Consequences of Bankruptcy

Introduction

Data from the Australian Financial Authority reveals that for the last financial year, personal insolvencies were up by 5.3% to 12,257, with business-related personal insolvencies accounting for 28.8% of that number¹.

As we await data for FY 2025-26, Litigation Lawyer Graham Egan provides a timely reminder of the legal consequences for individuals who become bankrupt under Australian law.

Personal bankruptcy is governed primarily by the Bankruptcy Act 1966 (Cth) and represents a legal process with wide-ranging implications for the bankrupt person's property, financial affairs, and personal freedoms.

Property Consequences

The bankrupt's property vests in a Trustee. This means all property acquired before and during the bankruptcy of every description and wherever situated. The bankrupt therefore loses control over their assets, which are administered and distributed among creditors according to statutory priorities. There are limited exceptions to this general rule.

Legal Proceedings

Bankruptcy generally pauses legal proceedings commenced by or against the bankrupt unless the Trustee elects to continue them or they relate to personal injury, wrongs to the bankrupt or their family, or the death of a family member.

Travel Restrictions

A bankrupt cannot leave Australia without the written consent of their Trustee, and it is a crime to do so which is punishable by up to three years imprisonment. The Trustee has discretion to impose conditions on any consent granted.

Professional and Business Limitations

A bankrupt is automatically disqualified from being a company director without obtaining permission from the court. They also cannot operate a trust account. Industry associations or licencing authorities may impose their own restrictions or conditions on members or licensees who become bankrupt. This means that certain trades and careers are more significantly impacted by bankruptcy than others.

If the bankrupt operates as a sole trader, their activities are subject to certain restrictions, and they must disclose their bankruptcy to everyone they do business with.

Credit and Financial Reputation‍

A bankrupt's credit record will be affected by the bankruptcy. The formal bankruptcy will be a matter of public record and may have additional negative effects on credit worthiness and the ability to obtain credit in the future.

Obligations the bankrupt has to their Trustee

There are also a number of obligations on the bankrupt to the Trustee throughout the life of their bankruptcy which include:

• Cooperating with the Trustee and providing information.
• If the bankrupt earns over the income threshold, they will have to make compulsory payments to the Trustee for dealing with in the bankruptcy. The current threshold is around $72,000 if they have no dependents.  Amounts above that are subject to the compulsory payment regime.
• The bankrupt can’t dispose of any property or assets whilst they remain bankrupt and must tell the Trustee if they come into any money or property whilst bankrupt as some assets may become part of the assets available to the Trustee to satisfy their debts.

Termination

After three years, and if the bankrupt complies with their obligations and there are no objections from the Trustee, the bankrupt is released from all debts, local and foreign, provable in the Australian bankruptcy. Objections can lead to an extension of bankruptcy.

Creditor Treatment

 All creditors, whether foreign or local, may prove claims in bankruptcy and will be treated equally. This ensures orderly distribution of available assets according to statutory priorities.

At the end of the bankruptcy and subject to the legislation that provides certain debts survive bankruptcy, all provable creditors prior to they bankruptcy can no longer make claims against the bankrupt as they are all swept up and effectively “put to bed” in the bankruptcy process.

How Sharrock Pitman Legal can help?

For legal advice regarding bankruptcy, including if you have been served with a bankruptcy notice or are considering voluntary bankruptcy, please contact our litigation team on (03) 9560 2922 to speak to one of our lawyers or email sp@sharrockpitman.com.au.

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1 [Source:https://www.afsa.gov.au/about-us/statistics-and-insights/headline-statistics/financial-year-personal-insolvency-statistics]

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

Liability limited by a scheme approved under Professional Standards Legislation‍