Bankruptcy: What You Lose,
and What You Keep
THE REAL LEDGER OF PERSONAL BANKRUPTCY IN AUSTRALIA
Say the word "bankruptcy" and most people picture losing everything.
The real rules are far less dramatic:
they take some things, and they are explicit about what cannot be touched.
Do the sums first, then decide whether this is your road | Source: Pexels
In our last two issues we covered personal guarantees and statutory demands. When a guarantee is called on, or a demand expires unpaid, the word "bankruptcy" lands on the table for real. Clients tend to arrive with one of two pictures in mind: either bankruptcy means losing everything and being publicly ruined, or it means the debts vanish and life restarts clean. Neither is accurate.
This article opens the ledger of personal bankruptcy under the Bankruptcy Act 1966 (Cth) and the published rules of the Australian Financial Security Authority (AFSA): what gets taken, what the law lets you keep, which restrictions apply to your status, which debts are wiped and which are not, and how long the record follows you. The dollar figures mentioned are indexed by AFSA and change regularly; the amounts on AFSA's website at the time always govern.
01／First, a misconception to clear up
Bankruptcy is not a punishment. It is a statutory process: a trustee takes control of your divisible property, realises it and distributes the proceeds to creditors, and in exchange most unsecured debts are released when the bankruptcy ends. In the usual case you are automatically discharged 3 years and 1 day after the relevant start date; if the trustee lodges a valid objection, the bankruptcy may be extended. The start date is generally the day AFSA accepts your bankruptcy application, or, where a creditor has made you bankrupt, the day you file a statement of affairs that AFSA accepts.
The design logic of bankruptcy is "take the surplus, leave the essentials". The law lists clearly what the trustee cannot touch, so that you can keep working and living through the bankruptcy period. The real question is not whether you lose everything, but where the line between surplus and essential actually falls.
02／What you lose
The trustee is entitled to deal with your "divisible property": what you own at the date of bankruptcy, and what you acquire during it. The main categories:
Cash and bank balances on the date of bankruptcy. This catches many people off guard: the trustee can take whatever is in your accounts on the day you become bankrupt. Income you earn afterwards is yours to keep (subject to the contribution rules below), but the balance on day one belongs, in principle, to the trustee, though this still depends on the nature of the funds and the particular circumstances.
Real estate. Neither the family home nor investment property is protected. If a property is in your sole name, the trustee can sell it. If it is jointly owned with a spouse, the trustee takes over your share of the equity and will generally negotiate with the co-owner: in practice that may mean the co-owner or a third party buying out your interest, or it may end in a joint sale. For mortgaged property, what matters to the trustee is the equity after the loan.
Investments, shares, and vehicles or tools above the protected limits. Vehicles and tools of trade each have a protected value cap (see the next section); anything above it can be realised.
Windfalls during the bankruptcy. An inheritance, a lottery win or a gift received while bankrupt is divisible property and must be declared to the trustee.
One more point that cannot be ignored: if you transferred assets to relatives or friends for less than their value before going bankrupt, the trustee has power to unwind those transactions. That is a substantial topic in its own right, and we will cover it separately.
These, the law leaves with you | Source: Pexels
03／What you keep
The list of protected property is longer than most people expect:
WHAT YOU CAN KEEP DURING BANKRUPTCY
Ordinary household goods: furniture, appliances, clothing, essential electronics
Tools of trade up to a total value of $4,600
A primary vehicle with net value up to $9,950
Superannuation in a regulated fund, generally protected
Income you earn after the date of bankruptcy, and savings from it
These amounts are adjusted periodically; the latest indexed amounts published by AFSA govern.
Superannuation deserves its own mention. The balance in a regulated super fund is generally not divisible property, and super payments received during bankruptcy are usually protected too. But if you made large last-minute contributions before bankruptcy to put money out of creditors' reach, the trustee can pursue them.
Income during bankruptcy is the most practical part of this article. Bankruptcy does not stop you working, and there is no cap on what you can earn. The rule is this: if your after-tax income exceeds the AFSA threshold (a base figure of roughly $70,000-plus after tax, higher if you have dependants, updated each March and September), you must pay 50% of the amount above the threshold to your trustee as income contributions; everything under the threshold is yours. You must promptly report changes in income and employment to the trustee. Your spouse's income does not count in the assessment.
04／Restrictions on your status
Several things are restricted while you are bankrupt:
You cannot be a company director, or manage a company, without the court's permission. For readers who are also business owners this bites hardest: the company's directorship arrangements need to be sorted out before bankruptcy, not after.
Overseas travel requires the trustee's written consent. Leaving without it is a criminal offence. In practice, applying with reasons and paying the fee will usually secure a permission letter, which you carry with you.
Credit applications must be disclosed. Above the AFSA limit (currently $7,457, updated quarterly), you must tell the lender or supplier that you are bankrupt before borrowing, buying on credit or entering an instalment arrangement. Failing to do so is also an offence.
Your business name must include your own name. Trading as a sole trader is allowed, but the business name must contain your full name; otherwise you must tell every person you deal with that you are bankrupt. You also cannot manage a trust account, and some licensed trades (building, for instance) may impose additional restrictions, which you should confirm with the relevant licensing body.
Litigation is affected. Any legal proceedings you are involved in must be reported to the trustee, and the right to pursue certain claims passes to the trustee.
05／Which debts are wiped, and which are not
Most unsecured debts are released when the bankruptcy ends: credit cards, personal loans, overdue bills, tax debts, business trade creditors and the personal guarantees you signed. During the bankruptcy, creditors cannot chase you directly and must deal with the trustee instead.
Several categories are excluded: child support, court fines and penalties, HECS/HELP student loans, debts incurred after bankruptcy, and debts arising from fraud. Secured debts (mortgages, car loans) are different again: the creditor keeps its rights over the security, so you either keep up the repayments to keep the asset, or surrender it.
A detail that is easily missed: any tax refund due to you during the bankruptcy is kept by the ATO and paid into the bankrupt estate.
06／How long the record follows you
Three separate timelines need to be kept apart:
THE THREE TIMELINES OF BANKRUPTCY
Discharge: normally automatic 3 years and 1 day after the start date (extendable to up to 8 years on a valid trustee objection)
Credit report listing: 5 years from the date of bankruptcy, or 2 years after it ends, whichever is later
National Personal Insolvency Index (NPII): permanent
The NPII is a public register that anyone can search for a fee, and for people in business it is the longest shadow. The federal government's current bankruptcy reform agenda includes shortening how long a discharged bankruptcy remains listed on the NPII, but at the time of writing we have not seen that change enacted, and we will keep following it.
A closing reminder: bankruptcy is not the only option when the debts become unmanageable. A debt agreement (Part IX), a personal insolvency agreement (Part X) and an informal arrangement with creditors each suit different situations, and each has different consequences for your assets and credit record. Next issue, we look at how to choose between them.
Three years and one day later, the ledger turns a page | Source: Pexels
Bankruptcy takes the surplus on the balance sheet
and leaves the floor you need to keep living and working.
Only once you can see where that line sits can you make a real choice.
Sun Lawyers · Sydney Office
If you are considering bankruptcy, have received a bankruptcy notice, or want to understand what the alternatives would mean for your assets and your business before taking that step, contact Sun Lawyers. We work in both English and Mandarin.
Phone: 02 9267 4988 ｜ Email: enquiry@sunlaws.com
Sydney Office: Suite 703 & 704, 265 Castlereagh Street, Sydney NSW 2000
Website: sunlaws.com.au
This article is general legal information only and is not legal advice.
Please contact us for advice specific to your situation.