Going bankrupt

What is bankruptcy?

Bankruptcy is a legal process that releases a person from almost all of their debts.

You can apply to become bankrupt voluntarily if you have a debt of any amount you cannot pay. When you are a voluntary bankrupt, a trustee appointed by the Australian Financial Security Authority (AFSA) will manage your financial affairs. A fee may be charged where you have assets or earn above your income threshold amount (see information on current thresholds).

AFSA will advise you of when you are officially bankrupt. They will nominate a trustee to manage your financial affairs within two weeks of when you lodge your application with them. Bankruptcy lasts for three years from the day it is declared.

Creditors who have tried unsuccessfully to recover debts you owe that together total at least $5,000 can force you into bankruptcy. In this situation, a private trustee will manage your financial affairs and charge very high fees for this service.

Bankruptcy - a fresh start

The financial consequences of bankruptcy may adversely affect you immediately and into the future, however it can also offer you a fresh start. Depending on your circumstances, bankruptcy may:

  • have little impact on your life and provide you with a fresh start financially,


  • have significant consequences including making it difficult for you to obtain credit for a considerable time, limiting your future employment options, the loss of your home and other significant assets.

You need to act quickly if you are being pursued for debts and you wish to avoid bankruptcy. It’s essential that you get professional advice on your debt management options, or speak to a financial counsellor.

You must consider all of the advantages and disadvantages of bankruptcy if you are thinking about this option to deal with debts you cannot pay – even those advantages and disadvantages that do not currently apply to you.

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The effects of bankruptcy

When you become bankrupt:

  • you can keep household goods and personal effects like a television, computer and furniture of reasonable value;
  • the fact of your bankruptcy will appear on your credit report for seven years and on a public record known as the National Personal Insolvency Index for life (in practical terms though, you will find it difficult to obtain credit for seven years, two years longer than the five year listing for bad debts);
  • you may lose some of your assets (see next section) including your house and a car worth more than $7,350;
  • you can earn an income (a rate of $52,543.40 after tax for a person with no dependants and $66,730.12 for a person with two dependants) however if your after-tax income exceeds the amount applicable to you, you will have to pay contributions to your trustee for your creditors; and
  • you may need to continue to pay your Child support, Centrelink and Higher Education debts, and any court fines. Seek advice on this from a financial counsellor.

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What happens to your assets when you are bankrupt?

Assets that are safe*

  • household goods of reasonable value, like furniture, a television and a computer
  • a car in which you have less than $7,350* equity
  • tools of trade to the value of $3,600*
  • up to $1,000 in bank accounts (deemed to be for living expenses)
  • superannuation, life insurance policies and personal injury compensation payments

Assets you will probably lose

  • real estate including houses and land
  • cars in which you have more than $7,350* equity
  • personal effects such as antiques and luxury electronic items
  • tools of trade over the value of $3,600*
  • artworks of significant value and some jewellery
  • any inheritance, tax refund or winnings
  • money in bank accounts in excess of $1,000

* Values are as at 20 March, 2014. Information on current thresholds.

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What employment restrictions apply to bankrupts?

Director of a company

You cannot be a director of a company or be involved in its management without the permission of the Court during the term of your bankruptcy.

Other employment restrictions

Professional bodies and/or trade associations have certain conditions of membership for the duration of a bankruptcy.  There may be restrictions on holding some statutory positions during this period. Consumers should contact the relevant peak body of their trade or profession to see if there are any restrictions during and/or after bankruptcy.

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Case study 1

Amanda was working in a contract role on a project with an engineering company and earning $1,200 a week for almost 12 months. It was a large, long-term project and Amanda believed she’d be in the role for the foreseeable future. She decided to purchase a home unit for $260,000 and a good second-hand car for $16,000.

Read the entire case study

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