On this page:What is bankruptcy?How you go bankrupt Companies that 'go broke'
What is bankruptcy?
Bankruptcy occurs when the financial affairs of an individual are taken over by a trustee following the individual becoming unable to pay his or her debts.
If you have unmanageable debts you should first seek financial advice to explore ways to repay them. If this does not result in arrangements that satisfy your creditors you may then need to consider your options under the Bankruptcy Act 1966
The ultimate option under the Act is to become bankrupt. This has both advantages and disadvantages, and these need to be fully considered before making your decision.
Bankruptcy is available to individuals and companies.
The law governing bankruptcy applies throughout Australia. Under the Act, the Federal Court of Australia and the Federal Magistrates Court have the power to hear and decide bankruptcy cases.
How you go bankrupt
You can become bankrupt in one of two ways:
- As an individual you can file for bankruptcy by submitting a debtor's petition to the Official Receiver in Bankruptcy.
- One or more creditors can petition the Federal Court for you to be declared bankrupt.
As an alternative to bankruptcy, creditors will sometimes agree to a deed of arrangement with the debtor. This involves the debtor handing over the management of his or her affairs to a trustee who will work to provide a better return to creditors.
This arrangement is also beneficial to the debtor because it avoids the cost, trauma and stigma of bankruptcy.
Bankruptcy usually lasts three years. After this time, the bankruptcy is dissolved, freeing the bankrupt of their original debts and allowing a fresh start to be made.
Should you be facing bankruptcy at any time you should consult a solicitor for advice and assistance.
Full details of the bankruptcy procedure can be found on the website of the Insolvency Trustee Service Australia (ITSA) - the Federal body responsible for personal bankruptcy and insolvency law and practice.
Companies that 'go broke'
Companies are not made bankrupt in the same way as people. Instead, they may enter into a form of external management by way of a deed of arrangement with their creditors, receivership or liquidation.
The Corporations Act 2001 sets out the provisions for each of these forms of management.
If you are involved with a company that is in, or is likely to enter, external administration, you should seek legal advice on your responsibilities and the position generally.
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Introduction to bankruptcy law - Legal Services Commission of South Australia