In the wake of the Global Financial Crises and ongoing financial recovery, we have noticed a lot of our clients are being affected in one way or another by bankruptcy issues. A lot of the time, clients come to us after being advised that businesses or customers who owe them money have gone into bankruptcy or liquidation. This causes great stress and often confusion as to what to do. In a two part series, we will examine the basics of bankruptcy and liquidation. In this newsletter we will consider bankruptcy.
Firstly it is important to distinguish between bankruptcy and liquidation. Bankruptcy relates to an individual (often referred to as personal bankruptcy), whereas liquidation relates to companies (often referred to as corporate insolvency). Bankruptcy is basically a legal process where an independent trustee takes over the control of the person’s financial matters and assets. A person can voluntarily go into bankruptcy by filing a Debtor’s Petition and Statement of Affairs with the Official Receiver (part of The Insolvency and Trustee Service Australia – a Commonwealth Government body). This occurs when a person is unable to pay their debts and cannot arrange suitable repayment schemes with creditors.
The other way a person can go bankrupt is if they are forced into bankruptcy by a creditor to whom the debtor (bankrupt) owes money. To do this, the creditor has to establish that the debtor has committed an act of bankruptcy. The legislation provides a number of examples, but by far the most common act of bankruptcy is a failure to comply with a Bankruptcy Notice. This usually involves the creditor getting a judgment against a debtor for an outstanding debt and then serving them with a Bankruptcy Notice if the judgment remains unpaid. The debtor then has 21 days to either challenge the Bankruptcy Notice, or pay the money. If payment is not forthcoming, this is an act of bankruptcy and the creditor can apply to bankrupt the debtor. With recent changes to legislation, a creditor cannot apply for a Bankruptcy Notice or a petition to bankrupt a debtor unless the amount outstanding is at least $5,000.
Upon a finding of bankruptcy, a trustee will be appointed to sell the bankrupt’s assets (the family home is not exempt unless it is owned by someone other than the bankrupt), take contributions from income over a certain amount and investigate the bankrupt’s financial affairs to recover property or money that may have been unlawfully transferred to another person in an effort to avoid creditors. Bankruptcy is often a stressful and emotional time for both creditors and debtors. There are often no winners in such a scenario and sometimes creditors are better off financially if they can come to some kind of lawful arrangement for debt recovery. The legislation does provide for some measures, such as personal insolvency agreements. In any event, bankruptcy is a complex area of law and you should seek professional advice, particularly if you are considering bankrupting a debtor.