What are the consequences of bankruptcy?

Personal Insolvency occurs when a person is unable to pay their debts as and when they fall due. Our Litigation team explains what happens next.


Bankruptcy is the legal process and status that a person has under the Bankruptcy Act 1966 (Cth). An individual becomes bankrupt either voluntarily or involuntarily. Upon bankruptcy, property owned by the bankrupt vests with the Official Trustee in Bankruptcy or a trustee that is registered under the Bankruptcy Act 1996 (Cth). For more information about bankruptcy generally, please see our article titled A Guide to Bankruptcy.

What happens after I am declared bankrupt?

As noted above, a trustee in bankruptcy will be appointed to deal with your assets. The period of bankruptcy is usually three years and one day, however this may be extended upon application to the Court by the trustee.  

Your assets include property held at the start of the bankruptcy and those that you have acquired during bankruptcy. Further, certain property that you may have disposed of prior to bankruptcy can also be recovered by the trustee in bankruptcy in some circumstances.  

Role of the trustee

The trustee’s role in bankruptcy proceedings is to recover and sell property and distribute those proceeds to creditors who are owed money by the bankrupt.  

What are the main consequences of bankruptcy?

Although bankruptcy can provide relief to a person who is unable to pay their debts, there are a range of significant consequences that you should be aware if you are considering a voluntary bankruptcy. Some of these consequences are as follows:

1.    Ownership and control of property

Once you are declared bankrupt, most divisible property owned at the time of bankruptcy or acquired after bankruptcy vests in the trustee. Common types include shares, real estate, vehicles and fixtures and fittings as well as rights or powers over property that existed at the date of bankruptcy or during the bankruptcy. Further, if you earn over a specific amount (as set each year), then you may need to make compulsory payments to the trustee.

2.    Overseas travel  

In some situations, the trustee will require you to forfeit your passport until your bankruptcy period has finished.  However, in all situations, you will be required to obtain written permission from the trustee should you wish to travel overseas.

3.    Disclosure of bankruptcy and impacts on ability to obtain credit and future employment

Disclosure of your bankruptcy

Unless you tell the other party that you are an undischarged bankrupt (i.e. during their bankruptcy period), you cannot:

(a)  obtain credit, such as a loan from a bank over a set amount;

(b)  enter into a contract or agreement for the hire or lease of any goods (such as a car) over a set amount;

(c)  promise to pay for goods over a set amount;

(d)  obtain money from someone by promising to supply goods or services over a set amount; and

(e)  carry on a business under another name either alone or in partnership or under a firm name, without disclosing to all those people involved that you are an undischarged bankrupt.  

Impacts on obtaining credit and future employment

As your name will be permanently recorded on the National Personal Insolvency Index, a future employer or bank may search this register to find out whether you are currently bankrupt or have ever been bankrupt. This will likely impact future job prospects and impede obtaining finance (such as loans). Further, you will be disqualified from managing a company (including being a director or secretary of a company) for the duration of your bankruptcy.

4.    Not all debts are wiped

Some people believe that once they enter bankruptcy, all of their debts are ‘wiped’ or ‘covered’ and they do not need to repay them.

This is not the case with all debts, such as HECS & HELP debts, child support and maintenance contributions, court imposed penalties and fines, debts incurred after the bankruptcy begins, overseas debts and company debts. This also includes where a debt is tied to a property (such as a house by way of mortgage), as this creditor will be a secured creditor.  In this situation, you will need to assist the mortgagee in recovering monies owed.

These are only some of the consequences of entering bankruptcy. For further information about bankruptcy, we recommend visiting AFSA’s (Australian Financial Security Authority) website.

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.

The information contained in thisarticle is intended to be of a general nature only and should not be reliedupon as legal advice. Any legal matters should be discussed specifically withone of our lawyers.

Liability limited by a scheme approved underProfessional Standards Legislation

For further information contact  
Caroline Callegari

Caroline Callegari is an Associate Principal and leads our Disputes & Litigation team. She has an advisory and advocacy practice in the following areas: Commercial Litigation, corporate and personal disputes, debt recovery and, insolvency and bankruptcy matters. Caroline can be contacted on (03) 8561 3324 or by emailing caroline@sharrockpitman.com.au.


For fifty years Sharrock Pitman Legal has made a significant and long term contribution to meeting the legal needs of business owners and residents in the City of Monash and greater Melbourne area.

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