A person can either voluntarily become bankrupt by completing a Debtor’s Petition and lodging it with the Australian Financial Security Authority or a creditor can make an application to Court to make someone bankrupt. The most common creditor who makes applications to Court to make people bankrupt is the Australian Taxation Office (ATO).
When a person becomes bankrupt a bankruptcy Trustee is appointed to manage the bankruptcy. A bankruptcy Trustee is an independent person appointed by the Court if the Court makes a person bankrupt. People who voluntarily become bankrupt can choose their own bankruptcy Trustee.
Bankruptcy normally lasts for 3 years unless the time period is extended by your bankruptcy Trustee.
A person who becomes bankrupt is released from and no longer has to pay most debts they owe at the date of their bankruptcy. This includes debts owed to the ATO, unless the ATO has issued a Garnishee Notice to a person’s employer or third party, in which case they will not be released from the amount claimed in the Garnishee Notice.
Some of the other consequences and effects of bankruptcy include:
- A bankrupt’s assets, which are divisible property will be sold or realised. This commonly includes real property, shares, cash at bank and motor vehicles, although only vehicles over a certain value can be sold;
- Restrictions on a bankrupt travelling overseas;
- A bankrupt cannot be a company director and there are restrictions on a bankrupt trading a business as a sole trader; and
- If a bankrupt earns over a certain after-tax amount they have to pay 50 cents in every after-tax dollar earned over that amount to their bankruptcy Trustee.
In some circumstances bankruptcy is the best or only way to deal with unmanageable tax debts to the ATO, as it will result in a person being released from these debts and effectively gives the person a fresh start without the burden of significant tax liabilities. But bankruptcy is serious, understanding what to expect can be difficult and should be done in consultation with bankruptcy professionals.