What is bankruptcy

Bankruptcy is the legal process undertaken when you cannot pay your outstanding debts, whereby you give up control of your finances and possession of assets and as a result will be absolved of most of your debts. Although bankruptcy can provide relief from the strain of large debts, it can have a significant impact on your life, so it is essential to understand the consequences.

When you become bankrupt, a trustee will be appointed and take control of your property and affairs. Powers of trustees are contained in section 134 of the Bankruptcy Act 1966 (Cth) and include powers such as selling your property.

Property is defined in the Act as “real or personal property of every description, whether situated in Australia or elsewhere and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.”

Property that can be taken

Once you are declared bankrupt, generally your appointed trustee is given legal ownership or interest in all your property and assets. Some of your property and assets are protected under the Bankruptcy Act, and some can be liquidated in order to repay your creditors.

Your house and any property you own may be sold to repay your creditors. If you have a mortgage over a property, your secured creditor (bank or lender) may repossess and sell this property.

Money in your bank account may be taken by your trustee, but they may leave enough for modest living expenses. Compensation payments not related to personal injury, life insurance payments received before bankruptcy, and inheritances are all able to be taken by your trustee. Shares, dividends, lottery prizes, gifts, tax refunds and cryptocurrency may also be claimed by your trustee.

Property you can keep

  • Tools used to earn income, up to the value of $3,800
  • Vehicles used as primary means of transport, up to the value of $8,000
    • Excluding caravans, motorhomes and campervans
  • Personal property with sentimental value – e.g. wedding ring, family heirlooms
  • Household items of reasonable value – e.g. furniture, appliances
  • Superannuation is a regulated super fund, except where:
    • Unusual lump payments were made prior to bankruptcy in an attempt to protect the money, and
    • Money from your super is paid to you as a pension (this is treated as income and can be taken)
  • Protected money – including compensation for personal injury, life insurance payments received during bankruptcy, and assets purchased using these payments.

Joint assets

If you jointly own assets with another person, such as your partner, your trustee has ownership of your share in the property. If you jointly own a vehicle, you may keep it if your share in its value is less than the threshold (currently $8,000). If your share value is over this threshold, your trustee may sell the vehicle and pay out the co-owner for their share, or the co-owner may purchase your share of the vehicle. Similarly, for jointly owned houses or property, your trustee may sell the property and take your share value, or your co-owner may negotiate with the trustee to buy out your share. Even if you aren’t on the certificate of title, property your partner owns may be claimed by your trustee. The trustee will make an assessment of the title or loan documents, the use and history of the property, including contributions made by you, and your relationship with the owner of the property.