The threat of personal bankruptcy is a common tactic used by creditors in an attempt to recover money from a debtor.  It is helpful for creditors and debtors alike to understand when a creditor may make a debtor bankrupt and the consequences of doing so.

When can a creditor make a debtor bankrupt?

A creditor is entitled to apply to the Federal Court or the Federal Circuit Court if the creditor is owed a debt of $5,000 or more and the debtor has committed an ‘act of bankruptcy’.  That is to say, the mere fact that a creditor is owed money does not automatically give the creditor a right to make the debtor bankrupt.  The debtor must also have committed an act of bankruptcy.

Most relevantly, a debtor will commit an act of bankruptcy if:

(a) he or she gives notice to any of his or her creditors that he or she has suspended, or that he or she is about to suspend, payment of his or her debts; or

(b) if the creditor has obtained judgment from a court against the debtor for a debt, has served a bankruptcy notice on the debtor requiring payment of the judgment debt and payment has not been made after 21 days of service of the bankruptcy notice.

Only once there has been an act of bankruptcy can a creditor apply to the Court for an order declaring the debtor bankrupt.

What happens when a debtor is made bankrupt?

When a debtor is declared bankrupt by the Court, a registered trustee is appointed to manage the bankruptcy.  All of the property of the bankrupt, except exempt property, immediately becomes the property of the trustee and will be divisible among the bankrupt’s creditors.  Exempt property includes:

(a) Property held by the bankrupt in trust for another person;

(b) Limited household and personal property of the bankrupt; and

(c) A vehicle and tools used for the bankrupt’s trade.

The trustee has the power to review transactions to which the debtor was a party prior to being made bankrupt and reverse any transactions which were designed to defeat creditors or which were for the sale of property below its value.

The trustee can, in certain circumstances, make a claim to property held legally in the name of another person (usually the bankrupt’s spouse) where the bankrupt has contributed to the purchase price of that property.

During the period of bankruptcy, the bankrupt will be obliged to pay over part of their income to the trustee if the income exceeds the relevant threshold.

Once the trustee has taken possession or control of all of the property which forms the bankrupt estate and liquidated the property, the trustee will then, after payment of the trustee’s fees, distribute the dividends among the creditors.  If there is insufficient property to meet all proven debts, creditors will be entitled to any dividends on a pro rata basis.

A bankrupt will generally be discharged from bankruptcy after three years.

If you are owed a debt and would like advice on whether and how to make the debtor bankrupt please contact us.