Bankruptcy Lawyers 101 – Complete Guide
Bankruptcy lawyers, or personal insolvency lawyers, can help a number of different parties to a bankruptcy proceeding.
If a party is not able to pay their debts when they are due and payable, they are legally insolvent.
If a person cannot raise the money needed to pay those debts then they can be made bankrupt.
During this process there will be:
- Creditors – the person / company who is owed the debt;
- Debtors – the person who owes the debt and is unable to pay the debt; and
- Trustee – an entity appointed to manage the bankrupt’s financial affairs.
Bankruptcy lawyers work for creditors, trustees, and debtors.
Our insolvency lawyers explain in this article exactly what bankruptcy lawyers do.
What do Bankruptcy Lawyers Do?
Debt recovery and bankruptcy lawyers are able to give advice and assistance in all personal debt matters, from pre-bankruptcy advice to post bankruptcy advice. This includes (but is not limited to):
- Advice and assistance in relation to drafting or signing debt agreements, such as car financing agreements, home loan, agreements, mortgages, etc;
- Advice and assistance in relation to all pre-bankruptcy proceedings, including advising on your rights, risks and liabilities;
- Drafting lawyers letters of demand to a debtor foreshadowing bankruptcy action if the debtor does not attempt to pay their debts;
- Drafting, filing and service of a bankruptcy notice on behalf of a creditor;
- Advice and assistance with a debtor’s risks, rights, and liabilities when a debtor is served with a bankruptcy notice;
- Advice and assistance with the validity of a bankruptcy notice, and the steps needed when attempting to resist a bankruptcy notice;
- Advice and assistance on a creditors eligibility to present a creditor’s petition to the Federal Circuit and Family Court of Australia;
- Drafting, filing, and serving a creditor’s petition and all of the supporting documents needed in the bankruptcy proceeding;
- Advice and assistance on a debtors eligibility to present a debtor’s petition to AFSA;
- Drafting, filing, and serving a debtor’s petition and all of the supporting documents needed for AFSA;
- Working with the trustee to realise assets of the bankrupt, including voidable transactions in bankruptcy, and all claims from trustees in bankruptcy;
- Assistance in the negotiation of personal debt settlement agreements, personal insolvency agreements, and personal debt agreements;
- Advice and assistance relating to a bankrupts rights and obligations during the bankruptcy;
- Advice and assistance relating to a bankrupts rights and obligations after the bankruptcy;
- Advice and assistance on how to secure an early release from bankruptcy; and
- Advice and assistance in the Federal Circuit and Family Court of Australia with defending or resisting bankruptcy proceedings.
What is Bankruptcy?
Bankruptcy occurs when a debtor is unable to pay their debts.
It can initiated by a debtor using a debtor’s petition, or a creditor after receiving a judgment debt using a creditor’s petition.
In either case, a bankruptcy trustee is appointed to manage the financial affairs of the bankrupt and realise assets and property of the bankrupt, to satisfy the debts to the creditors.
A bankruptcy lawyer can help you with your debtor’s petition, help you enforce your judgment debt with a creditor’s petition, and assist the bankruptcy trustee with the bankruptcy.
What is a Debtor’s Petition?
Section 55 of the Bankruptcy Act 1964 (Cth) (“Bankruptcy Act”) says:
Subject to this section, a debtor may present to the Official Receiver a petition against himself or herself.
Section 5 of the Bankruptcy Act says:
“Official Receiver” includes a person acting as an Official Receiver.
The official receiver is an appointment under statute. On behalf of the Official Receiver, the Australian Financial Security Authority (“AFSA”) operates the day-to-day administration of bankruptcies, such as issuing bankruptcy notices, deciding debtor’s petitions, etc.
To petition for your own bankruptcy, a debtor must file a debtor’s petition and a statement of affairs with the Official Receiver.
If the debtor’s petition is accepted then the debtor has the option of appointing a registered trustee for the administration of the debtor’s estate, however creditors can change the trustee later.
Rejection of a Debtor’s Petition
Section 55(3) of the Bankruptcy Act also prescribes ways in the Official Receiver may reject a debtor’s petition, including if:
- The petition does not comply substantially with the approved form; or
- The petition is not accompanied by a statement of affairs; or
- The Official Receiver thinks that the statement of affairs accompanying the petition is inadequate.
- It appears from the information in the statement of affairs (and any additional information supplied by the debtor) that, if the debtor did not become a bankrupt, the debtor would be likely (either immediately or within a reasonable time) to be able to pay all the debts specified in the statement of affairs; and more.
If you are having financial problems and you are having trouble meeting your debts when they become due and payable, then contact our bankruptcy lawyers for advice and assistance with a debtor’s petition.
What is a Creditor’s Petition?
A creditor’s petition is an application to the Federal Circuit and Family Court of Australia from a creditor applicant, to a debtor respondent, asking the Court for a sequestration order, making the debtor bankrupt.
A creditor or the creditor’s bankruptcy lawyer must follow these steps:
- You must get a judgment from a Court over $10,000.00
- Apply to AFSA for a bankruptcy notice;
- Serve the bankruptcy notice and the judgment on the debtor;
- The debtor commits an act of bankruptcy;
- Present a creditor’s petition and supporting material to the Federal Circuit and Family Court of Australia;
- Serve the creditor’s petition and supporting material on the judgment debtor;
- Prepare your final affidavits (affidavit of debt & affidavit of search);
- If all is good, and the application is unopposed, the Court will make the sequestration order.
Judgment from a Court over $10,000.00
Section 41 of the Bankruptcy Act says:
An Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor:
(a) a final judgment or final order that:
(i) is of the kind described in paragraph 40(1)(g); and
(ii) is for an amount of at least $10,000; or
(b) 2 or more final judgments or final orders that:
(i) are of the kind described in paragraph 40(1)(g); and
(ii) taken together are for an amount of at least $10,000.
This means that you must have a judgment or final order of $10,000.00 or more, or two (2) or more judgments which total $10,000.00 or more to apply to AFSA for a bankruptcy notice.
Apply to AFSA for a Bankruptcy Notice
If you have a judgment from the Court which meets the requirement of section 41 above, then you can apply online on the AFSA website for a bankruptcy notice.
You have to be registered with AFSA to apply.
It is very important that the bankruptcy notice is completed correctly. One of the ways in which a bankruptcy notice can be set-aside is if it is defective.
We strongly recommend getting a bankruptcy lawyer to complete the drafting of the bankruptcy notice.
The cost of issuing a bankruptcy notice from AFSA is $470.00.
Serve the Bankruptcy Notice on the Debtor
Once you have a completed bankruptcy notice, you will need to serve the bankruptcy notice on the judgment debtor. You will have 6 months commencing on the date of issue of the bankruptcy notice.
A bankruptcy notice is not an originating process, but is a document, and so ordinary service is fine.
Section 102 of the Bankruptcy Regulations 2021 (Cth) (“the Regulations”) allows a document to be served on a debtor in the following ways:
(1) Unless the contrary intention appears, if a document is required or permitted by the Act or this instrument to be given or sent to, or served on, a person (other than the Inspector-General, the Official Receiver or the Official Trustee), the document may be:
(a) sent by a courier service to the person at the address of the person last known to the person serving the document; or
(b) left, in an envelope or similar packaging marked with the person’s name and any relevant document exchange number, at a document exchange where the person maintains a document exchange facility.
Note: See also section 28A of the Acts Interpretation Act 1901 .
(2) In the absence of proof to the contrary, the document is taken to have been received by, or served on, the person when the document would, in the due course of business practice, be delivered to that address or document exchange.
If the debtor does not comply with the bankruptcy notice and so commits an act of bankruptcy, you will need to file an affidavit of service of the bankruptcy notice, so ensure that you keep evidence of service to annex to the affidavit.
We have a very detailed article – Can you Still Serve a Bankruptcy Notice by Email?
If in doubt, bankruptcy lawyers can do this for you.
Act of Bankruptcy
A bankruptcy notice requires a debtor to comply with the notice. If the debtor fails to comply with the bankruptcy notice within 21 days from being served, then they have committed an act of bankruptcy.
Section 40(1)(g) of the Bankruptcy Act says:
(1) A debtor commits an act of bankruptcy in each of the following cases:
… (g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:
(i) where the notice was served in Australia–within the time specified in the notice; or
(ii) where the notice was served elsewhere–within the time fixed for the purpose by the order giving leave to effect the service;
comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counterclaim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained.
There are a number of other acts of bankruptcy, so it is worth reading all of section 40.
If the debtor commits an act of bankruptcy, then you have six (6) months to present the creditor’s petition to the Federal Circuit and Family Court of Australia of Australia.
Present a Creditor’s Petition to the Court
Section 43 of the Bankruptcy Act says:
Subject to this Act, where a debtor has committed an act of bankruptcy … the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.
A creditor’s petition is an originating process and will need to be drafted correctly.
To commence proceedings, the creditor will need to draft and file the following documents:
- Creditor’s petition; and
- Affidavit of service of the bankruptcy notice; and
- Affidavit of search; and
- Consent to act as trustee.
These are all complicated legal documents and will need to be completed correctly. We strongly recommend engaging bankruptcy lawyers to draft and file these documents.
Once drafted and filed with the Federal Court’s eLodgment system, you will be given sealed versions of the documents from the Court, with the return date for the hearing.
You will also need to pay the following filing fees:
- A corporate applicant (if you are suing in your company name) will cost $4,425.00; or
- If you are suing in your personal name $1,845.00.
Those sealed versions are to then be served on the debtor.
Serve the Creditor’s Petition on the Debtor
Personal service in the Federal Court jurisdiction is called “Service by Hand”.
Rule 4.05 of the Federal Court (Bankruptcy) Rules 2016 (Cth) (“the Rules”):
Unless the Court otherwise orders, at least 5 days before the date fixed for the hearing of a creditor’s petition, the applicant creditor must serve on the respondent debtor:
(a) the creditor’s petition; and
(b) a copy of the affidavit, or affidavits, verifying the petition required by subsection 47(1) of the Bankruptcy Act; and
(c) if applicable, a copy of the affidavits relating to the petition required by rule 4.04; and
(d) a copy of any consent to act as trustee of the debtor’s estate filed under section 156A of the Bankruptcy Act.
Once served, an affidavit of service of the creditor’s petition must be drafted and filed.
If you cannot personally serve the debtor by hand, then you may need to make an application for substituted service. Read our article on substituted service of a creditor’s petition here.
The Court will Make the Sequestration Order
After you prepare and file your final affidavits, ensure that everything is drafted and filed correctly, and the debtor does not oppose the petition, it is likely that Court will make the sequestration order forcing the debtor into bankruptcy.
If you are unable to set this aside, then you may be able to annul your bankruptcy.
Alternatives to Bankruptcy for Debtors
Bankruptcy lawyers can offer advice and assistance regarding alternatives to presenting a debtor’s petition. There are a number of alternatives to consider before filing for bankruptcy, including:
- Informal debt agreements; or
- Formal Part IX Debt Agreements; or
- Part X Personal Insolvency Agreements.
Alternatives to Bankruptcy for Creditors
Bankruptcy lawyers can offer advice and assistance regarding alternatives to presenting a creditor’s petition to the Federal Circuit and Family Court of Australia.
There are a number of alternatives that the debtor may want you to consider before presenting your petition, including:
- Informal debt agreements; or
- Enforcement through the Queensland Courts; or
- Formal Part IX Debt Agreements; or
- Part X Personal Insolvency Agreements.
Informal Debt Agreements by Bankruptcy Lawyers
Bankruptcy lawyers can attempt to negotiate an informal debt agreement, usually in the form of a deed of settlement.
At this point however, a creditor may have had months, or even years, of broken promises to pay and protracted litigation, making it difficult to negotiate.
A debtor will need to negotiate for something more than simply a promise to pay. A creditor may consider a deed simply another agreement which the debtor will not honour.
It is likely that a debtor will need to leverage something else to attempt to get a creditor to agree, security for the judgment debt, interest on repayments, and/or payment of costs, for example.
A qualified bankruptcy lawyer will be able to negotiate a good deal in an attempt to avoid enforcement proceedings, including bankruptcy proceedings.
Enforcement through the Queensland Courts
At this point, the creditor has been forced to get a judgment against the debtor, and all of the associated costs that were incurred because of it. From a creditor’s perspective, it may be understandable that they do not want to risk a further breach, or non-payment.
If an informal agreement cannot be reached, a creditor and/or a debtor might want to consider consenting to an enforcement warrant as an alternative to bankruptcy.
A warrant for redirection of earnings, or a warrant for redirection of debts, or an order authorising payment by instalments, for example.
A creditor may also consider other enforcement warrants, such as a warrant for seizure and sale of property which includes “all real and personal property”. A debt recovery / bankruptcy lawyer will be able to advise and assist in relation to enforcement through the Queensland Courts, and enforcement warrants.
Part IX Debt Agreements
A Part IX (Part 9) Debt Agreement is an agreement between a debtor and creditors to repay the debt or debts to the creditor.
As the name suggests, a Part IX Debt Agreement is an agreement pursuant to Part IX (Part 9) of the Bankruptcy Act.
The debtor must give a written proposal, and a statement of the debtor’s affairs with the proposal, to AFSA for repayment of debts to the creditors.
Once a compliant proposal is accepted by AFSA it is then provided to the creditors so that all of the creditors can vote on the proposal.
If the majority of the creditors vote to agree to the proposal, then the Part IX agreement is accepted.
Pursuant to section 185 of the Bankruptcy Act, this then means that upon acceptance of the Part IX agreement, a creditor cannot apply for enforcement of, or enforce, a remedy against the debtor’s person or property in respect of a frozen debt; and an enforcement officer must not take action, or further action, to execute, or sell property under, any process issued by a court to enforce payment of a frozen debt owed by the debtor.
Basic Eligibility for Part IX Agreement
To be eligible for a Part IX debt agreement you will need to satisfy the following:
- You must be insolvent – meaning that you are unable to pay your debts when they become due and payable;
- You must not have been bankrupt; or had a Part IX debt agreement; or had a Part X personal insolvency agreement; within the last ten (10) years;
- You must have unsecured debts of less than the threshold amount which is currently $140,012.60 – See here;
- You cannot have assets which are more than the threshold amount which is currently $280,025.20 – See here; and
- You cannot earn more after-tax income for the next 12 months to be than the threshold amount which is currently $105,009.45 – See here.
What does a Part IX Debt Agreement mean for me?
Although this debt agreement can be a good alternative to bankruptcy, it comes with a price.
Firstly, proposing a Part IX Debt Agreement is an act of bankruptcy.
Section 40(1)(h) of the Bankruptcy Act says:
(1) A debtor commits an act of bankruptcy in each of the following cases:
(ha) if the debtor gives the Official Receiver a debt agreement proposal;
(hb) if a debt agreement proposal given by the debtor to the Official Receiver is accepted by the debtor’s creditors;
(hc) if the debtor breaches a debt agreement;
(hd) if a debt agreement to which the debtor was a party (as a debtor) is terminated under section 185P, 185Q or 185QA;
An act of bankruptcy, like non-compliance with a bankruptcy notice, allows the creditors to present a petition to the Federal Circuit and Family Court of Australia.
A Part IX debt agreement is registered on the National Personal Insolvency Index, a search of which will show your name, which may affect your credit rating and your ability to borrow.
A Part IX Debt Agreement will only cover unsecured debts, a secured creditor can still attempt to realise their security interest.
If you trade under a business name, being a name that is not your name, you have to disclose the Part IX Debt Agreement to all other people that you are in business with.
Part X Personal Insolvency Agreements
A Part X (Part 10) Personal Insolvency Agreement is another agreement between a debtor and creditors to repay the debt or debts to the creditors.
As the name suggests, a Part X Personal Insolvency Agreement is an agreement pursuant to Part X (Part 10) of the Bankruptcy Act.
Section 188 of the Bankruptcy Act says that a debtor may sign an authority naming and authorising a registered trustee, a bankruptcy solicitor or the Official Trustee to call a meeting of the debtor’s creditors and to take control of the debtor’s property.
A Part X Personal Insolvency Agreement is similar to bankruptcy in a number of ways, except that it allows the debtor more control over how the trustee deals with the assets, property, etc. and how it is to be distributed to creditors.
Basic Eligibility for Part X Personal Insolvency Agreement
There are less eligibility requirements for a Part X Personal Insolvency Agreement. To be eligible, you simply need:
- To be insolvent – meaning not able to pay your debts when they become due and payable;
- To be present in, or reside in Australia or have a connection to Australia;
- To have not proposed a Part X Personal Insolvency Agreement in the previous six (6) months.
What does a Part X Personal Insolvency Agreement mean for me?
Although a Part X Personal Insolvency Agreement can be a good alternative to bankruptcy, it comes with a price, and it is a harsher price than a debt agreement.
Firstly, entering into a Part X Personal Insolvency Agreement is an act of bankruptcy.
Section 40(1)(l)(m) of the Bankruptcy Act says:
(1) A debtor commits an act of bankruptcy in each of the following cases:
(l) if, having been required by a special resolution of a meeting of his or her creditors so called to execute a personal insolvency agreement or to present a debtor’s petition, he or she fails, without sufficient cause:
(i) to comply with the requirements of this Act as to the execution of the agreement by him or her; or
(ii) to present a debtor’s petition within the time specified in the resolution;
as the case may be;
(m) if a personal insolvency agreement executed by him or her under Part X is:
(i) set aside by the Court; or
(ii) terminated;
An act of bankruptcy, like non-compliance with a bankruptcy notice, allows the creditors to present a petition to the Federal Circuit and Family Court of Australia.
A Part X Personal Insolvency Agreement is registered on the National Personal Insolvency Index forever, a search of which will show your name, which may affect your credit rating and your ability to borrow, and a default will appear on your credit file.
A Part X Personal Insolvency Agreement means that you will not be able to have any dealings with your assets (house or real property) without the consent of the trustee.
A Part X Personal Insolvency Agreement does not allow you to be the director of a company, and so if you are currently the director of a company (a trustee company of a self-managed-superannuation-fund, for example) then you will have to appoint another director.
What can Bankruptcy Lawyers do for me?
Bankruptcy Lawyers can do everything mentioned above and more.
If you are a debtor having difficulty paying your debts, or you are a creditor having difficulty getting paid from a debtor, then you should contact a debt recovery / bankruptcy lawyer.
Bankruptcy Lawyers FAQ
Navigating the complexities of bankruptcy in Australia can be challenging. Here are some frequently asked questions and answers that provide clarity on the role of bankruptcy lawyers, the process, and the implications for both debtors and creditors.
What is a bankruptcy lawyer?
A bankruptcy lawyer is a legal professional who specialises in insolvency law, primarily focusing on assisting individuals and companies to either recover from financial hardship or process claims against entities that have declared bankruptcy. They guide clients through legal proceedings, help in filing bankruptcy, and offer advice on alternatives to bankruptcy, such as debt agreements or personal insolvency agreements.
When should I consult a bankruptcy lawyer?
You should consult a bankruptcy lawyer when facing financial difficulties that might require legal resolution, such as when debts become unmanageable, before declaring bankruptcy, or if you are a creditor whose debtor has declared bankruptcy. These lawyers can provide strategic advice on both the implications of declaring bankruptcy and the alternatives available.
What are the alternatives to bankruptcy?
Alternatives to bankruptcy include debt agreements, personal insolvency agreements, and informal arrangements. These options are often considered before formal bankruptcy and involve negotiations with creditors to arrange payment plans or settle debts at an amount less than the total debts owed, potentially allowing the debtor to avoid the full impact of bankruptcy.
What is a Part IX Debt Agreement?
A Part IX Debt Agreement is a form of debt arrangement under the Bankruptcy Act that allows individuals facing financial difficulty to reach a legally binding agreement with their creditors to settle debts. This agreement enables debtors to pay back what they can afford over a period of time, avoiding the harsher consequences of full bankruptcy.
What does the bankruptcy process involve?
The bankruptcy process involves several steps including the filing of a debtor’s petition or a creditor’s application, assessment of the debtor’s financial affairs, and the appointment of a trustee. This trustee then manages the debtor’s estate to resolve debts by liquidating assets and distributing the proceeds among creditors according to legal priorities.
How long does bankruptcy last?
In Australia, bankruptcy typically lasts for three years and one day from the day it is declared, unless extended by the court. During this period, the person’s financial affairs are controlled by a trustee, and they are subject to certain restrictions, such as not being able to travel overseas without permission from the trustee.
Can bankruptcy be annulled?
Yes, bankruptcy can be annulled if the bankrupt person pays off all their debts or enters into a composition or arrangement with creditors, which is accepted and fully complied with. Annulling bankruptcy can remove the legal declaration of bankruptcy and its associated restrictions.
What are the consequences of declaring bankruptcy?
Declaring bankruptcy has significant financial and legal consequences, including damage to credit ratings, loss of assets, restrictions on employment in certain fields, and the inability to act as a company director. It can also affect the debtor’s ability to travel internationally and obtain certain types of loans.
Can a bankrupt individual travel overseas?
A bankrupt individual may travel overseas but must first obtain permission from their trustee. The trustee may refuse permission based on various factors, including the risk of non-return. If permitted, the individual often needs to meet specific conditions laid out by the trustee.
How can a bankruptcy lawyer help a creditor?
A bankruptcy lawyer can assist creditors by ensuring that they navigate the bankruptcy process efficiently to recover owed debts. This includes filing proofs of debt, attending creditors’ meetings, and advising on the legal ramifications of the debtor’s bankruptcy and potential recovery avenues.
