assistance to the Trustee as the Trustee reasonably requires to effect the sale
and distribution of any property so affected and failure to do so is an offence punishable by
imprisonment.
A person can become a company director again once they are discharged from bankruptcy.
However, they will need to be reappointed by the company in accordance with its constitution
and another Form 484 Change to company details lodged with ASIC.
Even though the restrictions on being a director or partner are lifted by discharge other restrictions
due to the client’s professional body’s rules or licensing regulations may impact upon the client’s
future employment. The fact that the bankruptcy is permanently recorded on the NPII could
impact on future promotion to high-level positions.
Some people still feel a sense of guilt that they have gone bankrupt and have not repaid their
debts. It is important to make it clear that even after discharge, the client can opt to repay all of
their debts plus the fees and charges imposed by the Trustee should they be in a position to do
so. Where the Trustee is satisfied that all the debts and the Trustee’s remuneration have been
paid in full, the Trustee can annul the bankruptcy under Section 153A of the Bankruptcy Act
after discharge. The annulment of the bankruptcy will then be recorded on the NPII.
The Bankruptcy Act does not allow a discharged bankrupt to obtain an annulment of their
bankruptcy by way of an offer of Composition under Section 74.
1
Under amendments to the Privacy Act from 12 March 2014 this is the longer of 5 years from date of bankruptcy or two years from
discharge or annulment – which could be only 5 years where there is no extension of the bankruptcy or longer than 7 (where for example
where the bankruptcy is extended for 8 years or someone fails to lodge their statement of affairs for some years after a sequestration
order).
222
Troubleshooting
On rare occasions a client will have been discharged from their bankruptcy and then find
themselves being pursued by a creditor who they had failed to list in their bankruptcy through an
oversight or memory lapse, even though the debt was incurred before the date of the bankruptcy.
The client should notify their Trustee of these debts and provide evidence that the debts were
incurred prior to the date of bankruptcy and request that the Trustee to record the debts in their
bankruptcy plus inform the creditor(s) accordingly.
Listing all potential parties to a debt on the statement of affairs in the first place helps minimise
the likelihood of debts popping up later– for example in the case of a motor vehicle accident the
other driver, owner of the vehicle (if different), the other party’s insurance company, and their
debt collector (if different) should all be listed if known so that they will all be notified by the
Trustee and have the opportunity to lodge a proof of debt.
Unfortunately some debt collectors contact clients about debts after bankruptcy and claim that
they are now able to them pursue because the bankruptcy is over. The client should immediately
contact their Trustee in these circumstances and should inform the debt collector that the debt
was listed in the bankruptcy. Any attempts to commence legal action should immediately be
referred for legal advice. Where the debt collector (or lender) is a member of an external dispute
resolution scheme, a complaint could be lodged with the relevant scheme if direct contact with
the client continues after the creditor has been directed to the trustee (See Chapter 8).
Part 2:
Debts allegedly incurred by fraud – dealing with
Centrelink demands
As covered in Chapter 6, Part 1, Centrelink will often seek to recover debts that would otherwise
be extinguished by bankruptcy on the basis that the debt was incurred by fraud. It is important
not to accept this demand at face value. Centrelink should not be demanding payment, or
garnisheeing the client’s income, unless they have:
1. A conviction for fraud, or
2. An admission from the client (see note below)
AND
3. There is no judgment or reparation order for the debt which predates the bankruptcy
➻➻ Note: Even an admission may not be sufficient depending on the client’s capacity and the
circumstances in which the admission was obtained. Where you doubt the client’s admission
would stand up to scrutiny refer the client for legal advice.
If your client is a discharged bankrupt who is being pursued for a Centrelink debt that predates
their bankruptcy and none of the above apply, there is a Sample Letter on the following page
that you can use to dispute Centrelink’s decision to pursue the debt. If there is a judgment which
pre-dates the bankruptcy use option 2.
Sample letter to Centrelink
The following has been adapted from a letter prepared by Malcolm Buchanan, Financial Counsellor,
Family Mediation Centre, Traralgon, Victoria.
Insert date
Authorised Review Officer
Centrelink
Insert address
Dear Sir/Madam,
Re: [Insert Client’s Name and CRN]
I am assisting the above client and my client’s authority is enclosed.
[Insert client’s name] contacted this agency in reference to a decision by Centrelink to reinstate a
debt of [insert amount] after discharged from bankruptcy. This debt predated the bankruptcy and
was provable in the bankruptcy.
You state in a letter to my client dated [insert date] that:
“After the bankruptcy is discharged, you will need to repay this amount as bankruptcy does not
cover money obtained by breach of trust or a fraudulent action”
“Centrelink does not need to take a matter to court to make this decision. We do, however, need
to have reasonable evidence that the money was obtained by deliberate incorrect information
or deliberate failure to provide required information”
My client disputes your decision to reinstate this debt as my client argues it was extinguished by
the bankruptcy.
Option 1 – delete if option 2 is applicable
I refer to the following cases:
■■
Civitareale and DFACS {1999} AAT 486
■■
Southcott v Department of Social Security (1998) 27AAR 106
■■
Dobson 2000 AATA 41
Once a person has bankrupted, a debt due to the Commonwealth is replaced by the right to prove
in bankruptcy under the Bankruptcy Act. The exception is, of course, if the debt is incurred by fraud.
In the Dobson case, the AATA found:
“the mere fact that someone knew that he or she should have notified Centrelink of income
earned or a change of circumstances during a particular period is not enough to show that a
client has been fraudulent”
Further, Paragraph 95 of the Civitareale case, the AAT defined fraud from the Osborne Law Dictionary:
“...Fraud is proved when it is shown that a false misrepresentation has been made (1) knowingly
or (2) without belief in its truth, or (3) recklessly, careless whether it is true or false. To obtain
damages for deceit it must be proved that the defendant intended that the plaintiff should act on
the fraudulent misrepresentation”
In my client’s case, there is no indication that you applied any of these definitions.
Please outline the evidence on which you are relying to establish that my client has behaved
fraudulently so that my client can properly make his or case to the review.
Option 2 – delete if not applicable
224
I note that my client’s debt is the subject of a judgment/reparation order dated [insert date of judgment/
order] which predates my client’s bankruptcy on [insert date of bankruptcy]. This debt is therefore
extinguished. Please note in this regard the Guide to Social Security Law, Version 1.185, 20 March
2012, Commonwealth of Australia and Power v Kenny [1977] WAR 87.
Please confirm that this debt has been extinguished and no further action will be taken.
Yours faithfully,
Financial Counsellor
The recent High Court case of Director of Public Prosecutions (Cth) v Keating [2013] HCA 20,
found that the notices issued to the defendant by Centrelink asking for updated income details
created a duty to disclose, which, if not complied with, could form the basis of the Criminal Code
offence of obtaining a financial advantage from a Commonwealth entity. This case is likely to be
quoted by Centrelink in response to this letter. If your client has not made any false statements
but has completely failed to complete forms sent by Centrelink requiring income information
without reasonable excuse (such as perhaps mental illness, lack of intellectual capacity, or perhaps
serious illness) then your client should get legal advice in relation to potential prosecution before
pushing this issue any further.
If you (or your) client receive further correspondence from Centrelink indicating that the debt
will continue to be pursued, you should refer the client for legal advice and assistance. Your
client can seek a review by an Authorised Review Officer and then the Social Security Appeals
Tribunal. If your client has not been charged with fraud you should also refer them for criminal
law advice prior to lodging an appeal. There is a risk that if they lose the appeal their matter
could be referred for prosecution.
If your client has already commenced paying back this debt in circumstances which appear
inappropriate it may be possible to seek a refund as an outcome of the review.
If your client concedes that they have engaged in fraud and yet is facing particular financial
hardship as a result of the demand for repayment, you can make representations to this effect
seeking a compassionate waiver or other suitable arrangement.
Notes
226
10
HELP, I’M BEING MADE BANKRUPT!
Content
Part 1: Introduction
228
Part 2: Bankruptcy Notices 233
Part 3: Creditor’s Petitions
238
Part 4: Sequestration orders
246
Summary
This chapter describes the process for making a debtor bankrupt through the courts. It describes
the process and your client’s options at each stage.
This is an area where things moves fast and legal costs accumulate quickly. If you have a client
who has received a Bankruptcy Notice or a Creditor’s Petition they will need urgent legal advice.
If your client has already been made bankrupt, the first they hear about it (or the first time
they are driven to take action) may be when the Trustee freezes their bank account(s). Again
it is important to get advice urgently because there are short time limits for taking action and
Trustees costs add up fast.
If your client has been made bankrupt, they need to file a statement of affairs as soon as
possible, whether they intend to try to get the bankruptcy set aside or not!
Key terms
Bankruptcy Notice
This is a document issued by the Official Receiver when a creditor applies (and pays the filing
fee) and can prove that there is an outstanding judgment (or judgments) against a debtor for
$5,000 or more. The judgment(s) must not have been stayed by the court and must not be more
than 6 years old. The notice itself does not start any court proceedings. Failure to pay within
the time provided is an act of bankruptcy (see below) on which a creditor may then base a
Creditor’s Petition.
Creditor’s Petition
This is a formal application to the court to make a debtor bankrupt. This commonly follows an
unpaid Bankruptcy Notice (although theoretically there are other acts of bankruptcy on which it
could be based – see next section below). The act of bankruptcy must have occurred in the previous
6 months. There will always be a hearing within a very short time and the debtor must attend or
apply to the court for an adjournment if he or she is to have any hope of avoiding bankruptcy.
Sequestration Order
This is an order of the court making a person bankrupt. Most commonly this will be the result
of a Creditor’s Petition. Your client’s options are very few once they have been made bankrupt.
Those options they do have are canvassed later in this Chapter.
Part 1:
Introduction
While voluntary bankruptcy is the most common way that debtors become bankrupt, a significant
number of debtors are threatened with forced bankruptcy each year for non-payment of debts.
In the 2010/2011 financial year there were 8,791 Bankruptcy Notices issued, 3,961 Creditor
Petitions lodged and 2,237 Sequestration Orders made. In the same period the Credit and Debt
Hotline in NSW, for example, received 138 calls for advice from consumers about a Bankruptcy
Notice they had received and 91 calls from consumers about a Creditor’s Petition they had been
served with. While a minority of Bankruptcy Notices result in bankruptcies (25% 2010/2011
financial year), ignoring a Bankruptcy Notice places a debtor in a very vulnerable position, as
their options narrow at every stage of the process.
Bankruptcy has serious consequences for these debtors, many of whom have assets to lose, most
commonly the family home, a vehicle or perhaps a mobile home/caravan which serves as their
home. The threat of Trustee’s fees, which can amount to tens of thousands of dollars in a relatively
short period of time, and legal fees, also means there is much more at stake than the amount
of the debts. A debtor who is not really insolvent, but ignores the bankruptcy process (often
because they don’t know what to do), can end up with nothing left by the time the bankruptcy is
annulled, or insufficient funds to annul the bankruptcy. This means that they may not only lose
their home and other assets, but they are also subject to the same restrictions as all bankrupts in
terms of their opportunities to travel, to enter loans, to be a company director etc.
While it is important that the law has a mechanism for dealing with insolvency, the results for
debtors can sometimes be punitive and disproportionate. While bankruptcy is not supposed
to be a substitute for debt collection, many financial counsellors and consumer advocates are
aware of creditors and debt collectors who routinely resort to bankruptcy without exhausting
other debt enforcement mechanisms first. Using the bankruptcy process to collect unpaid strata
management fees has become particularly common and many clients who present as experiencing
mortgage hardship are often also at serious risk of facing bankruptcy proceedings in relation to
unpaid strata management fees.
It is very important to act fast when your client may be at risk of being made bankrupt. For a
client facing bankruptcy, a day or two can make a world of difference. If your client says anything
or gives you any documents that indicate they are facing bankruptcy proceedings, or have been
made bankrupt, you should refer the client for urgent legal advice.
228
Case study
A financial counsellor had a client who had been hospitalised for many months due to her
mental health. Upon being released the client found she had a demand to pay $12,000 in strata
management fees. She paid immediately, but it was all the money she had. Later she received
a demand from a lawyer for costs. The letter claimed over $3,000 in legal costs, including
amounts for the issue of both a Bankruptcy Notice and a Creditor’s Petition. The financial
counsellor was very concerned the client may have already been made bankrupt. She contacted
Consumer Credit Legal Centre (“CCLC”). A CCLC solicitor searched for the client’s case on
the Commonwealth Courts Portal and discovered that the sequestration order had not been
made (because the client had paid the original debt) but that the Court had ordered the financial
counsellor’s client pay legal costs and specified the amount. If the sequestration order had been
made, the client would have had only 21 days from the date of the decision (which may have
been weeks ago) to have the decision reviewed! The financial counsellor did the right thing by
seeking assistance immediately.
Bankruptcy proceedings will usually take place in the Federal Circuit Court of Australia (“FCCA”)
or the Federal Court of Australia (“FCA”) for debts of very large amounts (or for the convenience
of the creditor’s solicitor), as both courts have exactly the same original jurisdiction under the
Bankruptcy Act. Bankruptcy proceedings are very technical, and can be very expensive. To
make matters worse, it is not a particularly “debtor-friendly” jurisdiction – there is less scope for
courts to be sympathetic to debtors once bankruptcy proceedings have begun. There is also a
risk of additional costs being ordered against your client at every turn. If your client agrees they
owe the debt, or most of it, then they should pay as much as they can, as soon as possible, and
keep negotiating for time to pay off the rest if necessary, at the same time as getting legal advice.
The rest of this Chapter will refer to the FCCA (formerly the Federal Magistrate’s Court).
However, in some cases the relevant court will be the Federal Court of Australia.
Hint for lawyers
This jurisdiction is very technical – do not put your toe in without being aware of the relevant
provisions and clauses in:
■■
Bankruptcy Act 1966
■■
Bankruptcy Regulations 1996
■■
Federal Circuit Court Act 1999
■■
Federal Court and Federal Circuit Court Regulations 2012
■■
■■
Federal Circuit Court (Bankruptcy) Rules 2006 (which may still be listed as the Federal
Magistrates Court (Bankruptcy) Rules 2006 but will be referred to throughout this
Chapter by the new name)
Federal Circuit Court Rules 2001 (or Federal Magistrate’s Rules 2001) which apply where
there is no specific coverage of the issue in the bankruptcy specific rules above
■■
The Federal Circuit Court Practice Statements (see www.federalcircuitcourt.gov.au)
■■
AFSA Practice Statements (see www.afsa.gov.au).
If the matter is in the Federal Court of Australia then the Federal Court (Bankruptcy) Rules
2006 and Federal Court Rules 2011 will apply. The Bankruptcy rules in both FCCA and FCA
are harmonised and are generally of the same effect – but check rules of the specific jurisdiction.
The Bankruptcy Act & Regulations and the Court Rules are amended from time to time in
significant ways. Lawyers should use Comlaw (www.comlaw.gov.au or www.federalcircuitcourt.
gov.au) to make sure they are referring to the correct instruments for the relevant point in time.
Acts of bankruptcy
A key concept in the Bankruptcy Act 1966 is that a person who commits an act of bankruptcy
is then vulnerable to bankruptcy proceedings – that is an application by a creditor, or group of
creditors, to make the person bankrupt against their will.
There are many acts of bankruptcy. A comprehensive list of acts of bankruptcy is found in
Section 40 of the Act. Some of these are alarmingly broad. The most commonly relied on act
of bankruptcy, however, is in Section 40(1)(g) and is based on an unsatisfied judgment debt,
followed by an unsatisfied Bankruptcy Notice. Bankruptcy Notices are covered in detail below.
Examples of acts of bankruptcy (see Section 40(1) )
■■
Filing a Debtor’s Petition
■■
Filing a Declaration of Intention to present a Debtor’s Petition
■■
Filing a Debt Agreement Proposal
■■
Breaching a Debt Agreement
■■
■■
■■
■■
■■
■■
■■
Disappearing, leaving the country, failing to respond to attempts at contact – all with the
intent to defeat or delay creditors
Giving notice to any of his or her creditors that he or she has suspended, or that he or she
is about to suspend, payment of his or her debts*
Making a conveyance or assignment for the benefit of creditors generally
Making a conveyance, transfer, settlement or other disposition of property, creating a
charge on property, or making a payment or incurring an obligation – any of which would
be void against the Trustee if the person went bankrupt
A court has issued an order or writ for execution against property which has since been
sold or held by the sheriff for 21 days, or the execution remains unsatisfied
If a Section 188 authority is signed appointing a controlling trustee (this is the first step in
entering a Personal Insolvency Agreement – See Chapter 5)
A Personal Insolvency Agreement, composition or scheme of arrangement is terminated
or set aside by the court
➻➻ *Note: It is sometimes observed that financial counsellors may be assisting clients to commit
an act of bankruptcy when writing to creditors about their financial difficulties and requesting
alternative repayment arrangements. While it would not hurt for financial counsellors to be careful
in their choice of language – do not directly state than clients will or have ceased paying their
debts, for example – there is no real cause for alarm on this count. Creditors prefer to rely on clear
cut acts of bankruptcy that are easy to prove. As noted above, failure to pay in accordance with
a Bankruptcy Notice issued in relation to a judgment debt is overwhelmingly the most common
basis for a Creditor’s Petition. Terminated PIA’s and Debt Agreements also lead to sequestration
orders (bankruptcy) in some cases. There is no known case of a financial counsellor’s hardship
letters being used to establish an act of bankruptcy.
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The process for making a debtor bankrupt
Final judgment
Not paid
Bankruptcy Notice served
Not paid within time given
(usually 21 days) – This is
an
Act of Bankruptcy
Creditor’s Petition served
Creditor’s Petition hearing
Sequestration order made
– client is now
BANKRUPT!
Apply for Review of a Registrar’s
decision (21 days) or Appeal from a
Federal Magistrate or single Judge
of FCA (21 days)
Apply to set aside Bankruptcy Notice or
extend time to comply.
IMPORTANT NOTE: DO NOT do this
without legal advice. This is a very technical
procedure – it is not about general fairness
but technical compliance. Your client will have
to pay costs if s/he is not successful. If your
client just wants more time to pay, negotiate
directly with the creditor or get the client to
apply to pay by installments at the original
court and start paying!
Application dismissed
Application granted
Your client MUST turn up to the Court for
the sequestration hearing!
Now is the time to try to get more time to
pay. The court will usually allow one or more
adjournments to allow the parties to “work
things out”. If your client has applied to pay by
installments, set aside the original judgment
or appealed the decision, they still need to
turn up and inform the court (with evidence)
Petition dismissed
Steps to avoid being made bankrupt
It gets more and more difficult to avoid bankruptcy as the process progresses. Once you have
committed an act of bankruptcy (such as failing to pay in accordance with a Bankruptcy Notice),
then an application to pay by instalments will no longer be a bar to bankruptcy, and the creditor
may even refuse to accept payments. This is because the bankruptcy may be dated back to the
first act of bankruptcy in the previous six months and the creditor would be forced to return
the money as a preferential payment. This is discussed in greater detail under section in relation
to Creditor’s Petitions below.
The best thing your client can do to prevent bankruptcy is avoid a judgment debt in the first
place. It is essential to respond to a statement of claim (or other initiating process) in the Local/
District/Supreme Court or other court to avoid a “default judgment”. If the credit provider is in
an External Dispute Resolution service (“EDR”), you can lodge in EDR to stop legal proceedings
progressing, but this will only provide you with a limited reprieve – you need to keep negotiating
while you are in EDR, make sure any resolution is realistic for your client and emphasise the
importance of the client sticking to the arrangement. Do NOT agree to judgment being entered
as part of the resolution if at all possible as this will leave your client vulnerable to bankruptcy
proceedings in the event they breach the arrangement.
If judgment has already been entered, then the client needs to pay the amount claimed in full
or to get enforcement of the judgment or order stayed in the court where the original judgment
was made prior to the issue of a Bankruptcy Notice. In most jurisdictions an application to
pay by instalments will result in a stay of enforcement, although you may have to specifically
apply for a stay (especially with second and subsequent applications). Check the rules in your
jurisdiction or get legal advice. Your client should pay what they can immediately (regardless of
any application to pay by instalments) and confirm any arrangement agreed with the creditor
in writing. Only a stay issued by the court, however, will prevent a Bankruptcy Notice being
issued or render it invalid.
Of course if your client believes the debt is not owed (that is that the client has a defence) or
the client has a possible cross-claim, the client should seek urgent legal advice, whether or not
judgment has been entered. It may be possible to get the judgment set aside.
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Applications to pay by instalments
The process for applying to pay a judgment debt by instalments varies between all the States
and Territories of Australia. Financial Counsellors will generally be familiar with their local
process and may even have knowledge of the idiosyncrasies of their nearest court(s).
Generally speaking there are two ways in which clients go wrong when preparing an
application to pay by instalments:
They complete the income and expenditure form in such a way that it does not reveal sufficient
income to meet the instalments offered (in other words they show a big shortfall between
income and expenditure). They believe that they need to convince the court that they are very
poor so that the court will agree to the order. Unfortunately, the court will not agree to the order
if it appears that the debtor cannot afford to meet the instalments.
AND/OR
They ask for such low instalments that the debt will not be paid off within a reasonable time.
Again, the courts will vary as to what they consider to be a reasonable time, and sometimes
even change their approach according to whether the creditor is an institution such as a bank,
or an individual or small business. Asking for instalments which will pay off the debt in less
than three to four years is generally a good guide.
If the client really cannot afford the instalments they are offering, or they cannot afford to pay
off the debt within a reasonable time, they may need to sell property in order to pay the debt
and avoid bankruptcy. If they do not have any property, you can try to convince the creditor
that they are wasting their time and money enforcing against the debtor.
As noted above, an application to pay by instalments will only stop bankruptcy proceedings if
it is accepted, and a stay of enforcement granted, prior to the issue of a Bankruptcy Notice.
Any breach of the instalment order will also mean that the stay ceases to have effect and a
Bankruptcy Notice can be validly issued. You can still apply to pay by instalments after the
issue of a Bankruptcy Notice, but it will not prevent the creditor filing a Creditor’s Petition.
Part 2:
Bankruptcy Notices
A creditor can apply to the Official Receiver for a Bankruptcy Notice if:
1. The creditor has:
–– a final judgment or order issued by a court, or enforceable as a court order, against the
debtor for at least $5,000; or
–– more than one final judgment or order adding up to at least $5,000 (Section 41(1));
and
2.
The judgment or order was issued no more than 6 years ago (Section 41(3)); and
3. The enforcement of the order must not have been stayed (Section 41(3));
4. The creditors pays the AFSA fee ($470 as at July 2014).
While creditors can claim post judgment interest on a Bankruptcy Notice in certain circumstances,
post judgment interest cannot be used to make up the $5,000 minimum required (See Official
Receiver’s Practice Statement 6, Bankruptcy Notices, Issued 1 December 2010, Updated 1
December 2012). Post judgment interest can be claimed on a Bankruptcy Notice only where
it is allowed by the terms of the judgment or the rules of the court in which the judgment was
given, the amount is specified and the schedule to the Bankruptcy Notice is completed showing
how the interest was calculated. Creditors can choose not to claim the post judgment interest
in order to avoid errors in its calculation which may render the Bankruptcy Notice invalid
(although AFSA’s online application process has recently made the correct calculation of interest
easier for creditors).
Legal fees can only be used to make up the $5,000 threshold where either:
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The amount claimed was included in the original judgment or order as a specific dollar
amount; or
The original judgment or order was for costs generally and those costs have since been
taxed (fixed) by the court or assessed by an assessor and a sealed bill of costs or certificate
issued. In NSW the certificate of assessment of costs needs to be registered as a judgment
in a court of competent jurisdiction before it can be enforced and form the basis of a
Bankruptcy Notice. Get advice about your jurisdiction if necessary.
The Bankruptcy Notice must be served on the debtor within 6 months of the date of issue of
the Bankruptcy Notice by the Official Receiver (Bankruptcy Regulations reg. 4.02A). The
creditor can apply for additional time to serve a Bankruptcy Notice but the application must
be accompanied by reasons and a description of the attempts made to serve the notice. Another
fee must also be paid ($160 as at July 2014).
Personal service is not required (Bankruptcy Regulation reg. 16.01). This means the Bankruptcy
Notice can potentially be posted, e-mailed or faxed to the debtor. That the Bankruptcy Notice
must be personally served is a common misconception. If this is the client’s only defence/objection
he or she will just incur additional costs if they try to fight the Bankruptcy Notice in court.
My client has been served with a Bankruptcy Notice – What
now?
The Bankruptcy Notice will usually give your client 21 days to comply (if the Bankruptcy
Notice is served outside Australia it may give the debtor a longer period to comply but this will
be specified in the notice). You should note the date the client received the Bankruptcy Notice
on your file and make sure the client is aware of when their time runs out!
Your client has a number of options apart from doing nothing. Doing nothing is not recommended
unless the client is happy to be made bankrupt and understands the consequences (see Chapter 6).
If the client can actually pay the amount claimed, he or she should do so within the 21 days
provided by the Bankruptcy Notice to avoid an act of bankruptcy. If your client disputes the
debt, he or she should get legal advice immediately (as time limits apply). If something can be
done to dispute liability (such as applying to set aside the judgment) then it will need to be done
urgently. It may be that the client has simply run out of options to dispute the debt and will need
to pay whether they believe they owe the money or not in order to avoid bankruptcy. Clients
find this idea very difficult (“it’s just not fair”) and it is your role to make them understand how
much more unfair it will be if they are forced into bankruptcy.
Reducing the debt below $5,000
Even if your client can’t pay the whole debt, it is worth your client trying to pay the debt down
to an amount below $5,000. If the debt is less than $5,000, then the creditor will not be able to
establish the grounds required for the issue of a Creditor’s Petition. The creditor may not accept
the payments, but they are more likely to do so now than after the issue of a Creditor’s Petition.
Post judgment interest cannot be used to make up the $5,000 minimum required to support
the issue of a Bankruptcy Notice.
This will not work where the client owes other amounts to the same creditor because once the act
of bankruptcy has been committed (failure to pay in accordance with the Bankruptcy Notice)
other amounts which were owed by the client prior the act of bankruptcy can be added to make
up the $5,000. Amounts owed to other creditor’s can also be relied on to make up the $5,000 if
those creditors join the proceedings or are substituted as petitioning creditors.
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Setting aside the Bankruptcy Notice on the grounds that it is
technically invalid
There are a number of grounds for setting aside a Bankruptcy Notice. Some examples include:
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The judgment or order on which the Bankruptcy Notice is based was stayed prior to the
issue of the Bankruptcy Notice (and remained stayed at the time the Bankruptcy Notice
was issued) (Section 41(3));
More than 6 years had expired from date of the judgment or order to the issue of
Bankruptcy Notice (Section 41 (3));
■■
The wrong creditor(s) has(have) issued the Bankruptcy Notice;
■■
The Bankruptcy Notice has been issued against the wrong debtor;
■■
The debtor does not owe the creditor(s) at least $5000;
■■
The Bankruptcy Notice is not in the required form and could mislead the debtor as to
what was required to comply or is an abuse of process.
Setting aside the Bankruptcy Notice will usually need to be done by application to the FCCA
and requires a Bankruptcy Rules Form 2 with a copy of the Bankruptcy Notice and an affidavit
in support (See the FCCA website). The application will need also to seek an extension of time
to comply with the Bankruptcy Notice until the court has heard the case (to avoid committing
an act of bankruptcy).
Your client must get legal advice before disputing a Bankruptcy Notice. The grounds are very
technical and there is no room for general arguments about unfairness, or pointlessness (where
the client has nothing). You cannot argue that your client is actually solvent (although you can
once the case gets to the Creditor’s Petition stage –see later section). Your client will be ordered
to pay the creditor’s costs if he or she is unsuccessful. It is also necessary to complete the correct
forms, attach the necessary evidence and file with the Court (within the 21 days on the Bankruptcy
Notice) and also serve the application on the creditor within the necessary time limit (in this
case 3 days!) [See Rule 3.02 of the Federal Circuit Court (Bankruptcy) Rules 2006].
➻➻ Note: If your client wishes to contest a Bankruptcy Notice or apply for an extension of time to
comply with a Bankruptcy Notice they now have to file a genuine steps statement detailing any
attempts that have been made to settle the matter with the creditor before court proceedings are
started. As the process is urgent and creditors may not return calls etc, this needs to be explained
in any genuine steps statement as it may become relevant to any costs application in due
course. The FCCA/FMC Rules and the FCA Rules provide procedures and forms. (FCA – Form
16 and FMC – approved “Genuine steps statement” found at http://www.fmc.gov.au/forms/html/
applicants_genuine_steps_statement.html).
If your client obtained an instalment order from the original court prior to the date on which the
Bankruptcy Notice was issued, then he or she may be able to argue that the debt was stayed, but
only if the instalment order was being strictly complied with. If a debtor has missed a payment
then the court will usually rule that the stay has ceased to apply (see for example, NSW Uniform
Civil Procedure Rules reg. 37.7). If a debtor makes an application to pay by instalments it is
important that they start paying in accordance with the proposed instalment plan immediately,
regardless of whether they have been notified of the court’s decision in relation to the application.
Similarly, if a creditor lodges an objection to an instalment order, the debtor should keep paying
until the objection has been dealt with by the court.
Case example
A debtor applied to the Local Court to pay a judgment debt by instalments, commencing with
a lump sum on a particular date (immediately after the application was lodged) and then a set
amount per month on a particular day of the month until the debt was paid. The date for the first
payment came and went without the debtor knowing whether the application to pay by instalments
had been accepted by the court so she did not make a payment. Even when the debtor was
notified in writing that the instalment order had been made she took three more days to make the
first payment. Shortly afterwards, the creditor applied for a Bankruptcy Notice.
The debtor argued that the judgment had been stayed by the application to pay by instalments
and the subsequent instalment order and could not therefore form the basis for a valid Bankrutpcy
Notice. The Federal Magistrate found that the stay of enforcement ceased to operate when the
debtor missed the first payment date (even though the debtor had not yet been notified that the
instalment order had been made) and that the Bankruptcy Notice was therefore valid. The Court
ordered the debtor to pay the creditor’s costs of approximately nearly $10,000 for the hearing &
other appearances in relation to the validity of the Bankruptcy Notice in addition to the original
debt.
Setting Aside the Bankruptcy Notice on the grounds of a set off
or cross claim
Section 40(1)(g) of the Bankruptcy Act says that in order to avoid an act of bankruptcy a debtor
either has to comply with a Bankruptcy Notice (in other words pay the debt) or:
(i.) Satisfy the court that he or she has a counter-claim, set-off or cross demand
(ii.)That is at least equal to the amount claimed in the Bankruptcy Notice AND importantly,
(iii.)Could not have been set up in the original action.
Section 41(7) also provides that if the debtor applies to the court (usually the Federal Circuit
Court) within the time to comply with the Bankruptcy Notice for an order setting aside a
Bankruptcy Notice on the grounds that they have a set off or cross claim as described above,
then the time to comply with notice will automatically be extended until the court has made a
decision in relation to the application.
It is important that the client understands that it is not enough to allege that a larger amount is
owed to them as a cross claim; they must be able to show why they could not legally have raised
the cross-claim in the earlier case (where the creditor got judgment against them). If relying
on this approach under Section 41(7) the initial affidavit in support of the application MUST
satisfactorily address (i), (ii) and (iii) above or the matter may be dismissed. Clients should not
attempt to use these provisions without legal advice!
Seeking an extension of time to comply with the Bankruptcy
Notice because the clients has lodged an application to set
aside the judgment or appealed the judgment.
If the client has a potential defence to the debt, or cross claim, that was not raised in the original
proceedings then it may be possible to apply to set aside the judgment debt. This must be done in
the original court where the judgment was made, not in the Federal Circuit Court of Australia
(or Federal Court of Australia). Usually the client will also need to be able to explain why they
did not take action when they received the original writ, summons, or statement of claim (or
other document initiating legal proceedings). Examples of good reasons include not receiving
the court documents or being incapacitated through illness or disability. The client should get
legal advice.
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➻➻ Remember: : Many clients will claim to have not received court documents but more often than
not it turns out that there is an affidavit of service on the court file. The client will need evidence
to counter this affidavit if they really believe it is not true. Further, even if the client was not served
with the documents, the court will find that they could have taken action as soon as they became
aware of the proceedings by any other means (the other side might have correspondence,
for example, from the client or their legal representative which shows they know about the
proceedings). This means the bankruptcy proceedings may continue despite the lack of service of
the documents.
If applying to set aside the judgment is a realistic possibility, then the client should:
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Apply to set aside the judgment in the original court AND
Apply to the Federal Circuit Court of Australia for an extension of time to comply with
the Bankruptcy Notice (Section 41(6A)).
Again, this will require the right forms, evidence, and service on the creditor, so legal assistance
is essential [Rule 3.03 of the Federal Circuit Court (Bankruptcy) Rules 2006]. The client risks
additional costs if the application to set aside the judgment is unsuccessful.
The client should also be aware that the Court has the power under Section 41(6C) to refuse to
extend time to comply with the Bankruptcy Notice if it is of the opinion that the application to set
aside the judgment is not bona fide (that is, has no real merit and is being used as a stalling tactic)
or is not being prosecuted with due diligence (is being intentionally “dragged out” to buy time).
An extension of time can also be sought if the original judgment or order is the subject of an
appeal or other form of review (for example, statutory review of a costs assessment where the
Bankruptcy Notice is based on legal fees owing). However, the Federal Circuit Court of Australia
will be reluctant to grant an extension on these grounds unless enforcement of the judgment
has also been stayed in the original court. If the judgment was already stayed at the time of the
issue of the Bankruptcy Notice, then the Bankruptcy Notice is invalid and can be opposed. If
the appeal has been lodged after the date of the Bankruptcy Notice (for example where leave
has been sought to lodge the appeal after the expiry of the time limit), then the client must also
apply to have the enforcement of the judgment stayed at the same time. Legal advice is essential.
What if the amount claimed on the Bankruptcy Notice is wrong?
A Bankruptcy Notice will not be invalid simply because the amount claimed is wrong. In order
to dispute a Bankruptcy Notice on the basis that the amount claimed exceeds the amount owed,
the debtor needs to give notice to the creditor within the time for compliance with the notice
that he or she intends to dispute the validity of the notice on the basis of the misstatement
(Section 41(5)). The Act does not specify how the notice is to be given, but the client would
be wise to notify the creditor in writing and confirm that the creditor has received the notice.
The debtor should also pay the amount they agree is owed within the time required by the notice,
or make an immediate arrangement to pay off the amount they agree is owed. Section 41(6)
states that if it is later proven that the Bankruptcy Notice does include an overstatement the
debtor will be taken to have complied with the notice if they paid the correct amount within
the required time. The debtor should seek legal advice about how to deal with the Bankruptcy
Notice in these circumstances. It may be that a notice of opposition and an application for
extension of time to comply should be lodged.
What if the client cannot afford to pay the amount claimed in
the Bankruptcy Notice and has no grounds to either dispute the
notice or set aside the judgment?
This is in fact the most common scenario of all. Many clients have not paid the judgment debt
because they simply cannot afford it. In some cases they may have a home, but no cash flow,
which is why the creditor is resorting to bankruptcy – to get access to the asset. In this case your
client cannot avoid committing an act of bankruptcy. However, they can try to reduce the risk
that the creditor will proceed to the next stage of the process by paying as much as they can and
trying to come to an arrangement with the creditor to pay the amount outstanding. Always get
any arrangement confirmed in writing and impress upon your client the importance of paying
in strict accordance with the arrangement.
Lodging an application to pay by instalments after the issue of
a Bankruptcy Notice.
A debtor can still lodge an application to pay by instalments in the original court after the
Bankruptcy Notice has been served. This will NOT affect the creditor’s rights to proceed to a
Creditor’s Petition, but it may make them disinclined to do so. It is important to pay strictly in
accordance with the instalment order if it is granted. An instalment order that is being complied
with might also be useful in arguing for an adjournment of a Creditor’s Petition to give the
debtor time to pay, but usually only if the debt will be paid quite quickly (usually within months,
not years). If the creditor objects to the instalment order, however, the client should get very
specific legal advice. The instalment order will not prevent the issue of a Creditor’s Petition and
the debtor could face an adverse costs order as a result of the hearing of the objection. The risk
of costs in these circumstances may vary from jurisdiction to jurisdiction.
If a debtor has been served with a Bankruptcy Notice and it has not been paid, set aside, or an
extension of time to comply granted by the court then the debtor will have committed an act
of bankruptcy (even if they have applied to pay by instalments). This means that the creditor
can proceed to a Creditor’s Petition. A search of the Commonwealth Courts Portal can show
whether a Creditor’s Petition has been presented and any relevant court dates.
Part 3:
Creditor’s Petitions
A creditor can present a Creditor’s Petition against a debtor if:
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The debtor has committed an act of bankruptcy within the preceding 6 months (Section
44 (1)(c))
The debtor owes the creditor at least $5,000, or in the case of a joint petition by 2 or more
creditors, the debtor owes a total of $5,000 when the debts to each creditor are added
together (Section 44(1)(a))
The debts are liquidated sums due at law or in equity (or partly in each) and are owed
immediately or at a certain future time.
A secured creditor can only be counted to the extent that the debt owed to them exceeds their
security (the amount of the estimated shortfall) unless they are willing to agree to surrender the
security for the benefit of all the debtor’s creditors.
The Creditor’s Petition must be filed in the Federal Circuit Court of Australia or the Federal
Court of Australia. The creditor must pay the cost of filing the application but the costs may
ultimately be paid out of the estate as a priority if the debtor is made bankrupt (Sections 51
and 109). A Creditor’s Petition cannot be withdrawn after presentation except with the leave
of the court (Section 47(2)).
The Creditor’s Petition will be listed for hearing by the court. The Creditor’s Petition must be
served on the debtor along with a copy of the affidavit(s) verifying the petition (proving the
required facts), and any other relevant documents, at least 5 days prior to the date fixed for the
hearing of the Creditor’s Petition. Creditor’s Petitions need to be “personally served” unless a
Court has made an order permitting substituted service. These orders are often made when a
debtor appears to be deliberately avoiding service, and can permit service by post, email and
even text message to the debtor’s mobile phone.
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At the hearing the creditor will need to prove to the court’s satisfaction that (Section 52(1)):
1. The matters stated in the Creditor’s Petition are true (that is that debtor has committed
act of bankruptcy in last 6 months & that at least $5,000 is owed now or at some future
definite time);
2. That the Creditor’s Petition has been served on the debtor as required; and
3. That the debt or debts on which the petitioning creditor(s) rely are still owed.
A Creditor’s Petition will lapse after 12 months unless, prior to the expiry of the 12 months, the
creditor applies for an extension of time (Section 52(4)). The Court can only give a maximum
of another 12 months (2 years in total) to prosecute the petition (Section 52(5)).
My client has been served with a Creditor’s Petition – What
now?
Your client still has options at this stage and the most important thing is not to ignore the Creditor’s
Petition. At the first return date (the first time the matter is in court) the matter will be listed
before a Registrar. The client may get as few as five days notice of the hearing but MUST attend
the hearing at the Court on the appointed day unless they are happy to be made bankrupt. If
he or she really cannot attend, they should fax the court giving reasons and attaching evidence,
and/or seek to appear by phone or instruct a solicitor to attend.
You client has three options:
1. Seek an adjournment (either to get advice or to pay or both); or
2. File a Debtor’s Petition; or
3. Oppose the Creditor’s Petition.
The court can make a sequestration order (an order making the debtor bankrupt) if the court is
convinced of the 3 matters required to be proved by the creditor (See above – Section 52 (1)).
However, if the court it is not satisfied of those matters, or it is satisfied by the debtor that either:
1. The debtor can pay his or her debts (solvency); or
2. There is other sufficient cause that the order should not be made;
Then the court may dismiss the petition (Section 52(2)).
Seeking an adjournment
In many cases your client’s best hope at this stage will be to attend the court and seek an adjournment
under s 33 of the Bankruptcy Act. If your client has paid off a substantial portion of the debt and
has a plan to pay the remainder within a few months, then evidence of this should be provided.
If your client has property that they are willing to sell, they will need to provide evidence of this,
such as a contract for sale and a real estate agent agreement. If your client has tried to pay and
the creditor won’t accept the money, then the client should also seek an adjournment for the
purpose of negotiations and advice. If your client needs legal advice, they should indicate this
and describe what they have done towards getting an appointment.
If your client really cannot attend on the nominated hearing date, he or she can apply for an
adjournment in writing. Ideally the application for an adjournment should be supported by an
affidavit, with supporting materials attached and filed as soon as possible (although it is better
to get something to the court than nothing). The affidavit can be faxed to the court, and the
original should be posted to the court registry. The client will need to have a very good reason
and provide evidence (such as a medical certificate indicating they are in hospital or recovering
from a very recent operation). The court will generally only give short adjournments (1 – 4
weeks). If possible the client should arrange to be available by telephone. An application to
attend by telephone can be made in writing to the Duty Registrar and should include the client’s
contact number.
Any adjournment will be for a limited time and your client will need to keep showing up to
argue if they need further time. It will be fairly easy to get an adjournment on the first date set
for hearing the Creditor’s Petition if your client has an arguable case, or just needs time to get
advice or pay the debt. But it will get increasingly difficult to get a further adjournment on each
subsequent occasion. Many Registrars operate on a rule of thumb that a bankruptcy case should
get no more than two adjournments without a very good reason. The creditor’s costs will also
increase with each court appearance.
If your client may have grounds to oppose the Creditor’s Petition (see below) or have a case for
setting aside or appealing the original judgment, they will need to get legal advice. Usually the
court will give an adjournment for this purpose.
If your client does lodge an appeal or set aside application (in the original court) and successfully
stays the judgment, this will NOT undo the act of bankruptcy already committed (failure to
pay in accordance with the Bankruptcy Notice) – the only way to prevent this is to apply for
an extension of time to comply with the Bankruptcy Notice before the time to pay expires.
However, it may provide grounds for the court to adjourn or dismiss the Creditor’s Petition.
(Another creditor [or creditors] could nevertheless rely on the original act of bankruptcy if they
are separately owed more than the required $5,000 and seek to be substituted as the petitioning
creditor (Section 49)).
In seeking adjournments it is important for the debtor explain to the court:
1. Why the adjournment is necessary to be fair to the debtor in the circumstances; AND
2. Why the adjournment will not prejudice the rights of the other party.
It is important to remember that the Creditor’s Petition will expire after 12 months. The court
can, on the application by the creditor, extend it for another 12 months but no longer. The
court is unlikely to allow adjournments to continue for long periods without very good reasons.
Case study
A woman in her late eighties contacted the Credit and Debt Hotline at Consumer Credit Legal
Centre because she had been served with a Creditor’s Petition. She rang on a Friday morning
and the Creditor’s Petition was listed for hearing on the following Monday. She owned a small flat
in an expensive part of Sydney. The paperwork alleged that she had obtained a loan. She had no
recollection of the loan and did not receive any money. She said that it was something to do with
her son. He had assured her that he was “fixing” everything but she thought she would just get a
little advice of her own. The original loan was for $60,000 and the amount now claimed exceeded
$100,000.
Had a sequestration order been made by the Court, she would have been made bankrupt, her
home and only asset, the flat, would have been sold, the loan would have been paid and she
would have forfeited thousands of dollars (possibly tens of thousands of dollars) in Trustee’s fees.
A CCLC solicitor attended the (then) Federal Magistrate’s Court on the Monday and sought
an extension of time on the basis that the client was seeking legal advice about a possible
application to set aside the original judgment. An application was subsequently lodged in the
Local Court and the judgment was eventually set aside. Several appearances were also required
in the Federal Magistrate’s Court to seek further adjournments of the Creditor’s Petition while this
process was taking place.
Filing a Debtor’s Petition
In some cases your client may decide that bankruptcy is his or her best option or inevitable and
wish to file a Debtor’s Petition rather than wait for a Creditor’s Petition to be heard.
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Advantages of filing a Debtor’s Petition
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The Official Trustee will be initially appointed as the trustee in bankruptcy. There is no
guarantee that the Official Trustee will remain as the Trustee – AFSA may allocate the
estate to a Registered Trustee, or the creditors may seek to appoint a Registered Trustee of
their choice.
The client can nominate their own Registered Trustee if they have a preference. However,
if the Petitioning Creditor has obtained the consent of another Registered Trustee to
administer the estate, generally the estate is then transferred to that Trustee. The creditors
have the ultimate say as to the appointment of the Trustee. The usual 3 years until discharge will start to run (if the client waits for the sequestration
order to be made and then files a statement of affairs as required, it could be weeks or even
months before the bankruptcy commences).
Disadvantages
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The client will need to act quickly to get the paperwork done
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AFSA may reject the Debtor’s Petition if too close to the Creditor’s Petition hearing
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It may be to the client’s advantage to delay the date of the bankruptcy as long as possible
because of previous transactions which may otherwise fall within the relation back period,
or be caught as undervalue transactions.
When is it too late to lodge a Debtor’s Petition?
A Debtor’s Petition will be accepted up to a full working day before the Creditor’s Petition
hearing except in certain narrow circumstances covered below. To be safe, your client should
aim to lodge the Debtor’s Petition at least two working days prior to the listed hearing date.
A Debtor’s Petition must be referred to the Court in the following circumstances:
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Where the debtor is one of a group of debtors against which a Creditor’s Petition is
pending (whether they are joint debtors or members of a partnership) [Section 55 (3B)].
Where one or more members of a partnership have lodged a Debtor’s Petition but not all
the members of a partnership [Section 56C (1)(a)].
Where there is a Creditor’s Petition pending against one or more but not all the members
of a partnership (if the Creditor’s Petition is against all of them there is no need to refer
the matter to the court) [Section 56C (1)(b)].
Where two or more debtors have lodged a joint Debtor’s Petition and at least one (but
not all) of them is subject to a pending Creditor’s Petition [Section 57(3B)].
Usually AFSA will contact the debtors to discuss whether they wish to withdraw the petition
before referring it to the court.
Petitioning creditor’s costs
When the court is made aware that the debtor has become bankrupt on a Debtor’s Petition, the
court will generally dismiss the Creditor’s Petition and order that the petitioning creditor’s costs
be paid out of the estate as if a sequestration order had been made. Accordingly, the bankrupt
does not incur a fresh personal liability for such costs. It is advisable to notify the solicitors
acting for the petitioning creditor when the debtor has presented his or her Debtor’s Petition.
Opposing the Creditor’s Petition
A debtor wanting to oppose a Creditor’s Petition must file a notice of appearance and a notice
of opposition, with supporting evidence, at least 3 days before the hearing and serve it on the
creditor (FMC Rules 2.06).
The client can oppose the Creditor’s Petition on a number of grounds including, but not limited
to, the following:
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The debt is no longer owed
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The debt was never owed
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The debt is below the threshold
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Solvency (the client can pay their debts as they fall due)
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No act of bankruptcy or act of bankruptcy more than 6 months ago.
The debt is no longer owed
If the debt has been paid in full by your client, and that payment has been accepted by the creditor,
then the sequestration order cannot be made (Section 52(2)). This is why it is very important
for people to pay if they possibly can, even if they find the prospect completely objectionable.
Getting out of bankruptcy once a sequestration order has been made is much more difficult
and expensive!
It is essential that the technical difference between tendering a payment towards the debt and the
acceptance of a payment towards the debt by the creditor is understood. For example, a payment
would be tendered if your client sent a cheque for the amount of the debt to the creditor. That
payment won’t be accepted until the creditor presents the cheque for payment. Similarly, if the
client has direct deposit account details, simply depositing the money won’t be enough – the
creditor still has the option of returning the money within a reasonable time and indicating that
they will not accept payment.
The importance of this difference is that, after an act of bankruptcy, tendering a payment towards
the debt will not have a binding effect on the creditor, and will not reduce the amount of the
debt. If the payment is accepted, however, the debt will be reduced. In general, creditors will be
hesitant to accept payments from a debtor after an act of bankruptcy, on the basis that if there
are other creditors pursuing a debt from your client, those payments might need to be paid back
(as preferential payments) to the eventual Trustee to help satisfy the debts of other creditors.
The distinction between the tendering and accepting a payment won’t always be black and white
– acceptance by a creditor might be able to be demonstrated by conduct alone. For example, if
your client deposits the amount in the creditors account and several weeks have passed without
it being returned, or better a receipt or statement is received noting the payment made and not
indicating any intention to reject it.
In practice there will often be a negotiation between the debtor and the creditor with the aim of
having the Creditor’s Petition dismissed (or adjourned) by consent. As part of this negotiation,
the creditor will usually ask the debtor to pay the creditor’s legal costs to date as a condition of
accepting the payment and agreement to the dismissal of the Creditor’s Petition.
If the creditor is hesitant to accept payment it could be useful to argue that there are no other
significant creditors (if this is true) or to offer payment tendered by a family member or friend.
This would minimise the chances that the money could be taken back from the creditor by the
trustee as a preferential payment. To avoid the risk of a payment being recovered by the Trustee
as a preferential payment, there must be no contractual relationship between the debtor and the
third party paying the money which requires the third party to pay the money (or the potential
bankrupt to repay the third party), and the payment offered must be from funds/property that
is in the sole ownership of the third party.
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If the debtor has paid the amount that the debtor believes to be the correct amount owing, but
that amount is less than the actual amount claimed by the creditor, then the Creditor’s Petition
can be opposed under Section 41(6), provided the court can be persuaded to accept the debtor’s
arguments in relation to the amount. Again, the creditor will need to have accepted the amount
paid.
The debt was never owed
As a Creditor’s Petition is most often based upon the failure to pay in accordance with a Bankruptcy
Notice, which itself is based on a judgment debt, it is difficult to argue that there is no debt at
this late stage. Nevertheless, the court does have a limited to power to look behind the original
judgment debt in some circumstances. This is more likely to be the case where there is a default
judgment. The bankruptcy courts have the power to look behind a judgment obtained after a
hearing but this power will usually only be exercised in exceptional circumstances – generally to
look behind a judgment, default or otherwise, there would need to be “circumstances tending
to show that there has been fraud, or collusion, or miscarriage of justice”. The debtor should
get urgent legal advice before pursuing this option. In most cases this situation would be more
appropriately dealt with by applying to set aside the original judgment and seeking an adjournment
of the bankruptcy proceedings.
The debt is less than the $5000 threshold
If the court is not satisfied that the debt (or debts) on which the Creditor’s Petition is based
are at least $5,000 in total, it has no power to make a sequestration order and should dismiss
the petition.
If the amount owed exceeded the $5000 threshold when the Creditor’s Petition was filed but
the debtor has since paid off enough money to reduce the amount below $5,000, the debt
will be below the $5,000 threshold if the creditor has accepted that payment. However, if the
judgment debt has reduced below $5,000, the $5,000 can be made up of other amounts owing
to the creditor, provided they accrued prior to the act of bankruptcy relied on (usually the failure
to pay in accordance with a Bankruptcy Notice). A typical example is a judgment by default
for strata levies which is later combined with unpaid strata levies that were post judgment but
accrued prior to the act of bankruptcy.
There is no obligation on the petitioning creditor to accept payments after the filing of the
Creditor’s Petition, but if they do accept an amount which takes the debt (including interest)
below $5,000 the debtor will be able to argue that the sequestration order cannot be made and
the Creditor’s Petition should be dismissed. Even if the payment has not been accepted, the
debtor may be able to seek an adjournment, to try to raise the rest of the money and settle the
matter with the creditor (see Seeking an adjournment above).
Even if the court agrees not to make the sequestration order, it is likely to order that the debtor
pay the petitioning creditor’s costs of the proceedings (provided the debts were originally above
$5,000 and the Creditor’s Petition was otherwise properly applied for and served). As noted
above, if your client is trying to settle the matter by consent, then they will usually need to pay
not only the debt but also the creditor’s costs to date.
Proving that the debtor is solvent
If the court is satisfied that the debtor can pay his or her debts then it may dismiss the Creditor’s
Petition (Section 52(2)).
Bankruptcy proceedings are said by the courts to be inappropriate for debtors who are able to
pay but simply reticent to do so. This is largely because it is recognised that bankruptcy affects
all creditor’s rights and other enforcement mechanisms are potentially available to a creditor
where the debtor has capacity to pay. In practice, however, the solvency argument is rarely made
with success, as it is not enough for the debtor to have assets which exceed their debts – they
must be able to liquidate those assets (by sale or borrowing money against them) and pay their
debts within a reasonable time in order to be found solvent. Again, from a practical point of view
more cases are resolved through getting adjournments while the money is raised or a settlement
reached than through the debtor successfully arguing that he or she is solvent.
For example – in the case of Quitlong [Quitlong v ACM group [2011] FMCA 688 (12 August
2011)], Mr Quitlong was held to be insolvent even though his debts were under $30,000 and
he jointly owned an unencumbered property worth $350,000 – $400,000. In finding that Mr
Quitlong was not solvent the Federal Magistrate noted that:
“It has not been established that Mr Quitlong’s interest in his home is presently available
or realisable........Mr Quitlong is only a part owner of that property. There is no indication
that his wife is willing for the property to be sold. On the contrary, he told the court that it
was not the case that his wife was willing to sell the property; that she had made the major
financial contribution to the property....”
It should be noted that Mr Quitlong was trying to set aside a sequestration order that had already
been made. Had he raised his solvency prior to the making of the order, he may have had better
success in at least getting an adjournment to try to raise the money. Generally, if there is a joint
owner in such circumstances, the debtor should ask the joint owner to attend court or prepare
an affidavit indicating their willingness to sell the property or ability to buy out the debtor’s
share of the equity. Evidence of having placed the property for sale, or conditional approval for
a loan, would also be useful.
Having sufficient income to pay a debt off over several years is also not sufficient to establish that
the client is solvent, even where there is evidence that this is the creditor’s only hope of recovery
(because the client has little or no equity in any asset).
In general, the assessment of a debtor’s solvency reflects one of the harshest aspects of bankruptcy
law in Australia. As a result, more often than not a court will only consider a person solvent if
they can pay their debts within a very short period of time. The reason for this is that the system
has been constructed to enable creditors to quickly recover their debts in circumstances where
normal payment terms have not been complied with and there is a question mark over whether
creditors will be able to be paid in full at all. For this reason, if your client is arguing that they
are solvent based on their ability to sell an asset, such as their home, you should try to gather
evidence to prove how quickly that property might be sold. For example in the case of James v
Deputy Commissioner of Taxation ([2010] FMCA 106) the debtor’s request for 6 – 8 months,
to enable him to sell his house was not considered by the court to be fast enough for the debtor
to be said to be solvent.
No act of bankruptcy, or act of bankruptcy more than 6 months ago
If the failure to pay in accordance with a Bankruptcy Notice (or other alleged act of bankruptcy)
occurred more than 6 months prior to the filing of the Creditor’s Petition, your client may have
grounds for opposing the petition.
If your client believes the Bankruptcy Notice was not valid but they did not take any action
to oppose it at the relevant time (within the period for payment – usually 21 days), then they
should get legal advice.
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Stay of the sequestration order for up to 21 days
The Court has the power to make a sequestration order but stay its operation for up to 21 days
(Section 52(3)). This will not stop the debtor becoming bankrupt, but it will mean that the
Trustee should not incur costs during the stay period. This will make it cheaper for the debtor
to annul the bankruptcy if he or she is able to raise the money to pay the debts and legal costs
within this time. It will also prevent any of the debtor’s property from being sold or otherwise
dealt with for the benefit of the creditors. This power has been used in cases where the debtor has
argued unsuccessfully that he or she is solvent. The Federal Magistrate (now judge) or Registrar
has taken the view that the debtor has not established that he or she is solvent, but gives the stay
to give the debtor one last chance to come up with the money.
What if my client wants to enter a Debt Agreement or Personal
Insolvency Agreement (“PIA”)?
If your client is a good candidate for a Debt Agreement or a PIA (See Chapter 5) then they need
to take urgent action to get assistance from a Debt Agreement Administrator or a Controlling
Trustee.
If the client is considering a PIA, appointing a controlling trustee will place the Creditor’s
Petition process on hold (Section 189AAA). The client will still need to attend court to inform
the court of the fact that a controlling trustee has been appointed and provide evidence of such
an appointment. Clients should get legal advice before appointing a controlling trustee.
If the client is considering a Debt Agreement, then they will need to turn up to the Creditor’s
Petition hearing with:
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Evidence of the Debt Agreement Proposal having been lodged or at least being prepared;
Evidence as to why it would be in the creditors’ interests to accept the Debt Agreement
Proposal;
Information about the date on which the proposal will be lodged, or if lodged, the date by
which creditors will need to indicate their acceptance or otherwise.
You should ensure you explain the consequences of a Debt Agreement in considerable detail
and particularly turn the client’s mind to whether he or she would not be better off allowing the
Creditor’s Petition to proceed (for example, because eventual bankruptcy is likely in any event).
Power to take control of property or examine debtor prior to
bankruptcy
It should be noted that the court has the power to order the Official Trustee, or a specific
Registered Trustee, to take control of a debtor’s property; order that the debtor be examined
(including producing any books in their possession pertaining to the debtor or related entities);
or make orders in relation to the debtor’s property BEFORE making a sequestration order if:
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A Bankruptcy Notice has been issued and not complied with or a Creditor’s Petition
presented AND
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A creditor (or creditors) seeks the relevant orders AND
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The court is of the view that it is in the interests of the creditors to do so (Section 50).
In the event that the Creditor’s Petition is ultimately dismissed, the debtor may within 21 days
apply for compensation for any loss that has resulted from the control order (Regulation 4.08).
Creditors are only likely to use this process if there is a good reason to suspect that assets/funds
and/or financial records will otherwise be destroyed or disposed of.
Part 4:
Sequestration orders
A sequestration order is the legal term for a court order making a person bankrupt.
The court has the jurisdiction to make a sequestration order if (Section 43(1)):
1. The person has committed an act of bankruptcy AND
2. The person had the required connection with Australia at the relevant time AND
3. A creditor has petitioned the court in accordance with the procedures outlined in the
previous sections (and established the requisite facts).
Upon the making of a sequestration order, a debtor becomes a bankrupt and remains a bankrupt
until either being discharged or the bankruptcy is annulled (Section 43(2)). However, the time
until automatic discharge does NOT start until the debtor files his or her statement of affairs
(Section 149) so it is important that the debtor file a statement of affairs as soon as possible.
The requirement to file a statement of affairs applies even where the debtor has applied to have
the decision reviewed or appealed.
A sequestration order has been made against my client – Is
there anything he or she can do?
A sequestration order will usually be made by a Registrar of the Federal Circuit Court of Australia.
It may be made upon the first date of the hearing of the Creditor’s Petition if the Registrar is
satisfied that all the relevant requirements have been met and the debtor has been duly served.
However, if a sequestration order is made by the Registrar, then the debtor has 21 days to seek a
review of that decision (Federal Circuit Court [Bankruptcy] Rules 2006, Rule 2.03).
On a review of a sequestration order the debtor will need to show that the order should not have
been made. Bankrupts are automatically entitled to a review of a Registrar’s decision (Section
104(3) of the Federal Circuit Court Act 1999) and the review hearing will be like the Creditor’s
Petition hearing conducted all over again, taking into account any information that was before the
Registrar at the time of the Registrar’s decision, and any information that has since come to light.
For a successful application to have the sequestration order reviewed your client must show that:
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One or more of the matters required to be proven at the Creditor’s Petition hearing was in
fact not true (see above); or
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He or she is solvent (see above); or
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There is another good reason why the sequestration order should not have been made.
It is not sufficient to show that the creditors are unlikely to benefit from the bankruptcy (because
for example the debtor has no assets or no equity in their assets). There is no general rule that
the sequestration order must be in the interests of the creditors.
The debtor should get legal advice. Usually the debtor would ask for the sequestration order to be
set aside and the Creditor’s Petition dismissed. It may also be necessary to ask in the alternative
for the bankruptcy to be annulled under Section 153B, although this may incur additional costs
because the Trustee may be required by the Court to prepare a report.
Before the hearing the debtor should:
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Pay the debt (if possible) or seek legal advice as to whether they have a realistic possibility
of setting aside the sequestration order on other grounds (if a set aside or appeal in
relation to the original judgment is to be made it should preferably have been filed by the
time the bankruptcy matter comes before the court)
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Complete their statement of affairs
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Request/warn the Trustee not to incur further costs.
➻➻ Note: It is very important to warn the Trustee of the debtor’s intention to challenge the order as
soon as possible because this will be taken into account when the Judge decides whether to set
the sequestration order aside, or annul the bankruptcy. If the bankruptcy is annulled, then the
Trustee is able to recover their costs and expenses directly from the estate and only give the
debtor what is left. If the sequestration order is set aside, then the Trustee is likely to be left to
whatever remedies he or she may have at common law (and this would usually be only to recover
expenses rather than hourly fees).
The Trustee’s costs start accumulating immediately after the sequestration order is made and
the Trustee is appointed. These costs can quickly amount to a substantial sum depending on
the circumstances.
A review application might first be considered by a Registrar, who would determine whether the
parties are ready to argue their cases on the review application (The Registrar cannot actually
hear the application, only deal with preliminary appearances). Alternatively, it might be up to a
Judge. If the parties are not ready an adjournment may be granted. Typically, on the first return
date of the review application the court will be prepared to grant an adjournment as long as an
adjournment does not prejudice the creditor(s).
On review, the Judge is reviewing the order “de novo” (without being bound by previously
submitted arguments or facts) and has broad powers to make a range of orders depending on
the circumstances as presented at that time, including for example:
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Setting aside the sequestration order
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Annulling the bankruptcy under Section 153(B) of the Bankruptcy Act
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Confirming the sequestration order
If the debtor’s only reason for setting aside the sequestration order is that they have sufficient assets
to ultimately pay the debt, and there is no good reason why they have not done so before, then
it is likely the court will decide to annul the bankruptcy rather than set aside the sequestration
order to ensure the Trustee is able to recover his or her costs. A successful set aside application
will be closer in effect to undoing the bankruptcy altogether. Annulment, on the other hand,
will end the bankruptcy, but will not make it as if it never happened. For example, the person
will still have been “bankrupt” in any context where this is relevant and any offence against the
Act committed while bankrupt could still be prosecuted.
In Pattison v Hadjimouratis (see later in this Chapter) the court agreed to set aside a sequestration
order in circumstances where the debtor had given the relevant documents to his solicitor and
the solicitor had failed to take any action or provide advice. The Trustee appealed because he
would be deprived of his substantial remuneration and argued that the bankruptcy should be
annulled instead. The Federal Court refused to overturn the decision to set aside the sequestration
order but confirmed that the debtor had to pay both the Trustee and the creditor’s legal costs of
the original set aside application hearing (but not the Trustee’s remuneration for work on the
bankrupt estate). The trustee had to pay the costs of the appeal.
Case study
The A family migrated to Australia in the early 80’s from Macedonia. Mr and Mrs A Senior and their
son and daughter-in-law (Mr and Mrs A Junior) jointly owned two units in Sydney.
Mr and Mrs A Senior worked as cleaners and their English skills were poor. Whilst they
understood they owned both properties with their son, they had little understanding that they had
joint obligations under the mortgage and in relation to strata fees. Mr A Junior was out of work due
to a back injury and Mrs A Junior received Centrelink benefits as she cared for their two young
children. Mr A Junior, who had primary responsibility in paying the mortgage, fell behind on the
mortgage and the strata fees. A Statement of Claim was issued and served for the outstanding
strata fees. After, 28 days judgment was entered against them for $3,200 including legal fees. At
that point in time a creditor only needed a debt of $2,000 to file a Creditor’s Petition.
Two days after the judgment was entered, a Bankruptcy Notice was issued and subsequently
served on Mr and Mrs A Senior and Junior. But the A’s did not respond to the Bankruptcy Notice
so they committed an act of bankruptcy.
Subsequently Creditor’s Petitions were served on all the A’s, and a date was set for a hearing at
the (then) Federal Magistrate’s Court. But, the A’s did not show up to the Petition Hearing.
Ultimately the A’s were made bankrupt by sequestration order in their absence by the Registrar
of the (then) Federal Magistrates Court. They received statements of affairs in the post and were
contacted by the Trustee. 16 days after the orders were made they sought advice from Consumer
Credit Legal Centre (“CCLC”).
CCLC applied for a review of the Registrar’s decision. In the meantime on CCLC’s advice, the A’s
paid the original judgment. CCLC commenced negotiations to have the sequestration order set
aside by consent. Eventually it was agreed that the A’s would pay the Trustee’s costs of $3,000
and the legal costs of the petitioning creditor.
In total, the A’s paid $11,000 to avoid bankruptcy. The original strata levy debt was about $3,000.
What if the 21 days is already up?
Section 33(c) of the Bankruptcy Act and Section 104(2)(b) of the Federal Circuit Court Act 1999
give the court a general power to hear applications to extend the time to do certain things under
the Act. Your client can apply to the Federal Circuit Court of Australia for leave to apply for a
review of the registrar’s decision out of time, particularly if there is a good reason for their failure
to do so earlier. However, the court will also consider the likely success of the review application
as relevant to whether time will be extended.
Example: Pattison v Hadjimouratis [2006] FCAFC 153
A judgment debt was entered against Mr Hadjimouratis on 20 May 2004. On 13 October 2004 he
was served with a Bankruptcy Notice and then on 23 March 2005, a Creditor’s Petition. He left these
documents with his then solicitors who did not take any action, or advise him what he should do. He
was made bankrupt by a sequestration order made by a Registrar in his absence on 3 May 2005.
Unsurprisingly, he then instructed new solicitors. These solicitors first of all wrote to the Trustee
indicating that their client was solvent and wanted to pay his debts and bring the bankruptcy to an
end. However, the solicitors reviewed their client’s options after being told by the Trustee that the
costs of annulling the bankruptcy would be $47,500, (some $33,000 over Mr Hadjimouratis’ initial
debts of about $14,000).
On 20 July 2005, Mr Hadjimouratis’ solicitors lodged a notice of motion in the (then) Federal Magistrate’s
Court seeking (among other things) an extension of time to apply for a review of the Registrar’s
decision (over 75 days after it was made), and an order setting aside the sequestration order, or
alternatively an order annulling the bankruptcy. On 7 October 2005, after hearing submissions from
Mr Hadjimouratis’ solicitors and the Trustee, a Federal Magistrate ordered that the sequestration
order be set aside, but that Mr Hadjimouratis pay the costs of the proceedings of both the Trustee
and the petitioning creditor.
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The Trustee appealed, arguing that the bankruptcy should have been annulled so that he would
have been able to recover his remuneration and expenses from the estate in accordance with the
Bankruptcy Act Section 154. The Federal Court found that the Federal Magistrate had the discretion
to set aside the sequestration order or annul the bankruptcy according to the circumstances. They
also found that the Federal Magistrate was correct in taking into account that the Trustee had early
notice that the debtor was allegedly solvent (two weeks after the sequestration order), despite the
fact that the formal application to review the decision was not made for some time after that date.
This meant that he had warning to proceed cautiously in incurring costs in administering the estate.
The Judges said that it may have been different if he had not had such notice and an annulment may
have been more appropriate. The fact that the bankrupt had not ignored the notices, but had sought
legal assistance (and was let down by his solicitors) was also doubtless relevant to the decision to
set aside rather than annul the bankruptcy.
What if the order was made by a Judge and not a registrar?
The decision of a Judge of the Federal Circuit Court can only be overturned on appeal to the
Federal Court of Australia. An appeal is a very formal and technical legal procedure generally
based on a legal ground (NOT a rehearing ‘de novo’ as is the review of a Registrar’s decision)
and the possibility of a costs order against the bankrupt is a very real risk. If your client wants to
pursue this course of action, they need urgent legal advice. Generally, an appeal must be lodged
within 21 days after the date the judgment was pronounced or order was made (rule 36.01, 36.03
Federal Court Rules 2011; FCA Form 121), although an extension of time to appeal may be
given in appropriate cases (rule 36.05 Federal Court Rules 2011; Form 67).
If your client does not have a good reason for failing to take action earlier, or the court rejects the
client’s application for an extension of time to appeal, or refuses to overturn the sequestration
order, then the client will remain bankrupt until s/he is discharged, or the bankruptcy is annulled.
If there are grounds, an annulment application can be made at any time in either FCCA or FCA.
Discharge and annulment of a bankruptcy are covered in Chapter 8.
My client has been made bankrupt – what now?
Lodge a statement of affairs!
If your client has been made bankrupt, they have 14 days from the date they are notified of the
bankruptcy to lodge a statement of affairs with the Official Receiver and the Trustee (Section
54 Bankruptcy Act). Failure to do so may result in a civil penalty. The Official Receiver can
also require the bankrupt to lodge his or her statement of affairs by issue of a written notice
to this effect (Section 77CA). Failure to comply with this notice attracts a criminal penalty
including potential imprisonment, although the bankrupt may argue a defence of reasonable
excuse (Section 267B).
The bankrupt should lodge a statement of affairs even if considering a review or appeal application,
or are of the view that they are, or may soon be, in a position to get the bankruptcy annulled.
The importance of lodging a statement of affairs cannot be overstated: under the Bankruptcy
Act, a bankrupt will be automatically discharged from bankruptcy 3 years from the date they
lodge their statement of affairs. This means that even if the 14 days has passed (even long passed),
the debtor needs to lodge their statement of affairs with the Official Receiver as soon as possible
to start the clock running on their bankruptcy. If they do not lodge a statement of affairs the
bankruptcy will never end.
➻➻ Note [Lawyers – If your client needs help completing their statement of affairs you can refer them
to a Financial Counsellor for assistance]. The process will then continue exactly as if your client
filed a Debtor’s petition – See Chapters 6 & 8.
Importance of a bankrupt complying with orders of the court
Once your client is given a Bankruptcy Notice or a Creditor’s Petition it is important that you
advise your client not to:
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abscond (run away or hide); or
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conceal or remove any property that might be taken upon bankruptcy
with the aim of avoiding the payment of debts, or to prevent or delay the bankruptcy proceedings.
It is also important that your client does not:
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destroy, conceal, or remove any documents relating to their financial affairs; or
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conceal or remove any property without permission of the trustee (once bankrupt); or
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fail to comply with any order of the court or obligation under the Bankruptcy Act (for
example, the obligation to provide a statement of affairs).
If your client breaches any of the above, they face the risk of being arrested and prosecuted under
Section 78 of the Bankruptcy Act.
► see checklist for this chapter in Chapter 11: Tools and Resources
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11
DEBT AGREEMENTS
PROPOSAL PROCESS, COMPLAINTS, VARIATION AND
TERMINATION
Content
Part 1: The Debt Agreement proposal and acceptance process
251
Part 2: Complaints about Debt Agreements and Debt Agreement Administrators
257
Part 3: Varying, terminating or otherwise ending a Debt Agreement
269
Summary
This section covers the process for entering a Part IX Debt Agreement including:
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What must be included in the proposal
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The procedure for acceptance by AFSA
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The procedure for voting by creditors)
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What happens next depending on whether it is accepted or not.
Information about who can enter a Debt Agreement, the consequences of entering Debt Agreement
and comparative information about Debt Agreements and bankruptcy are included in Chapter 5.
This Chapter provides information on assisting clients with common complaints about Debt
Agreements, including what to do if a client has started the proposal process and does not
want to proceed, or has pulled out and is now being chased for fees. Varying or terminating a
Debt Agreement is also covered.
➻➻ Note: This Chapter is not intended to inform financial counsellors how to set up Debt Agreements
for clients. It is intended to explain the process so that financial counsellors understand what is
involved. It also provides information on what clients can (or can’t) do if they decide they want to
change their mind or experience problems along the way such as feeling misled or being unable
to pay.
Part 1:
The Debt Agreement proposal and acceptance process
Where the client meets all the requirements to qualify to enter a Debt Agreement listed in
Chapter 5, five documents need to be lodged with the Official Receiver at AFSA to constitute
a valid Debt Agreement Proposal (Section 185C & D):
1. The prescribed information form with the acknowledgement section at the bottom
signed and dated by the debtor;
2. A Debt Agreement Proposal and Explanatory Statement, signed and dated by the debtor;
3. A Debt Agreement Statement of Affairs with the declaration signed and dated by the
debtor;
4. If the Debt Agreement is being put forward by anyone other than the debtor – A
Certificate by Debt Agreement Administrator, signed, dated and otherwise completed
must also be lodged1.
1
The 2011/12 review is looking at preventing debtors from administering their own agreements. This rarely occurs in any event.
5. Payment of the Debt Agreement Proposal Lodgement Fee ($200 as at March 2014)
6. Copies of these forms are provided at the end of this Chapter. These forms are available
from AFSA at www.afsa.gov.au.
➻➻ Note: As noted in Chapter 5, there may also be a requirement to provide a Statement of
Suitability introduced as a result of the 2011/12 review.
In relation to the proposed arrangement itself (Section 185C):
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All provable debts must rank equally;
Where the provable debts are not being paid in full, then they must be paid
proportionately (that is a creditor that is owed 50% of the client’s unsecured debts by
value, must receive 50% of the proceeds available for distribution to creditors under the
Debt Agreement);
It must not include the transfer of property other than money to a creditor (although the
agreement can propose that certain property will be sold by the debtor and a specified sum
paid out of the proceeds to the administrator for distribution to the creditors);
For secured debts, it should only include any amount owed by the debtor over and above
the value of the security.
If a Debt Agreement Proposal is expressed to be subject to the occurrence of a specified event
within a specified period after the proposal is accepted, the specified period must not be longer
than 7 days. For example, two debtors with joint debts may each propose a Debt Agreement
that is conditional on the acceptance of the other. This way they ensure that they both receive
a release from the debt by completing the agreement and/or have the opportunity to try other
measures if one of the Debt Agreements is accepted and not the other.
The Debt Agreement Proposal may also provide for the payment of the fees of the Debt Agreement
Administrator (“DAA”), and invariably does. The fees are payable for administering the agreement
until it ends and must be expressed as a percentage of the total amount to be paid by the debtor.
The fees can only be collected by taking no more than the nominated percentage from payments
received from the debtor (Section 185C (3A)). That is that the DAA cannot take their money
first, in preference to the creditors, but must take their nominated share from each payment
or when they make a distribution to creditors. There is no limit on the size of the overall fees
percentage, but this is one aspect that can be taken into account by the debtor on deciding whether
to proceed with the proposal (at least in theory) and the creditors in deciding whether to accept
it. According to AFSA, fees range from 18% to 30% with the majority charging about 20% (this
is in addition to any upfront fee charged for the preparation of the proposal – See Chapter 5).
The Certificate by the DAA includes a statement to the effect that the DAA has reasonable
grounds to believe that the debtor will be able to meet the repayments required under the
Debt Agreement and that all the required information in the debtor’s Statement of Affairs and
Explanatory Statement have been disclosed by the debtor. This requirement has led to the sharp
decline in the number of proposals being rejected (and arguably to the increased length of Debt
Agreements) and AFSA monitors the registered DAAs. However a small percentage of Debt
Agreements are not proposed by registered DAAs (although this may change as a result of the
recent review in this area).
Acceptance of the proposal
There are two parts to the acceptance of a Debt Agreement Proposal:
1. The Official Receiver must decide whether to accept the proposal for processing
2. The creditors must then vote on the proposal.
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Acceptance for processing by the Official Receiver
Before accepting a Debt Agreement Proposal for processing the Official Receiver must be
satisfied that (Section 185E):
■■
■■
■■
■■
■■
All the prerequisites have been met, such as insolvency, limitations on previous activities
under the Bankruptcy Act, fitting within the relevant monetary thresholds (See Chapter
5);
All the required forms have been validly completed and appear to be in order (no clearly
inconsistent information, Debt Agreement Proposal meets the requirements set out
above, fees specifications meet the requirements set out above);
Where the proposal is lodged by someone other than the debtor, that –
–– there is a validly executed Certificate by the DAA
–– that the DAA is either a registered Debt Agreement Administrator, registered trustee,
or person who is (or will be including this Agreement) administering less than 5 Debt
Agreements and otherwise meets the eligibility criteria (see below);
That the proposal has been presented to the Official Receiver within 14 days of having
been signed by the debtor; and
That the Official Receiver is NOT of the view that the creditors’ interests would be best
served by rejecting the proposal (in fact the section says that the Official Receiver MUST
reject the proposal if the Official Receiver is of the view that the creditor’s interests would
be best served by doing so).
In relation to the last point there are two examples given in the Official Receiver’s Practice Statement
– When a debt agreement proposal is acceptable for sending to creditors for their vote are: firstly
where there is only one debt and it is therefore preferable that the debtor deal directly with
creditor to try to come to an arrangement; and secondly where there is concern the proposal
will not be understood by creditors (subject to AFSA being able to remedy this by a comment
in the Official Receiver’s Report to creditors).2
The debtor may apply to the Administrative Appeals Tribunal if he or she is dissatisfied with the
Official Receiver’s decision whether or not to accept a proposal for processing.
Once a Debt Agreement Proposal has been accepted for processing it is recorded on the NPII
and accordingly, the debtor’s unsecured debts are “frozen”. This means that (Section 185F):
■■
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■■
A creditor with a “frozen debt” cannot apply for enforcement of, or enforce, a remedy
against the debtor or their property.
The sheriff must not take action, or further action, to execute, or sell property under, any
process issued by a court to enforce payment of a frozen debt
A person who is entitled under a law of the Commonwealth, or of a State or Territory of
the Commonwealth, to retain or deduct money from money that is or will be owing or
payable to the debtor must not retain or deduct money.
A creditor may, however start legal proceedings in respect of a frozen debt or take a fresh step in
existing proceedings, provided that step is not to enforce a judgment (Section 185F(2)). This is
to ensure that the creditors interests are not prejudiced pending voting on the Debt Agreement
Proposal.3 Secured creditors are permitted take any action to enforce their security that is
otherwise permitted at law – in other words the Debt Agreement Proposal, or any resulting
Debt Agreement, does not affect the rights of a secured creditor in relation to their right to
2 Official Receiver’s Practice Statement – When a debt agreement proposal is acceptable for sending to creditors for their vote,
July 2008, updated 1 December 2012,available at www.afsa.gov.au
3
This section does not prevent a creditor from applying for enforcement of, or enforcing, a remedy against the debtor’s person or
property in respect of a liability under a proceeds of crime law (Section 185F(3)).
repossess, sell or otherwise deal with their security if the debtor is in default under the terms of
the security (Section 185XA).
The presentation of the proposal to the Official Receiver, as well as its acceptance, also means
that the debtor has committed an act of bankruptcy. Other acts of bankruptcy relevant to Debt
Agreements are a breach of the Debt Agreement or its termination. An act of bankruptcy is relied
upon by a creditor to make the person bankrupt via a Creditors Petition. In the case of Debt
Agreement being terminated by the court a creditor can rely on the termination of the Debt
Agreement to make the person bankrupt whether or not the debts exceed the usual threshold
of $5,000 required for a Creditor’s Petition.
The debts remain frozen until the Debt Agreement is either accepted (and the details entered on the
NPII), rejected, cancelled or lapses (Section 185F). If the agreement is accepted, then the debtor
and creditors are bound by the agreement. Otherwise, enforcement action can recommence.4
Eligibility criteria for unregistered administrators
The eligibility criteria for unregistered administrators of Debt Agreements are that they must meet
the basic eligibility criteria (outlined in Section 186A) – including, for example, not having been
convicted of an offence of fraud or dishonesty, not having been disqualified from managing a
corporation, not being a party as a debtor to a debt agreement, nor having been found to have
failed in the duties of an administrator under a Debt Agreement – and must not be currently
subject to an order under Section 186M declaring the person to be unfit to act as Debt Agreement
Administrator for a specified period up to 3 years.
➻➻ Note: There have been many concerns noted by stakeholders in relation to unregistered
administrators and the recent review was considering the removal of the provisions allowing
unregistered administrators to administer Debt Agreements at all.
Creditors voting process
Once the Official Receiver has decided to accept a proposal for processing it must be forwarded
to every affected creditor known to the Official Receiver requesting each creditor to indicate
whether the proposal should be accepted (Section 185EA). The Official Receiver must provide
each affected creditor with:
1. The Debt Agreement Proposal and Explanatory Statement
2. The person to whom replies must be sent accepting or rejecting the proposal
3. The deadline by which replies accepting or rejecting the proposal must be sent
4. A request that the creditor respond by written statement in the approved form
(Statement of Claim and Voting – “SOCAV”).
Both the debtor and other affected creditors have the right to inspect and make copies or take
extracts of an SOCAV provided by an affected creditor (Section 185EB), which will include
its claim to be a creditor, the amount claimed as unsecured, whether it votes yes, no or abstains
and in some cases the reasons behind a “no” vote.5
Creditors have 35 days to vote (from acceptance and recording on the NPII) unless the proposal
was lodged in December in which case the voting period is 42 days (Section 185 definitions).
4
If the proposal is rejected or no replies are received by the deadline, enforcement action can commence once the deadline for
replies has passed. If the debtor dies after lodging the proposal but before acceptance, then the debts cease to be frozen as at the date of
the debtor’s death. If a debt agreement is contingent on a particular event occurring within a certain period and that event does not occur,
the debts cease to be frozen when the deadline for the event occurs.
5 Official Receiver’s Practice Statement – Voting on Debt Agreement, Variation and Termination Proposals, issued July 2009,
updated 1 December 2012
254
A Debt Agreement Proposal is officially ‘accepted’ if the majority of creditors by value respond
before the applicable deadline indicating that the proposal should be accepted (Section 185EC).
The proposal is taken to be accepted on the date of the applicable deadline. The value of a
creditor’s debt is the amount outstanding at the time the acceptance by the Official Receiver of
the Debt Agreement Proposal for processing was recorded on the NPII. The value of a debt that
has been assigned (sold) to a creditor, who is a related entity of the debtor, is the equivalent of
the amount the assignee paid for the debt (not its contractual value). The value of any secured
creditor’s debt is only that which exceeds the value of the relevant security.
Example
Mary owes the following:
$14,200 to Westpac for a credit card debt
$21,500 to Citibank for a credit card debt
$5,000 to GE for a personal loan
$11,000 to Capital Finance (for a car now worth approximately $8,000)
As Capital finance can claim no more than $3,000 (debt less value of security), then it would take
a positive vote from all the creditors except Citibank to bind Citibank to the Debt Agreement. On
the other hand, Citibank would only need the agreement of one other creditor if they were of a
mind to accept the proposal to bind all the others.
➻➻ Note: Changes to the voting process to allow creditors to propose an alternative arrangement
were canvassed as part of the 2011/12 Review.
The Official Receiver can cancel the acceptance of a proposal for processing at any time prior to
the deadline for acceptance if the Official Receiver becomes aware of a matter that would alter
its decision to accept the agreement – for example, a material change in the debtor’s position, or
a material error, omission or falsehood in the forms which formed the basis for acceptance, or
the non-disclosure of an affected creditor (Section 185ED). This decision can also be appealed
by the debtor to the AAT.
Once the agreement has been accepted by creditors, the details of the Debt Agreement must be
entered on the NPII by the Official Receiver. Note that this is in addition to the acceptance of the
proposal for processing which will already have been entered on the NPII. The Debt Agreement
commences from the date that this is done (Section 185H). The parties to the agreement are
the debtor and the creditors to whom the debtor owes provable debts (Section 185I). Secured
creditors can choose:
■■
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■■
To accept a dividend proportionate to the unsecured part of the debt (as assessed by the
DAA); or
To receive a dividend only if they repossess the security during the life of the debt
agreement and are entitled to recover a shortfall; or
Not to receive a dividend at all.6
In any of these circumstances, the secured creditor is still considered a party to the Debt Agreement.
There is no stamp duty payable on Debt Agreements (Section 185X).
6
Inspector-General Practice Direction No10 – Practice Guide for Debt Agreement Administrators: Treatment of Secured Creditors
in a Part IX Debt Agreement (For Debt Agreements entered into as a result of a proposal accepted by the Official Receiver after 1 July
2007), issued August 2009, updated February 2013
What happens once the Debt Agreement is made?
Once the Debt Agreement has been made (Section 185K):
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■■
A creditor cannot
–– Present a Creditor’s Petition against the debtor
–– Or proceed with a Creditor’s Petition that was presented prior to the Debt Agreement
being entered on the NPII
–– Or enforce a remedy against the debtor’s person or property (such as a writ or
garnishee) or take a fresh step in legal proceedings in relation to a provable debt
The sheriff must not take action, or further action, to execute a writ or process, or sell
property pursuant to a court order, in respect of a provable debt
A person who is entitled under a law of the Commonwealth, or of a State or Territory, to
retain or deduct money from money that is or will be owing or payable to the debtor must
not retain or deduct money.
A creditor may, however, enforce a remedy in relation to a maintenance order or agreement
(including child support), or a proceeds of crime law action.
A secured creditor may take action in relation to the security for the debt (Section 185XA).
This means that an order for repossession could be sought for a car or goods under the National
Credit Code (or the goods simply repossessed from a public place), or a writ for possession in the
Supreme Court for a home or land if the debtor does not keep up with repayments. Debtors will
need to keep paying their secured debts in order to avoid repossession. If a security is repossessed
with a shortfall during the period of the Debt Agreement, the relative dividends paid to each
creditor may need to change to take into account the secured creditor’s share (if not being claimed
from the start). Further, there is a remote possibility that a creditor may apply to the Official
Receiver to vary the agreement because the debtor is no longer making payments towards the
secured debt and has more income available for other debts.7
➻➻ Note: In relation to secured debts: While interest may continue to accrue and be paid by a debtor
under a secured loan despite the existence of a Debt Agreement, interest accrued after the date
of the Debt Agreement cannot be collected under the Debt Agreement in the event of a default
and a shortfall on repossession of the property or goods. The amount that can be claimed in the
Debt Agreement is the creditor’s fair share of the dividend based on the amount outstanding at the
time the Debt Agreement was entered on the NPII, less any payments made and the net amount
recovered from the sale of the security.
When & how does the Debt Agreement end?
A Debt Agreement can end in a number of ways:
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■■
Discharging all the obligations (making all the payments required) under the agreement
(completion of the agreement) (Section 185N)
An application to the Official Receiver to terminate the agreement made by the debtor
or a creditor bound by the agreement (Section 185P)
By application to the Court to terminate the agreement by the debtor, a creditor (of the
debtor, but not necessarily a party to the agreement), or the Official Receiver
As a result of a six month arrears default (that is debtor has continuously been in arrears
for a period of six consecutive months) (Section 185QA)
If the debtor becomes bankrupt (Section 185R).8
7
Inspector-General Practice Direction No10 – Practice Guide for Debt Agreement Administrators: Treatment of Secured Creditors
in a Part IX Debt Agreement (For Debt Agreements entered into as a result of a proposal accepted by the Official Receiver after 1 July
2007), issued August 2009, updated August 2013
Generally speaking a debtor cannot lodge a Debtor’s Petition while in a Debt Agreement and cannot be the
subject of a Creditor’s Petition. However, the debtor could present a Debtor’s Petition with the leave of the court (Section
55(5A)), or he or she could become bankrupt as a result of a Creditor’s Petition presented against a partnership.
8
256
Completion of the agreement is covered immediately below. The other four possibilities are
covered later in this Chapter in the section called Getting out of a Debt Agreement.
Completion of the agreement
When all the obligations under the Debt Agreement have been discharged (usually all payments
made) the administrator must notify the Official Receiver in writing of this fact within 5 working
days (Section 185N(5)). The Official Receiver will require the DAA to provide a statement of
receipts and payments showing the total amount paid by the debtor, any sale of assets, total
payments for fees and expenses, and total dividends to creditors. This will be then checked against
the Debt Agreement (as varied if applicable) to make sure that all obligations have been met.
If there is some doubt about whether creditors have been paid as stated the Official Receiver
will make compliance calls to creditors to confirm payment. Compliance calls to creditors are
done as a matter of course where the agreement is self administered (no DAA) or the DAA is
unregistered.9 Once the Official Receiver is satisfied with the evidence that the agreement has
been completed this will be recorded on the NPII.
The Official Receiver must then give the debtor a Certificate as evidence of the completion of
the Debt Agreement (Section 185N(3)). The debtor is then released from all provable debts (See
Chapter 6, Part 1) that the debtor would have been released from had he or she gone bankrupt
on the date the acceptance of the Debt Agreement Proposal for processing was recorded on the
NPII (Section 185NA). Accordingly, the debtor is not released from debts such as Child Support
or maintenance or debts incurred by fraud. The debtor is NOT released from any subsequently
incurred debts, nor any secured debts that are still on foot. However, should the debtor default
on a secured debt after the Debt Agreement has been completed and the repossessed security
is insufficient to cover the amount owing, the debtor is released from the unsecured portion
of the debt (provided the debt existed and was included in the Debt Agreement Proposal). It
makes no difference whether the secured creditor chose to receive a dividend under the debt
agreement or not.10
The release ceases to operate if the Debt Agreement is declared void by the court (Section 185NA).
Co-borrower and guarantors continue to be liable for the debts, despite the acceptance of the
Debt Agreement or its completion (Section 185NA), unless they have independently become
bankrupt or entered a Debt Agreement or other arrangement.
Part 2:
Complaints about Debt Agreements and Debt
Agreement Administrators
Summary
This section covers how to deal with complaints about Debt Agreements including:
■■
I want to get out now (before a Debt Agreement has been accepted by creditors)
■■
Liability for upfront fees
■■
I have been rejected and I am in worse trouble
■■
I was misled.
Official Receiver’s Practice Statement – Completion of a Debt Agreement, issued July 2008, updated December 2012
9
Inspector-General Practice Direction No10 – Practice Guide for Debt Agreement Administrators: Treatment of
Secured Creditors in a Part IX Debt Agreement (For Debt Agreements entered into as a result of a proposal accepted
by the Official Receiver after 1 July 2007), issued August 2009, updated August 2013
10
If your client has signed up for a Debt Agreement Proposal and wants to get out you need to
act fast because they will have very limited options once the agreement has been accepted
by creditors!
Do not allow clients to be bullied into proceeding with a Debt Agreement because they are
allegedly liable to pay upfront fees even if they pull out – the consequences of a Debt Agreement
are so serious that the fees may be the least of their problems. Further, in some circumstances
your client may have a case for either reducing the fees or denying liability for them altogether.
Common problems reported by debtors
Financial counsellors (and community lawyers) commonly receive complaints from clients
who have already entered into Debt Agreements (or are in the process of entering them) and
are dissatisfied or having problems as a result. This Section examines some of the most common
complaints received by consumer assistance agencies, and what the clients’ rights and options
are. Sample letters for complaining to AFSA or ASIC are also included at the conclusion of
this Chapter.
I signed up to propose a Debt Agreement and now I don’t want
to go ahead
Case study A – Part 1
CCLC’s client, a 23 yr old single mother with 2 small children, saw an ad on TV about “clearing
your credit history”. She rang the number shown and came to a verbal agreement over the phone
to pay $40 per week for 208 weeks (4 years) after which her credit report would say “paid”. She
had a small child crying while on phone and only partly understood what was happening. When
she said she could not really afford the $40 per week she was told she should seek to borrow
$10 per week from a family member. She got an e-mail from the company in relation to the verbal
agreement that indicated she had agreed to propose a Debt Agreement and that she would be
direct debited the amount of $40 per week. She had debts of about $5,000. The total amount
payable to complete the agreement was $8,320. She says she does not remember being told that
this was anything to do with bankruptcy or that the agreement would be listed on her credit file
and the NPII. She rang them to get her credit file expunged/repaired!
Misunderstanding the nature of a Debt Agreement, or being actively misled about it, is a common
complaint by consumers. Once the Debt Agreement has been voted on and entered in the NPII, it
is very difficult to undo. Ways to terminate or vary the agreement are covered later in this Chapter.
Where the Debt Agreement forms have not been signed your client should not proceed unless
they have been advised about all their options (by an independent person, not the DAA or their
broker/referrer) and have decided that the Debt Agreement is appropriate and they can afford
it. In the case above the client had not been talking to a Debt Agreement Administrator but to
a broker or intermediary. The paperwork had not yet been prepared for signing.
If the Debt Agreement paperwork has been signed, and the Debt Agreement Administrator
has not yet lodged it with the Official Receiver for processing, then you may be able to stop its
lodgement by contacting the DAA or their broker/agent and asking them not to proceed, or
instructing the client to do so. Initial requests made of the administrator by phone should be
followed up with written confirmation, with a copy being sent to the Official Receiver.
258
If the other party refuses to stop the process, or indicates that the paperwork has already been
lodged with the Official Receiver, you or the client should contact AFSA immediately to indicate
that the client does not wish to proceed with the Debt Agreement Proposal. The withdrawal
should be followed up in writing and a reason should preferably be given but is not required
(AFSA monitors reasons for withdrawals).11 The client may also wish to make a complaint about
the DAA or broker, depending on the circumstances.
It should be noted that if the Debt Agreement Proposal is withdrawn after it has been accepted
for processing by the Official Receiver but before acceptance by creditors, an act of bankruptcy
has already occurred (the lodging of the proposal in the first place) and the NPII record will
remain with a notation that the debt agreement proposal was withdrawn (although this could
change depending on the final outcome of the 2011/12 review).
You should warn your client that they may have already incurred a liability for the set-up fees,
regardless of whether they proceed – but note the section below on options for disputing these fees.
Liability for fees
Usually, the debtor is required to pay the upfront fee to the DAA or their broker/referrer before
the debt agreement proposal is submitted to the Official Receiver. If the client tries to withdraw,
the DAA (or broker/referrer) will usually claim that the client has already incurred the liability
for the upfront fee and insist that the fee is paid regardless of whether the client proceeds with
the Debt Agreement Proposal (similarly there is usually no automatic refund of upfront fees
when a Debt Agreement Proposal is rejected by creditors). Whether your client can get out of
these fees will depend on the circumstances of the case.
Case study A – Part 2
The financial counsellor who took the call from the young woman in the case study above
explained to her what a Debt Agreement was. Having understood this information, and knowing
she could not afford the payments anyway, she indicated that she did not want to propose a Debt
Agreement after all.
She had not signed yet signed any of the paperwork necessary to proposing a Debt Agreement.
The financial counsellor advised her to reply to the e-mail she had received indicating that
she wished to rescind her verbal agreement with them in relation to the preparation of a Debt
Agreement Proposal. Further he indicated that she should cancel the direct debit for $40 in writing
with both the company and the bank.
The company the woman was dealing with was not the intended DAA but a broker who referred
clients for a fee. The first response from the company was that the young woman would still have
to pay $880 but with the support of the financial counsellor she argued with the company, put in a
complaint to AFSA, and ultimately did not have to pay.
If you, or the client, are unable to settle the dispute with the other party by complaint and
negotiation, then the client should get legal advice. Usually the following options are available:
■■
■■
If the entity who charged the fee is in EDR, then lodge a complaint in an EDR scheme
(many Debt Agreement Administrators and their brokers may also be credit licensees or
credit representatives under the credit law and therefore be required to be in EDR)
Apply to an appropriate consumer jurisdiction for a declaration that the fees are not
payable (for e.g. NCAT in NSW or VCAT in Victoria)
11
See Official Receiver’s Practice Statement – Cancellation of Debt Agreement Proposal by Official Receiver and withdrawal of Debt
Agreement Proposal by debtor, July 2008 , updated December 2012
■■
Wait and lodge a defence and cross claim in the event that the other party commences
legal action (of course the client cannot be guaranteed they will win and they could face
some legal costs). Your client should get legal advice.
If there is a default listed on the client’s credit report as a result of the unpaid fees, then a complaint
should be lodged with the credit reporting agency, attaching a copy of the letter disputing the
fees. If the listing is not removed then the client should complain to the EDR scheme of which
the Credit Reporting Agency is a member. If the other party is in EDR, then preferably the
complaint in relation to the credit report listing should also be taken to that scheme.12
The Debt Genie Pty Ltd v Kirstein Edwards (2011) NSWLC
CCLC’s client was a single mother in casual employment. She had two loans totalling $25,000.
She was in temporary hardship as a result of having to take unpaid time off work to care for her
teenage son who had recently been released from hospital. In this period she had entered three
high cost pawnbroking contracts to pay for essential expenses. As a result of the temporary lack
of income and the need to repay the short-term contracts, she encountered significant hardship in
trying to pay her other loans.
She was handed a flyer on the railway station one day advertising “No Interest Debt
Consolidation”. She was attracted by the idea of consolidating her payments and reducing
her interest. She met twice with a person who turned out, in hindsight, to be a representative
of Debt Genie, an unregistered Debt Agreement Administrator. She had already signed an
acknowledgement that she would liable to pay a fee when she became concerned about the
whole process and decided not to proceed any further.
The Debt Genie then commenced action in the Local Court to recover its fee of $880. CCLC
assisted the client to lodge a defence and represented her before the assessor in the small claims
division. In finding in favour of our client the assessor said:
“The use of the term ‘debt consolidation’ and the complete absence in the
advertisement flyer and the plaintiff’s website of the term Debt Agreement is a clear
attempt by the plaintiff to obfuscate the nature of the service it provides as a debt
agreement administrator.”
In ultimately finding that the contract to pay $880 was unjust, the assessor referred to a number of
relevant factors:
■■
■■
■■
The misleading advertising referred to above;
The lack of provision by Debt Genie of clear, written information about the nature of their
service and the consequences of a Debt Agreement before getting the client to agree to pay
their fees; and
The failure by Debt Genie to assess whether the client was actually insolvent prior committing
her to paying the fee.
Our client was then referred to a local financial counsellor who was able to secure temporary
hardship arrangements with both the client’s main creditors, allowing her to pay out her pawnbroking contracts and resume her normal loan repayments in a few months time.
In some cases a client may wish to raise a dispute over fees even though the Debt Agreement
went ahead.
12
Recent amendments to privacy legislation require all entities who list credit information with a credit reporting agency to be members of EDR. These provisions start in March 2014.
260
Case study B
CCLC’s client entered a Debt Agreement when she was in her early twenties. English was not her
first language, although she was reasonably literate in English. She was over limit on a number
of credit card accounts and she was in arrears on a GE account. Although she had many debts
which added up to a considerable amount, her total over limit/arrears was less than $1500 dollars
and she was working full-time.
She responded to an advertisement that implied the service offered was debt consolidation.
One payment would be a lot easier after all. After several phone calls and e-mails to a particular
consultant for a registered Debt Agreement Administrator, she agreed to enter a Debt Agreement.
She signed most of the material without reviewing it properly. She was under a lot of pressure at
the time due to illness, financial pressure and family issues. The consultant kept assuring her it
was the right thing to do. A few weeks later she had second thoughts and sought to withdraw. The
consultant convinced her to continue but gave her a discount on the upfront fees.
Not long afterwards she fell pregnant and could not keep up with the Debt Agreement. She was
also shocked to find out that she had trouble renting a home and getting basic services like Foxtel
connected because of the Debt Agreement. She felt that she was suffering all the restrictions
of bankruptcy along with the stress of continuing debt. She realised that the Debt Agreement
had been a very bad idea and felt that the consultant had been motivated by the potential fees
rather than her best interests. She lodged a complaint with AFSA and lodged an application in
the Consumer Trader and Tenancy Tribunal in relation to the $1,300 upfront fee paid. The Debt
Agreement Administrator offered her $500 dollars back at conciliation and agreed to complete a
proposal to vary her Debt Agreement to a more affordable amount (of course this will depend on
the agreement of the majority of her creditors).
My Debt Agreement Proposal was rejected and now I am in
worse trouble!
Debtors often contact financial counselling agencies and advice lines seeking assistance after their
Debt Agreement Proposal has been rejected by their creditors. It is not uncommon for these
clients to report that they were advised to pay the Debt Agreement Administrator’s (or broker’s)
upfront fees in preference to their creditors during the period in which the Debt Agreement
Proposal was being prepared, submitted and voted on. As a result these clients are further behind
(or even behind for the first time) on their credit accounts and may be facing enforcement action.
Ideally a DAA should run a proposal past the creditors prior to formal submission rather than
waste the client’s time and money. They should also be open to discussing a refund or partial
refund where a proposal has been rejected, particularly if they have not done sufficient preparation
or have misled the client in anyway. You should try to negotiate a refund but in the meantime
you need to attend to the other creditors as a priority.
In these circumstances the only options for the client include:
■■
■■
■■
Negotiations and hardship applications in relation to the creditors (including EDR where
applicable)
Making a complaint to AFSA if there was anything misleading or inappropriate about the
actions of the Debt Agreement Administrator (or to ASIC if the party complained about
is the broker)
If negotiations with the DAA and/or broker fail, applying to a State based tribunal or
court in relation to getting all or part of the upfront fee refunded (see Case Study B and
The Debt Genie case above) – make sure the client gets legal advice before lodging court
or tribunal documents.
Case study C
CCLC’s client thought she was entering a Debt Agreement. She says was only $40 behind at
the time she made the arrangement with the Debt Agreement brokers (she did not know they
were brokers at the time – she had no concept of what at DAA or a broker was). She then paid a
significant sum each fortnight for a couple of months.
After she had made a few payments to the broker instead of to her creditors (as advised), she
received a default notice from one of her creditors. She referred this notice to her contact at the
broker service. She then received a Statement of Claim from the same creditor for $1900, $600
of which was legal costs. She contacted the broker to find out what had gone wrong. They said
that the amount she had paid so far was to cover their upfront fee and that it is not their practice
to lodge the Debt Agreement Proposal until this fee has been paid! The fact that the creditor had
commenced legal action in the meantime was apparently not their problem.
➻➻ Note: If one of your client’s creditor’s has commenced legal action you should assist them (or
advise them) to lodge in EDR immediately to prevent any further action being taken while the
Debt Agreement situation is being resolved. Even though the creditor is not the “wrong-doer” in
this scenario, the client is usually in financial hardship as a result of the fees paid to the DAA or
broker and can lodge in EDR on this basis. If the client does not proceed with a Debt Agreement
they will need to start making repayments to their creditors again as soon as possible. If you are
able to negotiate a resolution with the creditor (with or without lodging in EDR), make sure you
get written confirmation of the arrangement including specifically that the legal process will be
discontinued.
I was misled!
There are many ways in which clients claim to have been misled by Debt Agreement Administrators
and other related entities . The following represent just a few.
Case study
A caller to the Credit and Debt Hotline complained that he had been told by his Debt Agreement
Administrator that his employment would not be affected by the Debt Agreement when this was
not true. He had just received a letter from the Real Estate Licensing Division of the Office of Fair
Trading asking him to show cause why he should be allowed to continue as a real estate agent
despite having entered a Debt Agreement.
Case study
A debtor paid a broker to set up a Debt Agreement. The proposal was rejected because the
debtor had been bankrupt previously less than 10 years ago. She maintains that she told the
broker this in the first place and they should not have taken her money and wasted her time.
Case study
A debtor entered a Debt Agreement to pay 85% of his debts including a joint debt with his wife.
He says he was not warned that she would still be pursued for the remainder of the debt, plus any
interest accrued or accruing on the whole debt.
262
Case study
A woman and her partner applied for Debt Agreements and were told to pay the intended $640
per month as a sign of “goodwill” while the proposal was being prepared and voted on. The
proposal was rejected and the woman is very angry because it turns out that the amount paid was
a non-refundable upfront fee rather than a “goodwill” payment. Further, she says that they were
told it would only appear on their credit file if it was accepted. Now they are in a worse situation
than ever, $1920 out of pocket and their credit report ruined!
In most cases the client will have few options except complaining to AFSA (See Sample Letters
at the end of this Chapter), seeking a refund or reduction in fees (see above) and/or seeking
to vary or get out of the agreement as explained in the sections below. Getting out of the Debt
Agreement without negative consequences is usually not possible. If the entity is in EDR then you
can lodge a complaint with the EDR scheme but the Debt Agreement itself cannot be changed
or undone except by using the processes set out in the following sections.
I can’t afford to keep up the payments on my Debt Agreement!
As with loans, there are two main scenarios in which clients cannot afford to pay in accordance
with a Debt Agreement:
1. When they have experienced a change of circumstances (with Debt Agreements getting
longer a change of circumstances within the period of the agreement is also more likely)
2. When the Debt Agreement was unsustainable in the first place.
Case study
A caller to the Credit and Debt Hotline said that he had entered a Debt Agreement which required
him to pay just under $700 per month. At the time his income was only $24,000 per annum gross
and he could not really afford this. It also became apparent upon further investigation that he
had no assets that would be divisible among his creditors in bankruptcy and derived no tangible
advantage from the Debt Agreement.
If the Debt Agreement was never sustainable, you should complain to AFSA. The Act requires
the Debt Agreement Administrator to certify that s/he has reasonable grounds to believe that
the debtor will be able to “discharge the obligations created by the agreement as and when they
fall due” (that is, meet the repayments required under the Debt Agreement). If you can convince
AFSA that the Debt Agreement Administrator could not possibly have had reasonable grounds
to believe this then AFSA may take disciplinary action. This will not assist the client, although
it may go towards preventing similar problems in the future.
The client has the option of either attempting to vary the Debt Agreement or pursuing one of
the options in Getting out of a Debt Agreement later in this Chapter in Part 3.
Making a complaint
Summary
Complaints may be made to AFSA in relation to registered Debt Agreement Administrators and
to ASIC in relation to brokers or intermediaries who are not regulated by AFSA.
Making a complaint will not undo a Debt Agreement. It is important that the regulators receive
complaints so that they are aware of problems in the industry and can take action to possibly
protect other consumers in future.
Complaining to AFSA
It is important that clients make complaints to AFSA when they are dissatisfied with any aspect
of the Debt Agreement process so that AFSA is made aware of the debtor’s perspective. It is
important, however, to manage your client’s expectations about what AFSA is likely to do, if
anything.
Information about lodging complaints is contained in Inspector-General Practice Statement No
10, Complaint handling process for complaints against bankruptcy trustees and debt agreement
administrators, Issued 10 October 2008, updated August 2013 and the AFSA, Resolving
Complaints about Trustees and Administrators, website information, available at www.afsa.gov.
au/about-us/complaints-and-reviews/resolving-complaints-about-trustees-and-administrators.
There must be a breach of the law, an improper use of a power or the non-performance of a duty
before AFSA can take any action. In many cases clients are unhappy with the situation but no
actual breach of law or duty or abuse of power can be identified. Further, even if the relevant breach
or impropriety can be established, AFSA may have the power to discipline the administrator
but no power to undo the harm to the client or otherwise deliver the result the client is looking
for. In some cases the complaint may be about the conduct of AFSA itself. AFSA has no power
to undo a Debt Agreement – only the court has this power (See later section of this Chapter).
If your client’s complaint is about (or includes a reference to) an advertisement or marketing about
Debt Agreements, then you should also refer to Section 18 (l) of the Australian Consumer Law
and Inspector-General Practice Guideline – 1 Debt Agreement Administrators Guidelines relating
to advertising, released March 2011, updated May 2014. Complaints about misleading and
deceptive conduct can also be made to the Australian Consumer and Competition Commission
– see www.accc.gov.au.
➻➻ Note: Problems in relation to ongoing misleading advertising are also specifically mentioned in
the 2011/12 review and additional restrictions/powers may be introduced
If your client was arguably solvent at the time they entered the Debt Agreement you should
complain about both the Debt Agreement Administrator’s conduct and the conduct of AFSA
in accepting the Debt Agreement for processing. See earlier section in relation to insolvency in
Chapter 5 and refer to the Official Receiver’s Practice Statement – Who is eligible to make a debt
agreement? Issued July 2008, updated December 2012, available at www.afsa.gov.au. Information
about AFSA’s complaint handling procedures are found on the website at https://www.afsa.gov.
au/about-us/complaints-and-reviews/complaints-handling-procedure.
Enquiries and complaints can be made to AFSA Regulation and Enforcement by telephone (on
1300 364 785), post, facsimile, e-mail, in person or through the AFSA internet contact e-mail.
There is a complaint form available at https://www.afsa.gov.au/resources/forms/complaintand-review-forms/complaint-form-1. Parts of the sample letters below can be cut and pasted
into the form at Question 5.
Region
Postal Address
Facsimile
QLD, WA & NT
(07) 3360 5402
VIC, TAS & SA
(03) 8631 4840
NSW & ACT
(02) 8233 7805
264
Sample letter – complaint to AFSA
[Insert date]
ITSA Regulation and Enforcement
Dear Sir/Madam
Re: Complaint about [insert name of Debt Agreement Administrator], in relation to Debt Agreement
set up for [client’s name] any identifying reference in relation to the Debt Agreement.
I am assisting [client’s name] in relation to his/her Debt Agreement entered on [insert date and
provide a copy if possible].
My client wishes to complain about the conduct of [debt agreement administrator’s name].
Delete the sections which do not apply. These are examples only. You must include the details
of your client’s particular experience. Add additional information wherever available (including exact
quotes of conversations where possible and attach any additional evidence such as e-mails and
correspondence). Delete paragraphs which do not apply.
On [insert date] my client responded to an advertisement which stated that [insert details of relevant
advertising]. My client claims that this ad/marketing was misleading because [insert details of the
ways in which the client was misled, for example:
1. The advertisement mentioned debt consolidation and did not mention the Bankruptcy Act. As
a result my client believed that s/he was inquiring about refinancing into a consolidation loan
2. The advertisement referred to the Commonwealth Government as if it was a government
sponsored scheme
3. The advertisement mentioned “no interest” but did not mention the Bankruptcy Act – my
client thought s/he would be refinancing to a no interest loan option such as the community
based/government and industry sponsored no interest loans schemes
4. The advertisement referred to being debt free/stress free when in fact my client is struggling
to make the repayments under the Debt Agreement at the same time as facing many of the
limitations associated with bankruptcy. The Debt Agreement does not extinguish debts as
implied by the term “debt free”].
My client was led to believe that the [insert name of Debt Agreement Administrator] representative
[insert name of person who dealt with your client] was acting in his/her best interests when in fact
he was pursuing a “sale” to generate a commission. [Insert further details]
My client was told all the advantages of a Debt Agreement verbally, but only referred to the written
material in relation to the disadvantages. My client has limited literacy skills/speaks English as second
language/cannot read written English. [Insert further details].
My client was required to sign a contract obligating s/he to pay significant fees prior to being given
any information about the true nature of a debt agreement. [Insert further details].
My client told the Debt Agreement Administrator that s/he did not want to proceed with the Debt
Agreement but was told that she would have to pay the upfront fees of $ [insert amount] regardless
and was otherwise pressured to continue with the process. [Insert further details].
My client was never told about alternatives to a Debt Agreement/my client was told misleading
information about the likely effectiveness of the alternatives to a Debt Agreement in his or her case.
[Insert further details].
My client was not insolvent at the time s/he entered the Debt Agreement [insert evidence including
statements etc showing that the client was able to pay their debts as they fell due, or was only in
very temporary difficulty/arrears. For example, there was no default notice, statement of claim,
enforcement action threatened/my client had a good case for a hardship variation under the credit
law without any long term adverse effects on his/her credit record etc.]
My client could not afford the repayments under the Debt Agreement without substantial hardship
[insert evidence including income and expenditure at the relevant time]. I note that the Debt Agreement
Administrator was required to certify that the debtor was able to afford the repayments.
My client was told not to pay his or her creditors so that s/he could pay the Debt Agreement
Administrator’s fees instead. The proposal was rejected and now my client has serious arrears
when this was not the case previously. [Provide amounts and evidence such as statements.]
In all cases explain why your client is in a worse position as a result of the above conduct.
Yours faithfully, etc
Financial Counsellor
Complaining to ASIC (notes and Sample Letter)
In some cases your client may have been misled by a person or organisation that is not a Debt
Agreement Administrator. Sometimes the advertising and initial contact with the client is
done by another entity who acts as a broker, referrer or intermediary for a registered Debt
Agreement Administrator who then administers the agreement. In that case the conduct is not
necessarily regulated by AFSA. If you, or your client, want to complain about an entity that is
not a registered Debt Agreement Administrator, then you should address your complaint to
ASIC (better still – complain to both!).
You can check whether the entity happens to have a credit licence or is a credit representative
of a credit licensee by going to www.asic.gov.au and choosing to search the registers for both
credit licensees and credit representatives. This will also tell you the relevant EDR scheme if
you want to raise a dispute in EDR also. Alternatively you can search the membership lists of
both the Financial Ombudsman Service and the Credit Ombudsman Service. Some entities
recommending Debt Agreements also offer debt consolidations and other services which may
be caught by the credit law or the ASIC Act.
Whether or not the entity you want to complain about is a credit licensee or credit representative,
then you should complain to ASIC anyway. The law in this area is relatively new and it is
important that ASIC can:
■■
■■
Make its own assessment of whether the alleged conduct is in breach of any law it
administers or any licensing requirement
Make recommendations to government in relation to gaps in the law.
You can complain online by going to www.asic.gov.au and selecting how to complain in the top
right hand corner. Alternatively you can write to
Misconduct & Breach Reporting
Australian Securities and Investments Commission
GPO Box 9827
Your Capital City
Or ring 1300 300 630.
266
Sample letter – complaint to ASIC
Insert date
Misconduct & Breach Reporting
GPO Box 9827
Your Capital City
Dear Sir/Madam
Re: Complaint about [insert name of entity you are complaining about and their license/credit
representative number if applicable.]
I am assisting [insert client’s name] in relation to his/her Debt Agreement entered on [insert date
and provide a copy if possible].
My client wishes to complain about the conduct of [insert name of the entity to be complained about].
Insert similar details to those contained in the letter to AFSA above.
Part 3:
Varying, terminating or otherwise ending a Debt
Agreement
When the debtor has experienced a change in circumstances
Case study
A CCLC caller entered a Debt Agreement committing him to $600 per month for several years.
Eight months later he was retrenched. Now he has less than $2,000 in his bank account from the
retrenchment and will not be eligible for social security for another 3 months. His rent alone is
$300 per week. He has not been able to find work and his partner is ill and cannot work.
A debtor may no longer be able to pay in accordance with a Debt Agreement for a number of
reasons, for example:
■■
unemployment or reduction in income/employment
■■
increase in dependents (birth of a child, new dependent adult)
■■
unavoidable increase in essential expenditure (e.g. medical bills, loss of free or supported
housing)
Faced with an inability to meet the payments under a Debt Agreement a debtor has 3 options:
■■
Apply to vary the Debt Agreement
■■
Apply to terminate the Debt Agreement (and possibly present a Debtor’s Petition)
■■
Wait and let the DAA trigger the termination of the Debt Agreement as a result of “6
month default”.
Varying a Debt Agreement
The debtor can apply to vary his or her Debt Agreement by completing a proposal in the approved
form accompanied by an Explanatory Statement, also in approved form (Section 185M). The
form is very similar to the original proposal form in many respects but also requires particulars of
the change of circumstances which has led to the need for the variation and the current status of
the agreement (when was the last payment made/Is the agreement in arrears and by how much?).
It is important that it is absolutely clear what the difference is between the original agreement
and the varied proposal so that creditors can make an informed decision on whether to vote in
favour of the proposal. The Explanatory Statement should also include both negative and positive
changes to the debtor’s financial position (for example a reduction in income as a result of a
birth of a child should also include information about any consequential increase in government
support for the debtor and his or her family).13 Whilst there is no requirement to lodge a fresh
statement of affairs, it may assist in demonstrating the change in the debtor’s circumstances.
The variation proposal can be submitted by the debtor, or the DAA. If it is submitted by the DAA
and there may be an additional fee payable. Clients sometimes report difficulties in getting Debt
Agreement Administrators to put forward variation proposals. This may be because asking the
creditor to accept less, or to accept the money over a longer period, will also involve a decrease
in the amount that can be kept by the Debt Agreement Administrator for administration. If
the debtor is dissatisfied with the DAA, they can approach another DAA to submit a variation
proposal to the Official Receiver proposing the replacement of the current DAA with a new
DAA or lodge a variation to this effect him or herself.
There are no grounds for variation set out in the Act. Commonly the debtor may want to reduce
the monthly repayments, reduce the payments and extend the period, or seek a temporary
suspension in repayments.
See Official Receiver’s Practice Statement Proposal to Vary a Debt Agreement and Withdrawal of a Proposal
by the Official Receiver, issued December 2010, updated December 2012 available at www.afsa.gov.au
13
268
Also, if a debtor’s financial position has improved, they may wish to vary the agreement by
increasing the regular payments or offering a lump sum so that the agreement can be ended
earlier. Understandably, in the majority of cases creditors would readily accept such variation
proposals. However creditors may ask the debtor to increase the total amount payable under
the agreement if there has been a significant improvement in the debtor’s financial position.
If the Official Receiver receives a variation proposal that complies with the requirements of
Section 185M, then it must be processed in accordance with Section 185MA, and the same
voting process applies as for the original Debt Agreement. Whilst the Official Receiver has no
discretion to reject the variation proposal on the basis that it is not in the interests of the creditors,
the Official Receiver can withdraw the variation proposal if a material error or deficiency is
detected in the proposal. This decision can be appealed to the AAT.
Creditors can also apply to vary a Debt Agreement
A creditor who is a party to a Debt Agreement can also apply to vary a Debt Agreement. There
are no grounds for variation set out in the Act but the Official Receiver’s Practice Statement on
the issue suggests that in an improvement in the debtor’s financial position, such as a new job,
or an increase in indebtedness as a result of a shortfall on a secured creditor’s repossession
might trigger a creditor to seek a variation.
The Practice Statement goes on to say that creditors should conduct negotiations with the
debtor in relation to his or her ability to meet any increased repayments before putting forward
a formal proposal:
“A proposal to vary lodged by a creditor relating to payment or action by the debtor, without
documented agreement by the debtor will not be accepted to send to creditors for voting.
A compliance telephone call is made to the debtor and administrator to establish whether
agreement has been obtained. A compliance telephone call is made to the creditor explaining
the practicalities of proposing such a variation without agreement by the debtor.”
If the debtor declines to agree to the variation which would increase the return to creditors
and there has been a significant improvement in the debtor’s financial position (eg Lotto win,
inheritance etc), the creditor(s) can submit a proposal to the Official Receiver that the debt
agreement be terminated.
Getting out of a Debt Agreement
Summary
Getting out of a Debt Agreement is almost impossible unless your client is happy to simply
default and eventually go bankrupt.
A Debt Agreement can be terminated by:
■■
■■
■■
■■
Agreement of the creditors (after a proposal is put forward by the debtor or one of the
creditors)
Default (it will be terminated automatically once the debtor has been in continuous default
for six months or if the agreement has gone more than 6 months past it due date for
completion without a variation having been agreed to)
Termination by the court (usually at the application of a creditor who was either not
included in the agreement or who has evidence the debtor has substantially misled the
creditors in the initial proposal).
Being declared void by the court (this section appears to have potential at least in theory to
assist debtors but has not been used in this way to date).
Applying to terminate a Debt Agreement
A debtor may also apply to terminate a Debt Agreement. The process is the same as for setting
up and varying the agreement – the proposal must be in the approved form and include an
Explanatory Statement setting out the reasons for the termination (Section 185P). If the proposal
appears to be in the approved form it must be accepted for processing (Section 185P) and the
creditors will be asked to vote whether or not to accept the termination proposal in the same
manner as the original proposal (Section 185PA).
The Act does not specify any required grounds for termination. The Official Receiver’s Practice
Statement – Proposal to terminate a debt agreement and withdrawal of a proposal 14 indicates that
where the proposal is made by a creditor there must generally be either:
1. A failure by the debtor to perform the terms of the Debt Agreement, or
2. A failure by the debtor to disclose a material particular affecting the creditors’ original
decision to accept the agreement
The forms required by AFSA list a number of possibilities for termination at the instigation of
the debtor or creditor:
■■
Debtor has ceased payments and is unlikely to recommence
■■
Significant undisclosed unsecured debts
■■
Significant understatement of unsecured debts
■■
Significant undisclosed income or assets
■■
Unemployment / Redundancy
■■
Incurred significant post Debt Agreement debts
■■
Loss of income
■■
Unexpected medical expenses
■■
Loss of supporting payments e.g. free board
■■
Increase in number of dependants
■■
Relationship breakdown and separation
The termination proposal must also contain a detailed status report from the DAA, updated
information about the debtor’s outstanding debts and a statement by the debtor indicating that
they understand that the debts are reinstated to their pre-Debt Agreement amounts plus interest,
less any amounts paid to creditors under the Debt Agreement (not amounts paid to the DAA
for set up administration), and that enforcement action may recommence.
Again, the Official Receiver may declare a termination proposal withdrawn if, before the
deadline for acceptance and before acceptance, the Official Receiver becomes aware that the
information contained in the proposal document is wrong or deficient in a material way, or that
the circumstances of the debtor have changed in a significant and relevant way not envisaged by
the proposal (Section 185PD). This decision can be reviewed by the AAT.
Creditors have only 14 days to vote (from acceptance and recording on the NPII) on a termination
proposal unless proposal was lodged in December in which case the voting period is 21 days
(Section 185 definitions).
Official Receiver’s Practice Statement – Proposal to Terminate a Debt Agreement and Withdrawal of a Proposal, issued July 2008, updated August 2013 available at www.afsa.gov.au
14
270
Proposal to terminate by the debtor
If a Debtor wishes to propose to terminate a Debt Agreement, they must be warned that they
will not be able to propose another Debt Agreement for 10 years (Section 185C(4)).
The Official Receiver’s Practice Statement only mentions one circumstance in which the debtor
may wish to terminate the agreement – that is, that the debtor wishes to lodge a Debtor’s
Petition rather than continue with the Debt Agreement. However, the debtor may submit a
termination proposal on the grounds that there has been a significant decrease in their financial
circumstances and they can no longer make the payments required under the Debt Agreement.
It would then be up to the creditors if they wished to pursue enforcement action (or effectively
force the debtor into bankruptcy).
Proposal to terminate by a creditor
A proposal to terminate by a creditor must include a current status report by the DAA to ensure
that up-to-date agreements are not generally terminated. A failure to distribute a dividend by the
DAA is not a reason to terminate if payments by the debtor are up to date. In order to terminate
an up-to-date agreement the creditor must be able to demonstrate a valid reason such as the
“non-disclosure of income, debts or assets which materially affect the dividend rate to creditors”.15
Termination as a result of a 6 month arrears default
A DAA must notify all the creditors who are party to a Debt Agreement within 10 working days
if the debtor is in arrears for a period of 3 consecutive months (Section 185LB). If the debtor is
in default for a period of 6 consecutive months, then the DAA must notify the Official Receiver
within 10 working days. This may include a debtor making no payments at all for 6 calendar
months past the due date for a payment, or 6 calendar months have passed since the date for
completion of the agreement and the agreement has not been completed. It is not six months
since the last payment, but six months after the next payment was due and unpaid.
In the case of passing the date for completion of the Debt Agreement, this will usually occur
because the debtor has continued to make some payments (and has not therefore incurred a
previous six-month arrears default) but pays less than the required amount and/or misses some
payments. In practice this means that a debtor must either get completely up to date within 6
months of the due date for completion, or get a variation approved within this time, in order to
avoid a termination of the agreement at this late stage.
If the agreement is terminated, the debtor will lose any benefit the agreement offered in terms
of savings on capital and interest (including interest accrued since the agreement was entered),
while having all the disadvantages of a listing on the NPII and their credit report continue. They
will also face potential enforcement action, including potentially a Creditor’s Petition.
Once the Official Receiver has been notified of a 6 month arrears default, and the Official Receiver
is satisfied that the alleged default has in fact occurred, then the Official Receiver must declare
in writing that the Debt Agreement is terminated and record that fact on the NPII (Section
185QA). The Debt Agreement is officially terminated on the date the termination is recorded
on the NPII (Section 185QA).
Official Receiver’s Practice Statement – Proposal to Terminate a Debt Agreement and Withdrawal of a Proposal, issued July 2008, updated August 2013 available at www.afsa.gov.au
15
The Official Receiver may make compliance calls to the debtor and/or administrator to confirm
the facts and seek evidence in the event of a dispute about the facts. However, there is no discretion
for the Official Receiver to decide not to terminate a Debt Agreement provided the 6 month
arrears default has occurred.16
Termination as a result of the debtor’s bankruptcy
A Debt Agreement is automatically terminated upon the bankruptcy of the debtor (Section
185R). Although a debtor generally cannot present a Debtor’s Petition while in a Debt Agreement
(Section 55(5A)) and can’t be personally subjected to a Creditor’s Petition (Section 185K), he
or she may become bankrupt as a result of, for example:
■■
■■
Obtaining permission of the Court to present a Debtor’s Petition while subject to a Debt
Agreement
A Creditor’s Petition being presented against a partnership of which the debtor is a
member.
Termination of a Debt Agreement by Court Order
The debtor17, Official receiver or a creditor of the debtor (but not necessarily a party to the
Debt Agreement) can apply to the court for an order terminating a Debt Agreement (Section
185Q(1)). The court can make the order if it is satisfied that (Section 185Q(4)):
■■
■■
■■
The debtor has failed to carry out a term of the agreement AND it is in the creditors’
interests to terminate the agreement;
or
That carrying out the agreement would cause injustice or undue delay to the creditors or
the debtor;
or
That for any other reason the agreement should be terminated and that it is in the
creditor’s interest to do so.
If the application is made by a creditor, then a simultaneous application for a sequestration order
against the debtor may also be made (Section 185Q (2)). The court may make the sequestration
order if it finds sufficient grounds for terminating the Debt Agreement (Section 185Q (5).
An application for a sequestration order at the same time as a termination order is taken to be
presenting a Creditor’s Petition against the debtor, but some of the usual requirements for a
Creditor’s Petition do not apply. For example, there is no requirement that the debtor owe more
than $5,000 for this to occur – although this is unlikely unless the debtor has significant assets
because of the legal costs involved.
16
Official Receiver’s Practice Statement – Six Month Arrears Default Termination of a Debt Agreement, issued July 200, updated
August 2013, available at www.afsa.gov.au
Or the debtor’s representative if the debtor has died. Other references to the debtor in this section include the
debtor’s representative or estate.
17
272
Applying to void a Debt Agreement
The debtor, Official Receiver or a creditor of the debtor (but not necessarily a party to the Debt
Agreement) can apply to the court for an order that all, or a specified part, of a Debt Agreement
is void (Section 185T(1)). The court can make the order if it is satisfied that (Section 185T(2)):
■■
■■
■■
There is doubt on a specific ground that the Debt Agreement was not made in accordance
with the relevant sections of the Act;
or
There is doubt on a specific ground that the Debt Agreement accords with the relevant
sections of the Act;
or
The statement of affairs lodged with the Debt Agreement was deficient because it omitted
a material particular or because it was incorrect in a material particular.
The court must not make a Debt Agreement void, or part of it void, on grounds of noncompliance
with the Act if there is substantial compliance – that is minor technical noncompliance will be
insufficient to have the agreement declared void (Section 185U (2)). Similarly the court must
not declare an agreement void on the grounds of a deficiency in the statement of affairs unless
the court it is satisfied that it is in the interests of the creditors to do so (Section 185U (3)).
The court can make whatever other orders it sees fit in relation to the Debt Agreement, including
ordering a person to pay another person compensation of a specified amount (Section 185U(5)
& (6)). In the case where the debtor considered that they had been misled by the DAA when
proposing their Debt Agreement, an application by the debtor to have it declared void would
appear preferable to applying to have it terminated because of the possibility of being awarded
compensation if the application was successful. However, given the comprehensive nature of
the prescribed information given to the debtor as part of the Debt Agreement proposal process
(and signed by the debtor), the debtor would have to have fairly good evidence of the misleading
statements/conduct, and/or have personal attributes that made it difficult for them to comprehend
the prescribed information, in order to have a good case.
A debtor who was not insolvent at the time of making a Debt Agreement proposal could, in
theory at least, apply to the court to have the Debt Agreement declared void. On the other hand,
as AFSA usually relies on a statement signed by the client to the effect that they cannot meet
their debts as they fall due, and DAA’s are quite adept at dictating a form of words sufficient
to satisfy AFSA, then the debtor may risk exposing him or herself to criticism by the court for
signing a false statement or even prosecution under Section 267 of the Act.
So far this section of the Act has only been used by creditors seeking to void a Debt Agreement
and usually make the debtor bankrupt.
An order cannot be made declaring the Debt Agreement void, or partly void, after all the
obligations created by the agreement have been discharged (Section 185T(3)). If a creditor is
applying to make a Debt Agreement void then the creditor may also apply for a sequestration
order. Similar rules apply as in relation to terminating a Debt Agreement and applying for a
sequestration order (see above).
Notes
274
12
PERSONAL INSOLVENCY AGREEMENTS
PROPOSAL PROCESS, VARIATION, TERMINATION AND
COMPLAINTS
Content
Part 1: What is the process for entering a PIA?
275
Part 2: Variation of a PIA
278
Part 3: Termination of a PIA
278
Part 4: Complaints
279
Summary
This Chapter does not cover the advantages and disadvantages of a Personal Insolvency
Agreement (“PIA”). For information about what a PIA is, the implications of a PIA and who may
be suitable for a PIA see Chapter 5.
This section covers:
■■
The process of entering a PIA
■■
Varying a PIA, terminating a PIA
■■
Making a complaint about a Controlling Trustee or a trustee administering a PIA
This section is very brief because financial counselling clients are rarely suitable for a PIA.
Contact AFSA for more information or an appropriate referral.
Part 1:
What is the process for entering a PIA?
Step1 – Appointing a Controlling Trustee
After getting advice, the debtor appoints a Controlling Trustee by signing a Section 188 Authority.
The Authority becomes effective when the proposed Controlling Trustee signs it. Only a registered
trustee, a suitably qualified solicitor or the Official Trustee (AFSA) can be appointed by law
(although in practice the Official trustee does not accept such appointments).
The debtor must be given a copy of the prescribed information before a Controlling Trustee can
consent to accept the appointment.
Normally, the proposed Controlling Trustee will consult with the debtor in the first instance and
assist in the formulation of the terms of the proposal to be made to creditors. Also, the debtor
and/or the proposed Controlling Trustee will ‘sound out’ the major creditors to ascertain whether
they will give the proposal favourable consideration. If the major creditors indicate that they will
not accept the proposal there is little utility in proceeding with the proposal.
The debtor must lodge with the proposed Controlling Trustee, as statement of affairs and a draft
PIA proposal plus a copy of the prescribed information containing a signed acknowledgment
by the debtor that they have received and read it.
➻➻ Note: The prescribed information in Part X is different to the prescribed information incorporated
into a Debtor’s Petition. It is the duty of the proposed Controlling Trustee to give the debtor the
prescribed information.
The Controlling Trustee must give the Official Receiver a copy of the Authority and statement
of affairs within 2 working days of the Authority becoming effective. Normally, the Official
Receiver is also given a copy of the draft PIA.
Step 2 – Preparing the Proposal and Report to Creditors
The Controlling Trustee takes control of the debtor’s property, looks into the debtor’s affairs,
examines the proposal and prepares a detailed report to creditors plus an invitation to a meeting
of creditors to consider the debtor’s PIA Proposal. The meeting must be must be held within
25 working days of the Controlling Trustee’s appointment (30 in December). The meeting is
advertised on the AFSA website (www.afsa.gov.au) or in local and national newspapers.
The main purpose of the report is to inform creditors of the rate of a dividend (that is, how
many cents in the dollar) they can expect if they accept the proposal compared with the rate of
dividend they would receive if the debtor went bankrupt instead. The Controlling Trustee makes
a recommendation as to whether he or she is of the view that it is in the interests of the creditors
to accept the proposal. The creditors must receive the Report no later than 10 days before the
meeting of creditors. Accordingly, the Controlling Trustee has a very limited time span in which
to undertake the investigations and compile the comprehensive report to creditors. Most of the
investigating time is spent on determining what could be expected from the debtor’s bankruptcy
which would involve possible voidable antecedent transactions and income contributions.
Due to the very short period of time available to conduct the investigations and compile the
report, a large number of the Controlling Trustee staff spend considerable time assisting in the
exercise. Consequently, the Controlling Trustee’s remuneration and expenses can be substantial
if the debtor’s affairs are complex. Generally, in Sydney an upfront payment of not less than
$15,000 is often required.
Step 3 – The creditors’ meeting
The meeting of creditors is held to consider the debtor’s proposal. Creditors can attend in person,
by proxy or attorney or by telephone if they cannot attend in person. The debtor must also attend
the meeting unless excused by the Controlling Trustee.
Creditors may ask questions of the Controlling Trustee and pass on information about the
debtor’s affairs (such as information the creditor thinks is relevant and may not have been
disclosed by the debtor).
Likewise, the creditors can question the debtor and discuss the proposal before voting. For the
PIA to be accepted, a ‘ special resolution’ must be passed, which comprises at least the majority
of unsecured creditors (by number) who represent at least 75% of the dollar value of the total
debts of the creditors who attend the meeting and vote on the resolution.
Accordingly, the debts of those unsecured creditors who either do not attend the meeting or if
they attend, they abstain from voting, are not taken into consideration for resolution purposes.
Large institutional creditors often abstain from voting, which can leave smaller creditors with
the deciding vote.
The debtor can be given the opportunity at the meeting to increase his or her offer. If all of the
known creditors are represented at the meeting (usually unlikely), the creditors can vote on
276
the increased offer. However, in the absence of all creditors, the meeting can be adjourned to
enable all the creditors to be informed of the increased offer and given an invitation to attend
the adjourned meeting to vote on the increased offer.
Step 4 – voting
Acceptance
If a special resolution is passed at the meeting to accept the proposal, creditors then vote on
the appointment of a trustee to administer the PIA. The trustee of the PIA must have lodged
a written consent to act as trustee of the PIA with the Controlling Trustee prior to meeting to
vote on the proposed PIA. Commonly, the Controlling Trustee will also be appointed as trustee
to administer the PIA. The trustee can be either the Official Trustee or a registered trustee – it
cannot be a solicitor unless they are also a registered trustee.
The trustee of the PIA and the debtor (and any other person who is a party to the PIA such
as the provider of the funds to be offered to creditors) must execute the PIA (in the form of a
deed) within 21 days of the resolution being passed. Once the PIA is executed, all creditors are
bound by the terms of the Personal Insolvency Agreement.
The rights of secured creditors to repossess and/or sell their security are not affected.
Rejection
If the debtor’s proposal is rejected, the creditors may vote in favour of the debtor becoming
bankrupt by presenting a Debtor’s Petition.
However, the debtor is not bound to do so.
Alternatively, the creditors may express no opinion on the matter and leave open the usual options
such as the debtor filing a Debtor’s Petition or individual creditors pursuing enforcement action,
including but not limited to bankruptcy proceedings. As noted in Chapter 5, the bankrupt has
committed a readily identifiable act of bankruptcy on which a creditor can base a Creditor’s
Petition (by appointing the Controlling Trustee), which would be almost impossible for the
debtor to successfully oppose.
Where the proposal has been rejected or lapses, the debtor can only appoint another Controlling
Trustee after six months have passed or with the leave of the court (to do so within a shorter
period).
If nothing has eventuated after 4 months, the Controlling Trusteeship comes to an end and the
debtor resumes control of his or her property.
Step 5 – Administration of the PIA
The trustee of the PIA conducts the administration in much the same way as administering a
bankrupt estate. Where applicable the trustee will sell assets, receive periodic payments, recover
funds/property from void antecedent transactions (where these apply), determine the creditors’
claims, pay a dividend to unsecured creditors, and then finalise the administration.
The trustee’s remuneration for the administration of the PIA is usually approved at the meeting
of creditors and is usually capped at a maximum amount. If additional and unexpected work is
required the trustee seeks approval from the creditors for the additional remuneration.
If creditors do not approve the remuneration in either of the above instances, the trustee can
have the Delegate of the Inspector-General decide the amount of the remuneration.
When the trustee’s remuneration reaches either the amount approved by creditors or decided by
the Delegate, the trustee is required to notify creditors by way of a Remuneration Claim Notice,
which also informs creditors and the debtor that they can apply to the Delegate for a review of
the trustee’s remuneration.
There is also a government levy, called a realisations charge, (currently 6% as at 1 July 2014)
payable on any funds realised by the trustee. The interest earned on the funds held in the bank
account for the PIA is payable to the government.
Part 2:
Variation of a PIA
The Act provides that creditors can approve a variation of a PIA by way of special resolution
and with the debtor’s written consent. A process is also prescribed for variations proposed by
the trustee (described below).
In practice, the debtor usually puts forward a proposal to the trustee to vary the terms of the
PIA that is then presented by the trustee using the following process.
The trustee must give a notice to all creditors (who would be entitled to receive notice of a
creditors’ meeting) including:
■■
■■
■■
A statement of the reasons for the variation and the likely impact it will have on creditors
Specification of a date (at least 14 days after the notice is given) from which the proposed
variation will take effect
State that any creditor may, by written notice to the trustee at least 2 days before the
specified date, object to the variation taking effect without there being a meeting of
creditors.
If the terms of the variation are reasonable, creditors generally raise no objection. The variations
usually relate to a reduction of the amount of periodic payment with a corresponding increase
in the number of payments in which case, the total amount paid remains the same. In some
instances, a lump sum might be offered instead of the remaining periodic payments.
If an objection is raised then a creditors’ meeting will need to be called to vote on the proposal
(or the variation may not be pursued).
Part 3:
Termination of a PIA
A PIA can be terminated in a number of ways:
1. The occurrence of an event stipulated in the PIA such as the unemployment or death of
the debtor;
2. Following the default of a term of the PIA, the trustee can notify creditors that the PIA
will be terminated at the expiration of a certain date (normally 14 days from the date of
the notice) unless at least 2 days before that date a creditor (or creditors) request that the
trustee hold a meeting to consider the termination;
3. The passing of a resolution by creditors that the PIA be terminated (usually following a
default of the terms of the PIA);
4. By an order of the court on the application of the debtor, the trustee or a creditor (or
creditors).
278
Part 4:
Complaints
Complaints about Controlling Trustees and administering trustees in relation to PIAs are handled
by AFSA Regulation. Information about lodging complaints is contained in Inspector-General
Practice Statement No 10, Complaint handling process for complaints against bankruptcy trustees
and debt agreement administrators, Issued 10 October 2008, updated 1 February 2013 AFSA,
Resolving Complaints about Trustees and Administrators website information, available at
www.afsa.gov.au/about-us/complaints-and-reviews/resolving-complaints-about-trustees-andadministrators.
Enquiries and complaints can be made to AFSA Regulation & Enforcement by telephone (on
1300 364 785), post, facsimile, e-mail, in person or through the AFSA internet contact e-mail.
There is a complaint form available at https://www.afsa.gov.au/resources/forms/complaintand-review-forms/complaint-form-1.
Region
Postal Address
Facsimile
QLD, WA & NT
(07) 3360 5402
VIC, TAS & SA
(03) 8631 4840
NSW & ACT
(02) 8233 7805
Notes
280
13
TOOLS AND RESOURCES
Contents
Checklists
281
Client Handout
286
Index of Sample letters and other resources in toolkit
288
Useful contacts
288
Checklists
Notes on using checklists
■■
■■
■■
Comprehensive files notes to accompany the checklist are essential. The file note needs to
summarise what you told the client and any specific instructions the client gave you. The
checklists in this kit provide a space for file notes to be attached. You should add as many
pages as you need.
Do not just tick boxes. Your service needs to have a process based on which it can be
confidently asserted that relevant matters have been adequately explained to clients. For
example, you can cross boxes where an item has been explained but is not particularly
relevant, tick where an issue is relevant and/or add a notation to indicate there is an
accompanying file note in relation to a particular issue. The more customised to the client
the better. An identical list with identical ticks or crosses in every box on every file may be
evidence of nothing more than the staff members’ ability to tick boxes.
Getting your client to sign a checklist is not sufficient evidence that all the items in the
list have been adequately explained – the client does not know what you are supposed
to explain and cannot therefore be the judge of whether you have done so adequately. A
checklist is an aid, to make sure you don’t forget anything and can constitute one piece of
evidence to support that you have proper systems in place to give accurate and up-to-date
information.
Acknowledgement
The following Bankruptcy Checklist is based on both the Lismore and District Financial
Counselling Bankruptcy Checklist and the Sharkwatch Bankruptcy Checklist frequently updated
and circulated by Wesley Mission’s National Financial Counsellors’ Resource Service with some
additions.
Bankruptcy checklist
Client Name
Date
Requirements
££Connection to Australia
££Possible referral to court by AFSA (joint petitions and
partnerships)
££May be rejected where it appears debts can be paid
££Increased risk of rejection where previous bankruptcies
££Forms will be returned and not processed if incorrect or
incomplete
££Debtor must read the Prescribed Information (or have it
read to them)
General warnings
££Penalties for incorrect, misleading information or material
omissions
££Data will be cross-matched (e.g. with ATO)
££Parts B, C & D of the SOA on public record ££Suppression of address – applications where debtors
have genuine fear for physical safety
££Generally bankruptcy cannot be undone only annulled at
significant cost
Duration of bankruptcy & its effects
££3 years and 1 day unless extended
££Can be extended by objection for 5 or 8 years for
breaches
££Continues indefinitely if no SOA filed (debtors made
bankrupt by court)
££NPII listing for life
££Credit listing 5 years from start or 2 years from end,
whichever is longer
What sort of debts are covered (provable)?
Note: All debts, provable and not, secured or not must be
listed in the SOA
££Individual debts
££Joint debts
££Unsecured debts – credit cards, personal loans etc.
££Centrelink (if no fraud)
££Interest/penalties only on Child Support
££Private debts (friends & family)
££Rental arrears
££Energy debts
££Telecommunications debts
££Tax debts
££GST debts
££Guarantees (for loans obtained by others)
££Personal guarantees given for company/business debts
££Contingent liabilities (e.g. goods or car lease entered prior
to bankruptcy but later defaulted on)
££Car accident with judgment or exchange of letters that
liquidate debt
££Genuinely forgotten debts can be added later
Worker:
File no:
What sort of debts are not covered (not provable)?
Can be enforced against the debtor
££Most court fines
££Director’s fines
££Debt incurred after date of bankruptcy
££Student assistance (HECS/HELP)
££Unliquidated debts
££Student Supplementation loan
Cannot legally be enforced against debtor
££Statute barred debts
££Illegal debts (debts to drug dealers and loan sharks)
Tricky debts
Secured debts — (repossession can occur, only provable
if security sold for shortfall):
££Home loans
££Car loans
££Water and council rates
££Debts incurred by fraud (e.g. Centrelink, enforcement
ceases during bankruptcy but can recommence
afterwards as debtor not released by discharge, possible
prosecution)
££Bail bonds
££Debts on recognisance
££Fines where license or registration at risk (waiver may be
available)
££Child support (provable, enforceable against the client,
not released upon discharge)
££Gambling debts (provable but possible prosecution)
££Debts to government or financial institutions with set off
rights (i.e ATO and future refunds if tax liability)
££Overseas debts
Advantages
££Fresh start
££Harassment stops
££Legal proceedings stop (for provable debts)
££Keep protected property (see below)
££Travel in Australia allowed
££Voluntary payments towards debts can be made
££Goods seized by Sheriff returned (if protected and not
already sold)
££Garnishee of wages/salary stops
££Sole traders may be able to continue in self-employment in
some circumstances
➻➻ Note: Indexed amounts are available at www.afsa.gov.au and updated regularly. This checklist is only a guide. It
is the responsibility of the worker using the list to ensure that the information provided to clients is comprehensive,
accurate and up-to-date.
282
Bankruptcy checklist (continued)
Client Name
Date
Protected Property
Note: All property must be listed in the SOA where
appropriate whether protected or not.
££Ordinary clothing
££Necessary household furniture & effects
££Motor vehicle up to $________
££Property belonging to non-bankrupt spouse/partner/cooccupant
££Property held in trust for others (subject to conditions)
££Tools of trade worth up to $________
££Wedding rings, jewellery and other items of sentimental
value in some circumstances
££Life assurance or endowment policies
££Superannuation (in a regulated Super fund)
££Some Rural Assistance Grants (generally older)
Protected money including:
££Proceeds of life insurance or endowment policies received
on or after date of bankruptcy
££Funds withdrawn from super on or after date of
bankruptcy
££Personal injury compensation received by the bankrupt
££Property purchased substantially wholly with protected
money (bankrupt’s name on title)
Disadvantages
££Difficulties obtaining credit (see above re NPII and credit
file)
££All property/assets go to bankrupt estate (real estate,
vehicles, shares, antiques, expensive jewellery)
££Savings over $1000 – $2000
££Tax refund (pre-bankruptcy earnings)
££Property now owned by others (undervalue
transactions, transfers to defeat creditors)
££Money already paid to creditors (preferential
payments)
££Business usually sold or liquidated
Property acquired during bankruptcy– vests in Trustee,
potential annulment and return of surplus if sufficient amount:
££asset purchases
££gifts
££winnings
££inheritances
££Must continue to pay secured debts or forfeit security
property
££Can’t be director of a company/incorporated organisation
or involved in its management (must resign directorship)
££Disclosure obligation when borrowing/passing cheques
etc. over $__________
££May be required to pay bond to secure utilities and
communications services
££May have difficulties obtaining some types of insurance
££May have difficulty securing rental property ££Guarantors and joint-debtors still liable
££Restriction on ability to take legal action
££Impact on intellectual property/copyright
££Migrants and sponsors of migrants need to check impact
on visas/immigration status
Real Estate (tricky issues)
££Bankrupt’s interest vests in Trustee
££Joint owners can buy Trustee’s share or property will be
sold
££Name on title not full story – transfers from bankrupt,
significant contributions by bankrupt
££Trustee has many years in which to sell (even after
discharge)
Worker:
File no:
££Discharged bankrupt can offer to buy back equity at
discharge if not already sold
££Pros and cons of retaining negative equity property
££Retain equity in Defence Service home loan (provided not
paid out in full during bankruptcy)
££If property might be protected evidence will be required
££May be able to recover protected money even if property
not fully protected
Travel restrictions
££Passport may be taken
££Can’t leave Australia without Trustee’s consent
££Fee payable to seek consent $______
££Will need to plan ahead and have good reason for travel
££Consent may be subject to conditions
££Contribution payers will need to pay in advance Contributions
££Contributions payable if earn above prescribed amount
££Number of dependents relevant to prescribed amount
££Salary sacrifice/fringe benefit arrangements grossed up
££Must keep Trustee informed of changes of circumstances
££Deemed income/ non-monetary benefits counted as
income
££Extensive power to enforce payment (objection to
discharge, supervised accounts, garnishees)
££Hardship available in limited circumstances
££Income contributions can be reassessed even after
discharge (where there has been non-disclosure)
Employment
Note: Debtor should make their own enquiries of any relevant
professional body or licensing/registration authority
££Prohibition on being a director/managing a corporation
££Armed forces
££Police
££Some public service
££Lawyers
££Partnerships
££Accountants
££Tax Agents
££Sheriff
££Real estate agent
££Gaming license
££Politicians
££Finance industry
££Key personnel under Aged Care Act
££Subcontractors who need licence
££Other licensed or registered trades or professions
Other
££Prosecution for non-compliance
££Possible referral to private trustee by AFSA
££Power of Attorney
££Need to keep trustee informed of changes of name,
address, income and property
££Annulment (upon payment of debts, interest and
substantial fees) ££Annulment noted on public record but bankruptcy remains
on record
££Composition or arrangement
Alternatives to Bankruptcy Checklist
Client Name
Date
Declaration of Intention
Temporary freeze on enforcement of debts
Advantages
££21 days breathing space
££No fee
££Don’t have to proceed to bankruptcy (but can lead to
Creditor’s Petition)
££Stops court enforcement (garnishee, sheriff seizure of
goods on writ)
££Time to negotiate or get advice
££No NPII or credit report listing
Disadvantages
££Act of bankruptcy (can lead to Creditor’s Petition)
££Need to complete mini-statement of affairs
££Gives a point in time snap shot of debtor’s affairs for future
reference by Trustee if debtor does go bankrupt eventually
For more information see Chapters 5 & 7
Debt Agreement
Worker:
File no:
££Can (and often does) last longer than bankruptcy
££Can cause hardship (will have to pay in accordance
with agreement even though not earning enough to be
required to pay contributions in bankruptcy)
££Difficult to change when circumstances change – variation
process similar to setting up agreement in the first place
££Not suitable for Centrelink recipients
££Serious non-completion risk (all advantages lost if not
completed and bankruptcy likely)
Personal Insolvency Agreement
Lump sum payment via trustee and/or assignment of
assets to trustee or periodic payments via trustee
Requirements to enter
££Insolvency
££Connection to Australia
££No other Personal Insolvency Agreement in the previous
six months
Advantages
££Insolvency
££Must earn less than $__________
££Unsecured debts less than $__________
££Assets (equity only) less than $____________
££No bankruptcy, Debt Agreement or PIA in last 10 years
££Will be released from interest and often part of debts if
completed
££Home and other assets may be able to be retained
(depending on agreement)
££Antecedent transactions may not apply (depending on
agreement)
££Business may be able to keep trading
££Future acquired property will not usually be affected (gifts,
winnings, inheritances)
££No restrictions on overseas travel
Advantages
Disadvantages
Usually regular single repayment towards debts up to an
agreed amount
Requirements to enter
££Will be released from interest (from the date of the Debt
Agreement) and sometimes part of principal debts if
agreement completed
££Can keep home and other unprotected assets
££Can be a director of a company (can’t if bankrupt or in
PIA)
££Can hold key personnel role under Aged Care Act (can’t if
bankrupt or in PIA)
££Antecedent transactions don’t apply (undervalue
transactions, transfers to defeat creditors etc.)
££Future acquired property will not usually be affected (gifts,
winnings, inheritances)
££No restrictions on overseas travel
££Very substantial fees (min.$10,000 – 15,000)
££No refunds if not accepted or completed
££Listed on NPII forever
££Listed on credit report for at least 5 years
££Cannot remain a director of a company (until agreement
obligations completed in full)
££Many similar consequences to bankruptcy including
impact on ability to get credit, access to services,
insurance and potential impact on some forms of
employment
££Non-completion risk – bankruptcy likely
Disadvantages
££Substantial fees upfront and ongoing
££No refunds if not accepted or not completed
££Listed on NPII forever
££Listed on credit report for at least 5 years
££Many similar consequences to bankruptcy including
impact on ability to get credit, access to services,
insurance and potential impact on some forms of
employment
➻➻ Note: Indexed amounts are available at www.afsa.gov.au and updated regularly. This checklist is only a guide. It
is the responsibility of the worker using the list to ensure that the information provided to clients is comprehensive,
accurate and up-to-date.
284
Bankruptcy by Creditor’s Petition Checklist
Client Name
Date
Most common process for making a person
bankrupt:
●●Obtain a judgment debt for $5,000 or more
●●Apply for and serve a Bankruptcy Notice (within 6 years of
date of judgment)
●●File and serve a Creditor’s Petition (within 6 months of the
expiration of the Bankruptcy Notice)
Other acts of bankruptcy that a Creditor’s Petition can be
based on (these are examples – there are many others):
Debt Agreement proposal
Debt Agreement termination
Execution of a writ on
a judgment against the
person’s property
No judgment required
Judgment may be more
than 6 years old
Where is your client up to in the process?
££Judgment but no Bankruptcy notice – Go to 1.
££Bankruptcy Notice – Go to 2.
££Creditor’s Petition – Go to 3. Note
If your client has failed to comply with a Bankruptcy Notice
or the date for a Creditor’s petition hearing has passed,
contact the court (or use the Commonwealth Courts Portal)
to determine whether a sequestration order has already been
made. If yes, refer for immediate legal advice. Time limits
apply.
1. Options after judgment but before issue of a
Bankruptcy Notice:
££Pay (all or as much as possible – get debt below $5,000 if
possible)
££Apply to pay by instalments (and seek a stay of
enforcement if not automatic)
££Get legal advice about setting judgment aside (if obtained
by default) or appeal if obtained at hearing
Note
You can negotiate an informal repayment arrangement but
this will not prevent the issue of a Bankruptcy Notice. Only a
stay of enforcement in the original court will prevent the issue
of a Bankruptcy Notice.
2. Options after a Bankruptcy Notice has been served
(personal service is NOT required):
££Pay within time limit, usually 21 days (pay all or as much
as possible – get debt below $5,000 if possible)
££Negotiate repayment arrangement
££Get legal advice about setting judgment aside (if obtained
by default) or appeal if obtained at hearing AND applying
for time to extend compliance with the Bankruptcy Notice
Worker:
File no:
Note
You can still apply to pay by instalments after a Bankruptcy
Notice has been issued but this will not prevent the creditor
from continuing with bankruptcy proceedings.
3. Options after a Creditor’s Petition has been served
(personal service is required unless a substituted
service order has been made by the court – the debtor
may only get a few days notice):
££Pay (all or as much as possible – get debt below $5,000 if
possible) – note that the creditor may not accept payment
at this late stage
££Negotiate
££Turn up to court or apply for permission to attend by
telephone (debtors should never ignore a Creditor’s
Petition unless they are content to be made bankrupt)
££Seek adjournment to pay or seek legal advice
Grounds for a sequestration (bankruptcy) order to be made
by the court:
●●Act of bankruptcy less than 6 months before the filing of
the Creditor’s Petition
●●Debt of over $5,000 still owed (can be to a different
creditor, a group of creditors, or other amounts owed to
original petitioning creditor provided debts were owed
prior to the act of bankruptcy relied on)
●●Creditor’s Petition validly served
Debtor can oppose the Creditor’s Petition in some
circumstances but must get legal advice.
Warnings to clients:
££Legal fees accumulate with every document served
and every court appearance (whether or not the debtor
appears)
££Trustees fees start to accumulate as soon as a
sequestration order is made – notify the Trustee if the
client is likely to seek a review of the order or appeal
££Get urgent legal advice if a sequestration order has
already been made – time limits apply
££File a statement of affairs as soon as possible after a
sequestration order has been made, even if the bankrupt
intends to apply for a review or appeal because –
●●The period of bankruptcy (3 years and 1 day) does not
start to run until a statement of affairs has been filed
●●The bankrupt’s chances of successfully getting a
sequestration order set aside can be jeopardised by
failure to supply a statement of affairs
●●The bankrupt can be compelled to complete a
statement of affairs and may be at risk of prosecution
for non-compliance.
For more information see Chapter 10.
➻➻ Note: This checklist is a guide to assist you to explore your client’s options. You should also recommend urgent
legal advice.
Client handout
Information for bankrupts
Now you are bankrupt you need to do the following:
■■
Lodge a statement of affairs if you have not already done so (this may apply if you have
been made bankrupt by the court). Your time until discharge does not start ticking until
your statement of affairs has been satisfactorily completed and is accepted by the Official
Receiver at AFSA.
■■
Cooperate with your trustee in bankruptcy (the Trustee)
■■
Complete any paperwork required by the Trustee
■■
Inform the Trustee in writing if you change your name or begin using a different name
■■
Inform the Trustee in writing if you change your address or contact numbers
■■
Inform the Trustee in writing if your income changes
■■
■■
■■
■■
Inform the Trustee in writing if you acquire money (above your declared income) or
property (for example an inheritance)
Pay your income contributions (if there are any assessed as payable)
If you receive an insurance payout for damage to, or loss of, property that vested in
the Trustee (or would have if it had not been lost/stolen/destroyed) you must give the
proceeds of the claim to the Trustee
Give any tax refund for the pre-bankruptcy period to your Trustee
You also need to do the following if requested by your Trustee:
■■
Hand in your passport
■■
Give the Trustee access to your accounts and financial records
■■
Attend a meeting of creditors
YOU MUST NOT:
■■
■■
■■
■■
■■
286
Travel outside Australia (or leave Australia) without the Trustee’s written permission
Borrow over $ [insert the current threshold amount] without telling the person/company
you are borrowing from that you are bankrupt (this also includes consumer leases and hire
purchase contracts over this amount)
Obtain goods and services on credit where the value is over $ [insert the current threshold
amount] without telling the person/company you are getting credit from that you are
bankrupt
Pass a cheque for over $ [insert the current threshold amount] without telling the person/
company you are making the cheque payable to that you are bankrupt
Offer to supply goods or services worth more than $ [insert the current threshold
amount] without telling the person/company you supplying the goods or services to that
you are bankrupt
■■
■■
■■
■■
■■
■■
Carry on a business in any name except the name that appears on your bankruptcy
records, unless you inform people that you deal with that you are bankrupt
Make misleading statements to the Trustee, leave out important details when supplying
information, or otherwise mislead or deceive the Trustee
Commence legal proceedings except in relation to personal injury (if you are served with
court documents inform the Trustee)
Destroy property or financial records
Try to sell, give away or otherwise deal with property that has vested in the Trustee – this
includes a home which you are paying off (unless it is protected property)
Run away or conceal your whereabouts
Some problems which may arise while you are bankrupt
■■
■■
■■
■■
■■
■■
■■
■■
■■
■■
You cannot afford your income contributions because of genuine hardship (medical
expenses for example)
Your accounts have been frozen by the Trustee
You are having income deducted or other action taken against you because of unpaid
contributions
You cannot get permission to travel
You believe that money or property that the trustee is taking/demanding should be
protected in bankruptcy
You want to claim on an insurance policy (or have received a payout) and you are not sure
whether the proceeds of the claim should go to the Trustee or are protected
You are struggling to pay secured debts (such as your home or car loan)
You are being chased for debts that you thought were, or should have been, included in
the bankruptcy
You have received money or property and are trying to annul the bankruptcy but you are
in dispute with the Trustee about the amount required
The Trustee is objecting to your discharge
If you encounter these or any other difficulties you may be able to get some advice or assistance
from the following services:
■■
■■
■■
[insert others including your own service if applicable]
For access to information, advice and referrals to financial counselling in any state of
Australia call 1800 007 007
The Australian Financial Security Authority on 1300 364 785
If you have relatives or associates who are affected by your bankruptcy (for example because you
own property jointly with them, or you have transferred money or property to them in the past)
they will need to get their own independent legal advice
Other resources found in this kit
■■
File note in relation to the A – Z of Bankruptcy questions (page 24)
■■
Question by question guides to completing the bankruptcy paperwork – Chapter 7 (page 131)
■■
EDR Bankruptcy Authority (page 203)
Sample letters:
■■
Car accidents – letter to other party (unliquidated debts) (page 53)
■■
Application for variation of income threshold on grounds of hardship (page 193)
■■
Request review of the Trustee’s decision to refuse hardship (page 194)
■■
Letter in relation to legal proceedings in relation to a provable debt (page 198)
■■
Letter in relation to threatened repossession of secured goods/property because of bankruptcy (page 199)
■■
Letter to Centrelink (re: alleged fraudulent debt) (page 224)
■■
Complaint to AFSA (re: Debt Agreement Administrator or broker/referrer) (page 266)
■■
Complaint to ASIC (re: Debt Agreement broker/referrer) (page 268)
Useful contacts
Australian Financial Security Authority (AFSA)
ph: 1300 364 785
www.afsa.gov.au
Enquiries via e-mail to: [email protected]
External Dispute Resolution
Financial Ombudsman Service
ph: 1300 78 08 08
www.fos.org.au
GPO Box 3
Melbourne VIC 3001
Credit Ombudsman Service
ph: 1800 138 422 Fax: 02 92738440
www.cosl.com.au
PO Box A252
Sydney South NSW 1235
Free Legal advice
Specialist Credit Law Advice—Community Legal Centres
ACT Consumer Law Centre ACT
ph: (02) 62571788
www.carefcs.org/services/consumerlawcentre.html
NSW Financial Rights Legal Centre
ph: 1800 007 007
www.financialrights.org.au
VIC Consumer Action Law Centre
ph: 1300 881 020
www.consumeraction.org.au
WA Consumer Credit Legal Service (WA)
ph:(08) 9221 7066
www.cclswa.org.au
288
Other Community Legal Centres
The National Association of Community Legal Centres
www.naclc.org.au
Legal Aid
NSW ph: 1300 888 529 (LawAccess NSW) or at www.legalaid.nsw.gov.au
QLD ph: 1300 651 188 or at www.legalaid.qld.gov.au
VIC ph: 1800 677 402 or at www.legalaid.vic.gov.au
NT: ph: 1800 019 343 or at www.ntlac.nt.gov.au
ACT ph: 1300 654 314 or at www.legalaidact.org.au
TAS ph: 1300 366 611 or at www.legalaid.tas.gov.au
SA: ph: 1300 366 424 or at www.lsc.sa.gov.au
Some community legal centres and legal aid offices also employ specialist consumer
credit lawyers.
Specialist Insurance Law Advice
Financial Rights Legal Centre
ph: 1300 663 464 from anywhere in Australia
Financial Counselling
Financial Counselling Australia
www.financialcounsellingaustralia.org.au
To lodge a complaint about a licensee or credit representative
GPO Box 9827
Your Capital City
ph: 1300 300 630
Lodge your complaint online:
www.asic.gov.au or www.fido.asic.gov.au
or fax it to
Australia (03) 5177 3749
TABLE OF STATUTES
COMMONWEALTH
Aged Care Act 1997 35, 38,
96
Australian Consumer Law
s 18(1) 264
Bankruptcy Act 1966 8, 31,
229, 230
Pt IX 29, 30, 115
Pt X 33, 43, 97, 115
Pt XI 128
s 29(5) 83
s 33 239
s 33(c) 248
s 40 230
s 40(1) 230
s 40(1)(da) 27
s 40(1)(g) 230, 236
s 41(3) 235
s 41(5) 237
s 41(6) 237, 243
s 41(6A) 237
s 41(6C) 237
s 41(7) 236
s 43(1) 246
s 43(2) 246
s 44(1)(c) 238
s 47(2) 238
s 49 240
s 50 245
s 51 238
s 52(1) 239
s 52(2) 239, 242, 243
s 52(3) 245
s 52(4) 239
s 52(5) 239
s 54 249
s 54A 27
s 54B 29
s 54C 134
s 55 137, 140
s 55(3B) 138, 241
s 55(5A) 272
s 56A 141
s 56C(1)(a) 112, 138, 241
290
s 56C(1)(b) 112, 138, 241
s 57(3b) 138, 241
s 57A 62
s 58 62, 102, 197
s 58(3) 102, 103, 197
s 58(5A) 58
s 60 102, 103
s 60(1) 55, 59
s 60(4) 103, 104
s 73 210, 213
s 74 213, 222
s 77 95, 98, 185–6
s 77CA 249
s 78 186, 187, 249
s 80 186
s 81 186
s 82 49, 51
s 82(1) 49, 51
s 82(3B) 55
s 109 214, 238
s 115 88
s 116 63, 69
s 116(1) 56, 104
s 116(1)(b) 103
s 116(2)(c) 65
s 116(2)(ca) 67
s 116(2D) 72
s 116(2)(d)(iv) 71
s 116(2)(g) 104
s 116(3) 72
s 116(4) 73
s 116(q) 121
s 116(r) 121
s 118 88
s 120 81, 85, 88, 121, 123,
124, 209
s 121 81, 87, 88, 121, 123,
124, 210
s 121(1) 121
s 122 85, 88, 136, 209
s 128B 70, 210
s 128C 70, 210
s 129 62
s 134 62
s 139DA 83
s 139EA 83
s 139K 92
s 139L 92
s 139M 93
s 139N 93
s 139N(3) 56
s 139R 95
s 139T 95, 191
s 139U 94
s 139V 94
s 139W 95
s 139X 94
s 139Y 94
s 139Z 94
s 139ZA 95
s 139ZF 95
s 139ZH 95
s 149 246
s 149A 209
s 149D 95, 209
s 152 222
s 153 57
s 153(1) 58
s 153(2A) 58
s 153(2)(b) 55, 58
s 153(2)(c) 58
s 153A 211, 212, 215, 222
s 153A(1A) 55
s 153B 211, 246
s 153(B) 247
s 154 212
s 161B 214
s 162 214
s 162(3) 214
s 167(4) 219
s 167(5) 219
s 167(6) 218
s 178 197
s 185 254, 270
s 185C 33, 251, 252
s 185C(1) 34
s 185C(3A) 252
s 185C(4) 271
s 185C(4)(a) 33
s 185C(4)(b) 33
s 185C(4)(c) 33
s 185C(4)(d) 33
s 185D 251
s 185E 253
s 185EA 254
s 185EB 254
s 185EC 254
s 185ED 254
s 185F 253, 254
s 185F(2) 253
s 185F(3) 253
s 185H 254
s 185I 254
s 185K 256, 272
s 185LB 271
s 185M 268, 269
s 185MA 269
s 185N 256
s 185N(3) 257
s 185N(5) 257
s 185NA 257
s 185P 256, 270
s 185PA 270
s 185PD 270
s 185Q(1) 272
s 185Q(2) 272
s 185Q(4) 272
s 185Q(5) 272
s 185QA 256, 271
s 185R 256, 272
s 185T(1) 273
s 185T(2) 273
s 185T(3) 273
s 185U(2) 273
s 185U(3) 273
s 185U(5) 273
s 185U(6) 273
s 185X 254
s 185XA 254, 256
s 186A 254
s 186M 254
s 188 216, 230
s 189AAA 245
s 267 273
s 267B 249
s 270 111, 154
s 270(2) 154
s 271 125, 126, 127, 128,
154
s 272 98, 196
s 272(3) 99
s 272(C) 98
s 301 68, 102, 112
s 302 68, 102
Bankruptcy Legislation
Amendment (Debt
Agreements) Act 2007 30–1
Bankruptcy Regulations 1966
8, 229
Sch 3 214
Sch 4A 217, 218
reg 3.01 83
reg 4.02A 234
reg 4.08 245
reg 6.01 214
reg 6.03 64
reg 6.03(6) 64
reg 6.12 92
reg 8.07 214
reg 8.08 214
reg 8.12A 215
reg 8.12C 215, 216
reg 8.12E(3) 216
reg 8.12E(5) 216
reg 8.12E(6) 216
reg 8.12E(C) 216
reg 8.12F(1) 216
reg 8.12F(2) 217
reg 8.12F(3) 217
reg 8.12G 217
reg 8.12J(2) 218
reg 8.12N(1) 218
reg 8.12N(2) 218
reg 8.12N(3) 218
reg 8.12O 219
reg 16.01 234
Child Support (Assessment)
Act 1989 20, 55, 92, 93, 102,
118
Corporations Act 2001 115,
177
s 206A 97
s 206B 97
s 588G 113
s 1317G 51
Family Law Act 1975 20, 55,
82–3, 93, 102, 116
Pt VIII 63, 117
Pt VIIIAB 63, 117
s 4AA 117
s 72 117
s 74 117, 119
s 75 117
s 78 116, 119
s 79 118, 119
s 79(10) 118
s 79(10A) 118
s 79A 119, 121, 122
s 79G 119
s 81 116
s 90F 122
s 90G 122
s 90J 122
s 90K 122
s 90K(3) 122
s 90SB 117
s 90SE 117, 119
s 90SF 117
s 90SL 116, 117, 119
s 90SM 118, 119
s 90SN 119, 121, 122
s 90SP 119
s 90UI 122
s 90UJ 122
s 90UL 122
s 90UM 122
s 90UM(6) 122
Federal Circuit Court
(Bankruptcy) Rules 2006 229
rule 2.03 246
rule 3.02 235
rule 3.03 237
Federal Court and Federal
Circuit Court Regulations
2012 229
Federal Court Rules 2011
229
rule 36.01 249
rule 36.03 249
rule 36.05 249
Fringe Benefits Tax
Assessment Act 1968 92
Life Insurance Act 1945 200
Migration Act 1958 55
Privacy Act 1988 36, 222
Retirement Savings Act 1997
63
Superannuation Industry
(Supervision) Act 1993 63,
70
Taxation Administration Act
1953 56, 136
ss 260–5 135
NEW SOUTH WALES
Uniform Civil Procedure
Rules
reg 37.7 235
Probate and Administration
Act 1898 128
VICTORIA
Administration and Probate
Act 1958 128
Judgment Debt Recovery
Act 14
Federal Circuit Court Act
1999 229
s 104(2) 248
s 104(3) 246
TABLE OF CASES
Debt Genie Pty Ltd v Kirstein Edwards (2011) NSWLC 260
Director of Public Prosecutions (Cth) v Keating [2013] HCA 20 57, 225
James v Deputy Commissioner of Taxation [2010] FMCA 106 244
Nguyen v Lion Finance Pty Ltd & Anor [2012] FMCA 880 212
Official Receiver v Prince [2006] FMCA 1917 202
Official Trustee in Bankruptcy v Brown and Anor [2011] FMCA 88 (20 May 2011) 120–1
Pattison v Hadjimouratis [2006] FCAFC 153 247, 248–9
Quitlong v ACM group [2011] FMCA 688 244
Stankovic v Van Der Velde [2012] FCA 1436 73–4
Sutherland v Byrne-Smith [2011] FCMA 632 (22 December 2011) 123
Witt v Witt and Another (2007) 38 Fam LR 431 120
292
INDEX
A
online resources for financial
counsellors 8
Regulation and Enforcement area
126–7
review of trustee fees 216-9
role 8
accounts with financial institutions
disclosure 157–8
freezing of 189–90
acts of bankruptcy 230
advantages of bankruptcy 8–9
advertising, misleading advertising 264
after-acquired assets/property 76, 208
alternatives to bankruptcy see Debt
Agreements; Personal Insolvency
Agreements
alternatives to bankruptcy checklist 284
annulment of bankruptcy
by court 211–12
composition or arrangements 213
effect 212
following payment of debts and costs
211
Trustees’ fees 213–19
assets
157–8
after-acquired assets 76, 208 cash 19,
157
investments 75, 163 life insurance
policies 19–20, 61-3, 159, money
owed to debtor/bankrupt 163–4
in possession of others 165–6
real estate 76-83, 161–3
sales, transfers or gifts 18-9, 86-7, 165,
shares 75, 163
superannuation 159
tax refunds 56–7, 61, 158
tools of trade 65, 158–9
transferred or sold due to pressure for
payment 166–7
transferred to company 178
treatment under PIAs 44
vehicles 65, 160
wills and deceased estates 21,76, 164,
see also divisible assets
Australian Financial Security Authority
(AFSA)
complaints about Debt Agreement
process 264–6
Australian Securities and Investments
Commission (ASIC) 97, 98
complaints about Debt Agreements
266–7
insolvent trading 114
B
bank accounts, set off 61
bankrupt estate 7, 50
bankruptcy
A – Z 14–26
acts of 230
advantages and disadvantages 8–9
consequences 9–11, 47-129
duration 7, 106, 209–14
emotional impact 106
getting out of 209–19
key concepts 7–8
objective 49
as positive or negative option 23
repeated incidences of 22, 137
steps to avoid 232
see also life in bankruptcy; life post
bankruptcy
bankruptcy checklist 282–3
bankruptcy law
debtors’ rights 7
mechanisms for creditors to recover
money 7
Bankruptcy Notices 6
arrangements with creditor 237–8
creditor applications for 233–4
extension of time to comply 236–7
nature of 227
paying by instalments 238
percentage resulting in bankruptcy
228
reducing debt below $5000 234
responding to 234
setting aside due to set off or cross
claim 236
setting aside as technically invalid
235–6
wrong amount claimed 237
Binding Financial Agreements 122–3
business assets
not sold 109,175
sold 174
business records 111, 176
business startups 115
C
Capacity Toolkit 23
Carey [2011] FCA 235 98
cash assets 19, 157
Centrelink
debts allegedly incurred by fraud
57–8, 223–5
requirements for early release of
superannuation 207
checklists
alternatives to bankruptcy checklist
284
bankruptcy by Creditor’s Petition
checklist 285
bankruptcy checklist 282–3
Debtor’s Petitions 136
notes on using 281
Statement of Affairs 181
child care benefit overpayments 57
Child Support Agency (CSA) 58–9
child support arrears 164
child support payments 20, 58, 92, 148
co-owners and ‘equity’ 77-9, 81
commercial leases 111–12
companies 107
assets transferred to company 178
de-registration 115
directors guarantees 114
insolvent trading 113–14
in liquidation or Administration
177–8
shares in company 178
winding up 114
proving debtor is solvent 243–4
responding to 239
stay of sequestration order 245
D
de facto relationships 117
compassionate waivers 16–17
de-registration of companies 115
consequences, of bankruptcy 9–11, 47129
death
and bankruptcy 128–9
relatives liability for debts of deceased
129
constructive trusts 82–3
consumer complaints
about financial counselors and other
bankruptcy advisors 2
about Debt Agreement Administrators
and brokers 257-68
about Registered Trustees/Controlling
Trustees 185, 216, 279
consumer credit debts 16
contacts 288–9
contracts, entering 102
Contribution Assessment Period (CAP)
90
Controlling Trustees 44, 45
council rates 51
court proceedings
against client 20, 102–3
by client 20, 103–6
credit, obtaining 22, 100, 209
Credit Law Toolkit 6
Credit Ombudsman Service 16, 203, 266
credit reports 22, 100, 102, 209
creditors
informal arrangements with 16–17
varying a Debt Agreement 269
Creditor’s Petitions 5, 6, 7, 29
adjournment 239–40
checklist 285
control taken over property 245
and death of debtor 129
and Debt Agreements 245
debt less than $5000 243
debt never owed 243
debt no longer owed 242–3
examination of debtor prior to
bankruptcy 245
filing a Debtor’s Petition 240–1
lodgement of 238–9
nature of 227
no act of bankruptcy 244
opposing 242–4
petitioning creditor’s costs 241
and PIAs 46, 245
294
Debt Agreement Administrators (DAAs)
32, 33, 34, 43, 252, 253, 257, 261–2, 268
Debt Agreements
acceptance by Official Receiver 253–4
acceptance of proposal 252–5
changes in circumstances 268
common problems 258-63
compared to bankruptcy 36–9
compared to Personal Insolvency
Agreements 46
complaints about 257–68
completion 257
consequences of making 256
consequences of proposing and
entering 35–6
and Creditor’s Petitions 245
creditors voting process 254–5
deciding not to proceed 258–9
determining benefits to client 40–1
eligibility 33–4
eligibility criteria for unregistered
administrators 254
fees 32–3
inability to keep up payments 263
insolvency 34
liability for fees 259–61
misunderstanding nature of 258–9
misuse 30
non-completion risk 42–3
obligations 31–2
proposal and acceptance process
251–7
reform of provisions 30–1
rejection of proposal 261–2
role of financial counsellors 33
summary 29–30
termination 256–7, 269–72
time line 43
using to save the home 41–2
varying 268–9
debt recovery, process 6
debtors, process of making bankrupt 231
Debtor’s Petitions
acknowledgement and signature 142
advantages and disadvantages after
service of Creditor’s Petition 241
checklists and file notes 136
client authority 138
completing 136–42
Declaration of Intent to Present 27–9
declaration of person assisting with
completion of forms 142
electronic lodgement 137
eligibility to lodge 137–8
fee for lodging 137
having clients complete forms 139
individual debtor, partnership or joint
petition 140–1
latest versions of forms 138lodging
paperwork 181–2
as means of initiating bankruptcy 5, 7
mentally incapacitated debtors 138
prescribed information 138
proof of identity 141
refusal to accept by Official Trustee 22
relevant Australian connection 140
timeframe for filing once a Creditor’s
Petition served 241
using a scribe 142
debtors’ rights 7
debts
extinguished by bankruptcy 48
guarantors for 17
legally owed 15
and National Credit Code 15–16
non-provable 51-2
not extinguished by bankruptcy 17, 48
not provable and not enforceable 53–4
provable 54-5
over $5000 14, 27, 233, 238
owed to debtor/bankrupt 163–4
secured debts 50-1, 168–9,198-9
deceased estates 21, 76, 164
Declaration of Intention to Present a
Debtor’s Petition
acceptability of 29
acceptance 134–5
assisting client with paperwork 134
authorised person section 132
checking details 132
and client does not proceed with
bankruptcy 135
and client proceeds with bankruptcy
136
financial affairs, secured assets and
other assets section 133
and garnishees on wages/salary 135,
136
having clients complete form 131–2
latest version of form 132
lodging documents 134
purpose and relevance, pros and cons
27–9
and Sheriff ’s actions 135
summary 27
bankruptcy prior or during
proceedings 119–21
Binding Financial Agreements 122–3
claims by Trustee on property of
previous relationship 124
de facto relationships 117
dividing property where ex-partner
may become bankrupt 123–4
maintenance orders 117–18
powers of Family Court to divide
property and debts 117–25
property settlement 118–19
and Statement of Affairs 148
third party creditors 119
Defence Service Home Loans 64
directors of companies 21, 35, 97–8,
113–15directors guarantees 114
disadvantages of bankruptcy 8–9
discharged bankrupts 184, 221-2
disclaiming contracts and property 83–4
divisible assets
after-acquired property 76
disclaiming contracts and property
83–4
home mortgages 79–81
houses and other real estate 76–9
past assets 84- 88
preferential payments 85, 88
property outside Australia 83
relation back period 85, 88
summary 74–5
time frame for re-vesting in bankrupt
89
time limit for claims upon 89
transfers to defeat creditors 87, 88
undervalue transactions 85–6, 88
what vests in the Trustee 75–83
duration of bankruptcy 7, 106, 209–14,
221–2
E
early release from bankruptcy 210
family tax benefit overpayments 57
family trusts 109
FEE-HELP 52
Financial Counselling Australia 289
financial counsellors
assisting small business owners 107–8
client handout - information for
bankrupts 286–7
complaints about 2, 142
determining the benefit of a Debt
Agreement 40–1
determining if bankruptcy is client’s
best option 14–26
role in assisting clients with bankruptcy
1–2, 13, 106, 184-5
role in relation to Debt Agreements 33
Financial Ombudsman Service 16, 29,
199, 203-4, 266, 288
forgotten debts 61, 171–2, 207
former bankrupts 184, 221-2
to bankrupt 209
GST debts 57
guarantors 17, 60
H
hardship (relief from income
contributions) 191-5
hazardous speculation
see gambling and hazardous speculation
health issues 23
HECS-HELP 52
home mortgages 79–81
household property 64–5
I
immigration status 102
income
expected in next 12 months 150
in last 12 months 149
income contributions 22
Assessment Notice 190
calculation of contribution 94–5
contribution assessment periods 94
definition of income 92–3
dependents 93
relevant income threshold 91
relief for hardship 191–5
role of financial counsellor 90–1
and subsequent hardship 195–6
summary 89–90
unpaid contributions 195
fraud
debts incurred by 22–3, 57
and social security debts 57–8, 223–5
informal arrangements with creditors
16–17
free legal advice 288–9
initiation of bankruptcy 5
G
insolvency, as requirement for Debt
Agreements 34
express trusts 81
gambling debts 22–3
external dispute resolution (EDR) 16,
29, 199, 203–4, 232, 266, 288
gambling and hazardous speculation
as contributing factor in insolvency
125, 154
gambling debts 22–3
likelihood of prosecution 126–7
policy issues 128
Insolvency and Trustee Service Australia
(ITSA) 8
emotional impact of bankruptcy 106
employment 96–7, 151
energy debts 16, 59
enforcement, bankruptcy as creditor’s
enforcement option 5, 7, 228–9
equity loans 169
F
Family Court, powers to divide property
and debts 117–25
Family Court orders 20–1, 116–19,
121–2
family law proceedings
background 116–17
bankruptcy after court orders made
121–2
garnishees on wages/salary
declaration of intention to lodge a
Debtor’s Petition 135, 136,
after lodging a Debtor’s Petition 182
gifts
by potential bankrupt/bankrupt19,
165,
inheritance 21, 76, 164
insolvent deceased estates, administration
128–9
insolvent trading, companies 113–14
Inspector-General Practice Direction 6 –
Remuneration entitlements of a registered
bankruptcy trustee 218
Inspector-General Practice Statement 10 –
Complaint handling process for complaints
against bankruptcy trustees and debt
agreement administrators 264, 279
Inspector-General Practice Statement 15
– Assessment by the Inspector-General of
a Trustee’s remuneration approval request
218
Inspector-General Practice Statement
16 – Reviewing Remuneration of
Trustees and Costs of Third Party
Service Providers 216, 217
offences 186–9
permission to travel 196–7
proceedings for provable debts 197–8
pursuit of unpaid income contributions
195
relief for hardship (income
contributions) 191–5
role of financial counsellors 184–5
secured loans 198–9
subsequent hardship 195–6
summary 183–5
as undischarged bankrupt 184
insurance, obtaining 22, 101
insurance claims 17–18
disputing a refusal in court 205
during bankruptcy 200–3
protected by Bankruptcy Act 63, 71,
200–1
re property protected under
Bankruptcy Act 201–2
re property vested in Trustee 202
re property which is security for a loan
201
insurance law advice 289
Insurance Law Service 18
insurance policies 17–18
intellectual property rights 75
investments 75, 163
life insurance policies 19–20, 63, 200-1,
159, 205
life post-bankruptcy
debts allegedly incurred by fraud
223–5
official end of bankruptcy 221–2
ongoing consequences 221–3
troubleshooting 223
loans, obtaining 100
J
long-term financial problems 15
joint debts 17, 60, 171
M
joint tenancy 81, 129
judgment debts 14, 231, 233
L
legal advice 288–9
legal proceedings
actions against client 20, 148-9, 102–3
actions by client 20, 148-9, 103–6
liabilities
equity loans 169
forgotten debts 61, 171–2
joint debts 17, 60, 171
secured creditors 50-1, 168–9
unsecured creditors 170–2
licensed trades, exclusion of bankrupts
21, 96-7
life in bankruptcy
common issues 208–9
complaints regarding actions of Trustee
185
disputing an insurance refusal in court
205
early release of superannuation 205–7
forgotten debts 207
freezing of accounts 189–90
income contributions 190–6
insurance claims 200–3
lodging a complaint in EDR 203–4
obligations to Trustee and the court
185–6
296
maintenance agreements 20, 58,
maintenance orders 117–18
mental illness 23
mentally incapacitated debtors 138
migrants, sponsorship of 102
misleading and deceptive conduct (Debt
Agreements) 264
mortgage assistance (early access to
superannuation) 207
Mortgage Stress Handbook 6
motor vehicle accident debts 52–3
motor vehicle benefits 153
motor vehicle leases 61
motor vehicles
ownership or interest in 160
protected property 65–7
secured loan contract 67–9, 160, 1689, 198-9
unencumbered 66–7
N
National Credit Code 15–16, 65
National Personal Insolvency Index
(NPII) 28, 35-6, 96, 99–100, 222
non-provable debts 22, 22–3, 49, 51–3
O
offences, during bankruptcy 186–9
Official Receivers 33, 137-8, 253–4
Official Receiver’s Practice Statement 5 –
Insolvent Deceased Estates (Part XI of the
Bankruptcy Act 1966) 129
Official Receiver’s Practice Statement 6 –
Bankruptcy Notices 233
Official Receiver’s Practice Statement –
Cancellation of Debt Agreement Proposal
by Official Receiver and withdrawal of
Debt Agreement Proposal by Debtor 259
Completion of a Debt Agreement 257
Proposal to Terminate a Debt Agreement
and Withdrawal of a Proposal 268, 269,
270, 271
Official Receiver’s Practice Statement – Six
Month Arrears Default Termination of a
Debt Agreement 272
Voting on Debt Agreement, Variation and
Termination Proposals 254
Official Receiver’s Practice Statement
– When a debt agreement proposal is
acceptable for sending to creditors for their
vote 253
Who is eligible to make a debt agreement?
33, 34, 264
Official Trustee Practice Statement 1 –
Income Contributions 90, 190
options for clients in financial stress
prior to legal action 5–7
where legal action has commenced 6
see also hardship
OS-HELP 52
P
partnerships (business) 21, 107, 112–13,
173–4
pecuniary penalties 51, 56
permanent financial problems 15
personal injury claims 53
personal injury compensation 71–4
Personal Insolvency Agreements (PIAs)
97, 115
acceptance of proposal 277
administration 277–8
advantages over bankruptcy 44–5
appointing controlling Trustee 275–6
compared to Debt Agreements 46
complaints 279
consequences 44
creditors’ meeting 276–7
and Creditor’s Petitions 46, 245
and Declarations of Intent 29
nature of 43
obligations 43–4
preparing proposal and report to
creditors 276
process for entering 275–8
rejection of proposal 277
suitable clients 46
termination 278
variation 278
voting 277
Personal Property Securities Register
(PPSR) 8
physical safety of clients 100, 140
tax debts 56
public record 99–100
R
real estate 76-83, 161–3
regulatory body 8
relation back period, divisible assets 85,
88
rent, outstanding 60
residential leases, obtaining 102, 208
resulting trusts 82
S
preferential payments 60
divisible assets 85, 88
sole traders 110–11
salary, garnishees
declaration of intention to lodge a
Debtor’s Petition 135, 136,
after lodging a Debtor’s Petition 182
previous bankruptcy activity 22, 155,
137
salary sacrifice 152
private health insurance 152
sample letters 288
proceeds of crime orders 20, 52, 149
savings, from post bankruptcy income
209
professional associations, exclusion of
bankrupts 21, 96
scribes, using 142
property
impact of bankruptcy 62
outside Australia 83
real estate 161–3
treatment under PIAs 44, 45
vested in Trustee 7–8
see also divisible assets; family law;
protected property
property ownership, types 81–3
property settlements (family law) 20–1,
118–19
protected property
compensation for personal injury
71–4
household property 64–5
motor vehicles 65–9
summary 61–2
superannuation 69–71
under Bankruptcy Act 63–4
provable debts
compelling reasons to pay 59
enforced during bankruptcy 58–9
interest on 55
overview 49, 54–5
payable after discharge 57
harassment/proceedings for during
bankruptcy 197–8
harassment/proceedings for after
discharge 223
secured creditors 168–9
secured debts 19, 50–1, 168-9, 198–9
self-managed superannuation funds 70
sequestration orders
by judge 249
court’s jurisdiction to make 246
importance of compliance 249–50
lodgement of statement of affairs 249
nature of 228, 246
responding to/applying for a review
246–8
applying for review after 21 days 248
set off 61
share ownership 75, 163, 178
sheriffs
response to Declaration of Intent 135,
136
return of goods seized 136
seizure or tagging of goods 135
small business and bankruptcy
alternatives to bankruptcy 115
business startups 115
directors and companies 113–15
family trusts 109
partnerships 112–13
role of financial counsellors 107–8
summary 107
social security debts, and fraud allegations
57–8, 223-225
sole traders 21, 107
business records 111
closure of business 110
commercial leases 111–12
preferential payments 110–11
Statement of Affairs 173–4
tax debts 111
trading after bankruptcy 109–10
transactions to defeat creditors 111
undervalue transactions 111
Statement of Affairs
‘about you’ section 156
about your insolvency 154
accountant 146–7
157–8
additional notes 143
assets 157–67
assets debtor/bankrupt has contributed
to purchase 166
assets in possession of others 165–6
assets transferred or money paid due to
pressure for payment 166–7
assets transferred to company 178
assisting clients bankrupt due to
creditors petition 143
assisting clients to complete 143
beginning and end of business 174
business assets 175
business assets previously sold 174
business details 173–81
business records 176
businesses sold as going concerns 174
cash 157
checklist 181
child support 148
commercial leases 175
companies 177
companies in liquidation or
Administration 177–8
confidential information 145
contact person 145
declaration and signature 180–1
demographics 146
driver’s license 146
employment 151
equity loans 169
expected income in next 12 months
150
family details 147–8
family law proceedings 148
first difficulties experienced in paying
debts 155
importance of lodging 249
income in last 12 months 149–50
investments 163
legal actions 148–9
liabilities 168–72
lodging paperwork 181–2
money owed to debtor/bankrupt
163–4
motor vehicle benefits 153
nature of business 174
occupation and business activities 157
other benefits 153
other items of value 167
Part A 145–55
Part B 156–7
Part C - Assets 157–67
Part D - Liabilities 168–72
Part E - Business details 173–81
partnerships 173–4
passport(s) 145–6
person/entity responsible for
preparation of company’s financial
statements and tax returns 178
person/entity responsible for
preparation of financial statements and
tax returns 176
personal contact details 145
previous addresses 156
previous bankruptcy activity 155
private health insurance 152
proceeds of crime orders 149
publically available information 156
real estate 161–3
recently ceased businesses 175
salary sacrifice 152
sale of business 176
sales, transfers or gifts 165
secured creditors 168–9
shares 163
shares in company 178
solicitor 146–7
source of information about
bankruptcy 155
superannuation benefits 152–3
superannuation and life insurance
policies 159
tax refunds 158
tools of trade 158–9
trusts 179–80
vehicles 160
warning for financial counsellors 173
wills and deceased estates 164
Student Financial Supplement Scheme
(SFSS) 52
superannuation
benefits 152–3
Centrelink requirements for early
298
release 207
compassionate grounds for early release
206–7
early access 17, 205–7
extra payments to 19- 20, 70
financial hardship and early release
206
and mortgage assistance 207
protection of funds 69, 159
self-managed funds 70
Total & Permanent Disability (TPD)
payouts 63, 71, 159, 201
Transfers to defeat creditors 70
T
review process 216–19
size of 213–14
trusts 109, 179–80
U
undervalue transactions
divisible assets 85–6, 88
sole traders 111
undischarged bankrupts 184
urgency 14
utilities connections 209
tax, and bankruptcy 56–7
W
tax debts 56
sole traders 111
unpaid GST 57
wages, garnishees 135, 136, 182
tax refunds
and bankrupt estate 56–7, 61
winding up of companies 114
water debts 16, 51
wills and deceased estates 76, 164, 209
tax returns, in future 57
telecommunications contracts, obtaining
102
telecommunications debts 16, 59
tenants in common 81, 129
threshold amount, contributions 22, 91
Total & Permanent Disability (TPD)
payouts 63, 71, 159, 201
transactions to defeat creditors, sole
traders 111
transfers to defeat creditors 87, 88
transfers to defeat creditors
superannuation 70
travel
permission to 196
restrictions 22, 98–9, 145–6
Trustees
cooperation with 106
making complaints about 185
options for pursuing unpaid income
contributions 195
role in bankruptcy 7–8
undischarged bankrupts obligations
to 185–6
Trustees’ fees
Application for Review of Trustee
Remuneration 217–18
initial remuneration notice 215
notices to bankrupts 215–16
Registered Trustees 214–15
remuneration claim notice 215–16

Untitled - Financial Rights Legal Centre

Transcription

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