What happens to your property, income and superannuation if you go bankrupt?

Bankruptcy can have significant consequences for your finances, but not everything you own is automatically lost. 

Depending on your circumstances, you may be able to retain certain assets while others may become available to your bankruptcy trustee. This guide explains how bankruptcy can affect your property, employment, income and superannuation in Australia, helping you understand what to expect before making any decisions.

Understanding how bankruptcy affects your property, employment, income and superannuation can help you make informed decisions before taking action. This guide explains what generally happens to your assets, the role of a bankruptcy trustee and the key considerations for individuals considering bankruptcy in Australia.

If you have a self-managed super fund (SMSF), the implications of bankruptcy are more complex. Read our guide to Superannuation and bankruptcy for more detailed information.

 Employment in bankruptcy 

Whilst the bankruptcy act does not impose any specific restrictions on employment in trades or professions for a bankrupt, we are aware that industry-specific licensing or registration authorities and associations may do so in the event of bankruptcy or entering into a formal bankruptcy alternative such as a personal insolvency agreement.

Potential impact of bankruptcy on trades and professions

Some common examples of trades and professions that may have rules and regulations applying to insolvency include builders, accountants, real estate agents, solicitors, travel agents, company directors/managers and gaming room employees.

This does not necessarily mean that a bankrupt cannot work in such trades or professions, however, it is noted as a guide to those contemplating bankruptcy or a formal bankruptcy alternative that restrictions or conditions may apply.

It is imperative that any person considering bankruptcy or a formal bankruptcy alternative reviews the relevant codes, guidelines or registration rules and eligibility requirements pertaining to their trade or profession before proceeding.

 Termination of employment during bankruptcy 

If a bankrupt’s employment is terminated during the period of bankruptcy (normally three years), any lump sum termination payments due will ordinarily be considered by the trustee as income.

Income in bankruptcy

If a bankrupt’s after-tax income exceeds a statutory prescribed limit, a contribution will generally be payable to the trustee during the bankruptcy term. If the bankrupt’s income does not exceed the statutory threshold no income contribution is payable unless the bankrupt wishes to make a voluntary contribution to their bankrupt estate.

The income that may be derived by a bankrupt before being required to contribute to their estate is affected by a number of factors including the number of their dependants. 

 Superannuation in bankruptcy 

The implications of bankruptcy for those with SMSFs are complex and for that reason are covered in a separate update.

For those that are not members of an SMSF, some of the key considerations in respect of superannuation to consider if bankruptcy is a possibility or you are currently an undischarged bankrupt are as follows:

Superannuation payments received prior to bankruptcy

• Remaining superannuation held as cash are generally claimable by your trustee in bankruptcy; and
• Your trustee will generally be able to recover and sell assets that you have acquired from superannuation received prior to bankruptcy.

Superannuation payments received during/after bankruptcy

• Superannuation payments received during and after bankruptcy are generally not claimable by your trustee in bankruptcy if it is a lump sum and your trustee would not generally be entitled to recover and sell assets you purchase with those funds.
• Rather than a lump sum, if you receive superannuation payments effectively as a pension during your bankruptcy this is considered to be an income stream and will form part of your assessable income and be applied in the calculation of any compulsory income contribution that you may be liable to make during the term of the bankruptcy.

Every bankruptcy is different, and the outcome depends on your financial circumstances, assets, employment and future plans. Seeking advice early can help you understand your options and avoid unintended consequences. If you're considering bankruptcy or exploring alternatives, speaking with an experienced restructuring adviser can help you determine the most appropriate path.

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 Can you keep your family home if you go bankrupt? 

One of the most common concerns people have when considering bankruptcy is whether they will lose their home. The answer depends on the amount of equity you have in the property and whether it is jointly owned.

If there is little or no equity, your trustee may decide not to sell the property. However, if there is significant equity available for creditors, the trustee may seek to realise the bankrupt person's share. Where a property is jointly owned, the trustee will generally work with the co-owner to determine whether the bankrupt's interest can be purchased before considering a sale.

Every situation is different, making it important to seek advice before making decisions about your home or other major assets.

 What assets are protected during bankruptcy? 

Not all assets are automatically available to your bankruptcy trustee. Australian bankruptcy laws protect certain assets to help ensure you can continue living and working during bankruptcy.

Protected assets may include:

• ordinary household furniture and personal belongings
• most regulated superannuation
• tools of trade up to the prescribed value
• a vehicle used primarily for transport up to the statutory threshold
• certain insurance and compensation payments.

Assets that exceed statutory limits or are not protected, such as investment properties, shares and other valuable investments, may be sold to repay creditors.

What happens if you receive an inheritance during bankruptcy?

Bankruptcy can also affect assets you receive after becoming bankrupt. If you inherit money or property before you are discharged from bankruptcy, you must notify your trustee.

Depending on your circumstances, an inheritance, lottery winnings or other financial windfall may become part of the bankruptcy estate and be used to repay creditors. Understanding your obligations can help you avoid unexpected outcomes, so it is important to seek advice if your financial circumstances change during bankruptcy.

Will bankruptcy affect your ability to obtain credit?

Bankruptcy can make it more difficult to obtain finance during and after your bankruptcy period. If you apply for credit above the prescribed limit while bankrupt, you are required to disclose your bankruptcy to the lender.

Your bankruptcy will also be recorded on your credit file for the period specified under Australian law. While this may affect your ability to borrow in the short term, many people are able to rebuild their financial position and improve their access to credit over time.

Are there alternatives to bankruptcy?

Bankruptcy is not the only option if you are experiencing financial hardship. Depending on your circumstances, there may be other solutions that help you manage your debts while avoiding some of the long-term consequences of bankruptcy.

These may include:

• Personal Insolvency Agreements may suit individuals who can repay part of their debts over time.
• Debt Agreements may be appropriate for people who meet the eligibility criteria and want to avoid bankruptcy.
• Informal arrangements can sometimes be negotiated directly with creditors.

Understanding all available options before taking action can help you make a more informed decision. An experienced restructuring adviser can assess your situation and explain which approach may be most appropriate.

 When should you seek professional advice? 

Financial difficulties can arise for many reasons, including business failure, illness, unemployment or unexpected life events. Seeking advice early often provides more options than waiting until your debts become unmanageable.

Bankruptcy can affect your property, income, employment and future financial opportunities, but it doesn't always mean losing everything. Understanding your options before making a decision can help you minimise the impact and achieve the best possible outcome. If you're experiencing financial difficulty, our Restructuring & Recovery specialists can help you assess your circumstances and explore the most appropriate path forward.

An experienced restructuring adviser can help you understand the implications of bankruptcy, assess alternative solutions and explain your legal obligations. Obtaining professional advice before taking action can help you make informed decisions and achieve the best possible outcome for your circumstances.