What happens when you go bankrupt? A guide for Australians

IN REALITY: It doesn't happen in all bankruptcy cases

If you own an interest in a family home when you become bankrupt, that interest generally vests in your bankruptcy trustee and may be realised for the benefit of creditors. However, the outcome will depend on factors including ownership, available equity and whether another person has an interest in the property.

Non-bankrupt spouses or relatives may still own a significant portion of the family home. The trustee is only looking to realise the benefit of the equity that the bankrupt owner would be entitled to. That means a non-bankrupt spouse can potentially buy the equity from the bankruptcy trustee by agreement, without the need to vacate and sell the property on the open market.

Learn more:

• Will I lose my family home if I go bankrupt?
• How bankruptcy impacts property, employment, income & superannuation
• Alternatives to bankruptcy: What you need to know before making a final decision

IN REALITY: It may be more difficult, usually for 3 years

AFSA currently states a credit report will generally show bankruptcy for:

• five years from the date bankruptcy began; or
• two years after bankruptcy ends,

Whichever is later. After bankruptcy ends, there is no legal restriction on applying for loans, although lenders decide whether to lend.

Re-shape your credit history

Critically, your income and spending habits post-bankruptcy will start to reshape your credit history. The best thing to do is work consistently for an employer, earn as much as possible and curb any previous bad spending habits. When the bankruptcy period has passed,  you will be well-positioned to get finance again to buy a home or a car. 

Related reading:

• How bankruptcy impacts property, employment, income & superannuation
• Alternatives to bankruptcy: What you need to know before making a final decision
• Superannuation & bankruptcy: What you need to know
   

IN REALITY: You can work and earn an income

During the standard bankruptcy period, you can work and earn an income, in fact - the more you can earn, the better! Bankruptcy does not normally prevent you from working. However, restrictions can apply to some professions, licences, trust-account roles and company directorships.

Getting a new loan: you can eventually secure new loans, but remember that loans may have been one of the reasons for your bankruptcy, so aim to use the bankruptcy period as a debt-free period, and assess what you need and don’t need in your life.

Losing assets: usually, you can’t wipe out your debts and expect to keep all your assets (unless you win the lotto of course). But there are allowances for you to retain superannuation, motor vehicles, household goods, tools of trade, and maybe the family home.

Related reading:

• How bankruptcy impacts property, employment, income & superannuation
• Alternatives to bankruptcy: What you need to know before making a final decision
• Superannuation & bankruptcy: What you need to know

IN REALITY: Pack your bags. Overseas travel is still possible, but you need permission

You can travel within Australia while bankrupt. If you plan to travel overseas, you must obtain written permission from your trustee before leaving Australia. Your trustee may request information about your trip before deciding whether to approve the application.

Related reading:

• How bankruptcy impacts property, employment, income & superannuation
• Alternatives to bankruptcy: What you need to know before making a final decision
• Superannuation & bankruptcy: What you need to know

IN REALITY: This is one of the biggest misconceptions

It’s a common fear that you automatically risk going to jail if you become bankrupt. It’s simply not true.

Know your rights and responsibilities (given to you by the trustee), and talk to the trustee about your affairs. Be truthful, honest and disclose everything required by law, and you have nothing to fear.

Obviously, breaking any Australian Law, whether it be traffic laws, property laws or bankruptcy laws, has consequences. If you have any questions about specific laws, speak to the trustee or to AFSA.

Related reading:

• How bankruptcy impacts property, employment, income & superannuation
• Alternatives to bankruptcy: What you need to know before making a final decision
• Superannuation & bankruptcy: What you need to know

Bankruptcy is a legal process that provides relief to individuals who are unable to repay their debts. When you become bankrupt, a registered trustee takes control of certain assets and administers your financial affairs in accordance with the Bankruptcy Act 1966. The trustee's role is to realise available assets, where appropriate, and distribute funds to creditors.

While bankruptcy can provide a fresh financial start, it also comes with legal obligations and restrictions that may affect your assets, income, employment, ability to obtain credit and overseas travel. Before deciding whether bankruptcy is the right option, it's important to understand the implications and consider any alternatives that may be available.

In most cases, bankruptcy lasts three years and one day from the date your Statement of Affairs is accepted by the Australian Financial Security Authority (AFSA).

During this period, you'll need to comply with certain obligations, including informing your trustee of changes to your financial circumstances and making compulsory income contributions if your after-tax income exceeds the prescribed threshold. Some restrictions, such as those relating to company directorships and overseas travel, generally remain in place until you are discharged from bankruptcy.

Although your bankruptcy ends after the standard period, it may continue for longer if you fail to meet your legal obligations or your trustee lodges an objection to your discharge.

If you decide bankruptcy is the most appropriate option, you can voluntarily apply by lodging a Bankruptcy Form and a Statement of Affairs with AFSA. Once your application has been accepted, you'll generally become bankrupt immediately, and a registered trustee will be appointed to administer your estate.

Before declaring bankruptcy, it's important to understand the consequences and consider whether other debt solutions may be more suitable. Depending on your circumstances, alternatives such as a debt agreement, personal insolvency agreement or informal arrangement with creditors may achieve a better outcome.

Seeking professional advice before lodging an application can help you understand your options and make an informed decision.

Bankruptcy can provide relief from many unsecured debts, including outstanding tax liabilities. However, becoming bankrupt does not automatically remove all financial obligations, and the treatment of tax debt depends on your individual circumstances.

You'll still be required to lodge outstanding tax returns, and your trustee will work with the Australian Taxation Office (ATO) and other creditors as part of administering your bankruptcy. Some liabilities, including certain penalties or obligations that arise after bankruptcy begins, may continue to apply.

Because tax matters can be complex, it's important to seek advice if you have significant outstanding tax obligations.

In many cases, unpaid tax debts owed to the Australian Taxation Office (ATO) are unsecured debts and may be included in your bankruptcy. This means the ATO generally becomes one of your creditors and participates in the bankruptcy process alongside other unsecured creditors.

However, bankruptcy does not remove your obligation to comply with Australia's tax laws. You'll still need to lodge tax returns, meet your ongoing tax obligations and cooperate with both your trustee and the ATO throughout the bankruptcy process.

If your financial difficulties are largely due to tax debt, seeking advice before declaring bankruptcy is important. Depending on your circumstances, there may be alternative solutions available, such as payment arrangements with the ATO or other insolvency options, that better meet your needs.

Bankruptcy can release you from most unsecured debts, but not every debt is cleared. Debts that generally remain payable can include court-imposed fines and penalties, child support and maintenance, HECS and HELP debts, debts incurred after bankruptcy begins and, in some circumstances, debts arising from fraud. Secured debts also need to be considered separately if you want to keep the asset securing the debt.

Before declaring bankruptcy, it is important to understand exactly which debts will remain and whether another personal insolvency option may provide a better outcome.

Superannuation held in a complying or regulated superannuation fund is generally protected from your bankruptcy trustee. However, the treatment can change depending on when and how superannuation is received.

For example, superannuation withdrawn before bankruptcy and still held as cash may be available to the trustee, while lump-sum superannuation payments received during or after bankruptcy are generally protected. Superannuation received as an income stream may also be included when assessing compulsory income contributions.

RSM explains these rules in more detail in Superannuation & bankruptcy: What you need to know

You may be able to keep your car during bankruptcy if the equity you hold in the vehicle is below the applicable indexed threshold, it is primarily used for transport and you continue making any required finance repayments. If the value of your interest exceeds the allowable threshold, your trustee may be able to claim and sell the vehicle.

The rules depend on the vehicle's value, finance owing and your ownership interest. RSM's guide to how bankruptcy impacts property, employment, income and superannuation provides further information about assets that may be retained or realised during bankruptcy.

Bankruptcy generally ends after three years and one day, although it can be extended in some circumstances. Once you are discharged, you are released from most debts covered by the bankruptcy and restrictions such as needing trustee permission to travel overseas generally cease. You can also apply for credit again, although lenders will make their own assessment and your bankruptcy may remain on your credit report for a period after discharge.

Importantly, the trustee may still need to deal with certain assets or outstanding matters after your bankruptcy ends. RSM's bankruptcy services can help you understand both the bankruptcy process and what to expect after discharge.