Debt Collection
9. Bankruptcy for Personal Debts
Firm / Chambers:
Last updated: 17 Jul 2015
- The Australia-wide bankruptcy law deals with cases where a debtor may be declared bankrupt in circumstances where they owe the creditor more than $5,000. The law sets out the situations where the debtor may be declared bankrupt.
- Section 40 of the Bankruptcy Act 1966 (Cth) lays out the different situations where a debtor has committed an ‘act of bankruptcy’. In these cases the creditor can apply to the Federal Court for a special order that declares that the debtor is bankrupt.
- The creditor will need to show the court that there has been an act of bankruptcy. Usually the creditor will provide evidence that the debtor did not comply with the bankruptcy notice.
- To do this they will have served the debtor with the bankruptcy notice that was issued after they got the judgement debt from the court. A bankruptcy notice gives the debtor 21 days to make arrangements to pay the debt in full.
- A failure to comply with this notice is an act of bankruptcy.
- Bankruptcy notices should be used as a test of solvency not as a method of debt collection. These notices are used as a test of solvency because if you pay the debt you pass the test. If you fail to pay the debt then you fail the solvency test and will be declared bankrupt.
- It is advisable to do some research about the debtor before you issue a bankruptcy notice. This is to see if they have any assets and if the process is worthwhile. To do this you can make checks such as:
- finding out if the debtor owns any real estate. You can do this by doing a Land Titles Office search; or
- by checking whether anyone else has taken legal action against the debtor. You can do this by contacting a credit reporting agency.
- A bankruptcy notice is more likely to be a successful if the debtor owns something that they do not want to lose such as owning real estate or having professional qualification.
- In cases where the debtor does not comply with the notice then you can apply to the Federal Court for a ‘creditor’s petition’. This is a special order where the court declares that the debtor is bankrupt and it appoints a Trustee to the estate. If this happens you can still avoid bankruptcy by paying the debt in full to the creditor.
- The creditor’s petition is a claim for payment of the debt. It can include any legal costs associated with applying for both the bankruptcy notice and the creditor’s petition.
- It is common for a creditor’s petition to be issued without the need for a bankruptcy notice. This situation usually arises if you already have a written document that confirms that the debtor is insolvent.
- An example of this would be if the debtor had written to you offering to pay the debt in instalments because they were unable to pay the debt in full. A lawyer will be able to advise you whether this is possible. You may also wish to ask your financial adviser about whether you should accept the instalment plan or push for bankruptcy.
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