So I’m Bankrupt – How Do I Get Out of It?

Discharge

Probably the most common, and dare I say obvious, way out of bankruptcy is to let your bankruptcy run its course.

A person who becomes bankrupt will, in most cases, be automatically discharged from their bankruptcy three years and one day after they lodge their Statement of Affairs with the Australian Financial Services Authority (AFSA).

The Statement of Affairs is now called a Bankruptcy Form, although Statement of Affairs is still a term used in the Bankruptcy Legislation. For ease of reference, I shall refer to a Statement of Affairs/Bankruptcy Form as ”SOA” for the rest of this article.

If you do not comply with your obligations under the Bankruptcy Act 1966 (the Act), or if you commit certain offences against the Act, your bankruptcy may be extended to five or eight years.

Despite being discharged from bankruptcy, you are still required to assist your trustee in bankruptcy in the administration of your bankrupt estate and the trustee can continue to collect unpaid income contributions and sell assets that you acquired prior to or during your bankruptcy.

Discharge from bankruptcy will also extinguish most debts that were incurred prior to you becoming bankrupt. Some debts that are NOT extinguished include debts incurred by fraud, child support and maintenance, unliquidated damages not arising from a contract, and fines and penalties.

Debts for the ongoing provision of services may need to be paid to ensure that those services continue to be provided. Such services include the provision of electricity, gas, phone, internet, etc.

It is the bankrupt’s obligation to lodge their SOA with AFSA and provide a copy to the trustee of their bankrupt estate. While most trustees will lodge a SOA that they receive with AFSA, any delays, or refusal, by the trustee will delay the date that you are discharged from bankruptcy.

Is there any other way out?

Yes. A bankruptcy can also be annulled.

Once a bankruptcy is annulled, the trustee of the bankrupt estate has no further call on the bankrupt’s assets or income and the administration of the bankrupt estate is, effectively, at an end.

There are three main ways to annul a bankruptcy.

Payment of All Debts

If, during the course of a bankruptcy, all of the trustee’s costs and fees, as well as all creditors’ claims, including post-bankruptcy interest on interest-bearing debts, have been paid, the bankruptcy is annulled.

Upon annulment, only proven debts, that is those debts for which claims have been made by the creditor and admitted by the trustee, are extinguished other than for some debts such as those mentioned earlier. Thus, if a creditor does not lodge a claim with the trustee, they may still pursue the former bankrupt for payment after the bankruptcy is annulled.

Composition

An undischarged bankrupt may make an offer of Composition to their creditors via the trustee in bankruptcy.

An offer of Composition is an offer of compromise which, if accepted by the required majority of creditors in the bankrupt estate, results in the bankruptcy being annulled.

An offer of Composition must provide for payment in full of the trustee’s costs and fees as well as providing for a return to creditors.

Upon receiving an offer of Composition, a trustee in bankruptcy is required to report to creditors on the details of the offer and advise of the benefits of accepting that offer. The trustee will then convene a meeting of creditors and if a majority in number, and at least 75% in value, of the creditors voting at that meeting accept the offer, the bankruptcy is annulled. Only creditors that exercise their right to vote at the meeting determine the outcome. If the offer is accepted, all creditors are bound by the outcome whether or not they voted on the Composition.

Upon acceptance of a Composition, the claims of all creditors whose claims would otherwise be extinguished upon discharge from bankruptcy, and not just those creditors who have lodged claims with the trustee, will be extinguished. The creditors who do lodge claims, and whose claims are admitted by the trustee, will receive a distribution from the Composition funds.

If a former bankrupt defaults in their obligations under a Composition, the Composition may be terminated and the person may be made bankrupt again by the Federal Court.

Application to the Court

A bankrupt may apply to the Court for an annulment of his/her bankruptcy pursuant to section 153B of the Act.

If the Court is satisfied that the person should never have been made bankrupt, whether they became bankrupt voluntarily or by Order of the Court, and all of the costs and fees of the bankruptcy trustee have been paid in full, the Court may make an Order annulling the bankruptcy.

Such an application to the Court may be considered in circumstances where the debt upon which a person was made bankrupt was not owed or had been paid, the creditor’s petition had not been served, cases of stolen identity, etc.

An annulment by the Court does not extinguish debts owed by the former bankrupt, it merely restores the debtor to the position that they were in before becoming bankrupt.