What to do if you have been issued with a bankruptcy notice,
and what happens if you become a bankrupt
What do I do if I have received a bankruptcy notice?
After receiving a bankruptcy notice, you usually have 21 days within which to comply with the notice, or to apply to have it cancelled.
If you fail to do anything within that timeframe, this may mean you have committed an ‘act of bankruptcy’. Once you have committed an act of bankruptcy, the person or company that applied for the bankruptcy notice (“the creditor”) is allowed to make an application to the Court called a ‘Creditor’s Petition’ for an order to be made making you (“the debtor”) a bankrupt. This order is called a ‘sequestration order’.
Bankruptcy notice requirements
A bankruptcy notice is a formal document which is issued following an application by the creditor to the Australian Financial Security Authority. A bankruptcy notice can be issued where:
- A creditor has a final judgment/order against you in a sum of $5,000.00 or more (“the judgment debt”);
- The final judgment/order has not been ‘stayed’, meaning the enforcement of the judgment/order has not been temporarily suspended by the Court; and
- The judgment/order is no older than six years.
A bankruptcy notice must follow a prescribed form set out in the Bankruptcy Regulations 1996 (Cth).
Service of a bankruptcy notice
Bankruptcy notices may be served in a number of ways, including being posted or couriered to your last-known address, left in an envelope marked with your name at your last-known address, personally delivered to you, faxed to you, or emailed to you.
You do not need to respond to the bankruptcy notice or attend Court to be considered to have been served, as in absence of evidence to the contrary, you will be taken to have been served with the bankruptcy notice.
In circumstances where the methods mentioned above are not available, the creditor may apply to the Court for an order permitting service via another method, called ‘substituted service.’ To obtain such an order, the creditor would need to convince the Court that the usual methods of service are unavailable, and that another method of service would likely bring the bankruptcy notice to your attention.
Complying with a bankruptcy notice
If you comply with a bankruptcy notice, this means that you either:
- Repay the debt owed to the creditor in full within the 21 day timeframe; or
- Propose an arrangement to the satisfaction of the creditor, such as an instalment plan. It is open to the creditor whether to accept the arrangement you propose or not.
Challenging a bankruptcy notice
Following the bankruptcy notice being served on you, you have 21 days within which you can make an application to the Court for it to be set aside.
Note that if the bankruptcy notice was posted to you, the date on which you were served is calculated from when the document would have been delivered in the ordinary course of the post, and if it was faxed or emailed service is calculated from the time of transmission. The date of service is not calculated from the date on which you received the bankruptcy notice.
The grounds upon which you can apply for a bankruptcy notice to be set aside include:
- You dispute the judgment debt, for example you have applied to set aside the judgment debt the bankruptcy notice is based on, or you have already paid the judgment debt;
- You can satisfy the Court that you have a counter-claim or set-off claim or cross demand against the creditor in a sum exceeding the judgment debt; or
- The bankruptcy notice is defective in some way, being that it does not meet regulated requirements, was incorrectly served, is incomplete, or contains errors.
The Court may extend the time for compliance with the bankruptcy notice whilst a set aside application is being considered.
Note that in the event you are able to set aside a bankruptcy notice on the basis of it being defective, the creditor may simply issue a new bankruptcy notice with the error corrected.
What happens next?
In the event the 21 day timeframe expires, or such other extended timeframe ordered by the Court, and you have not either complied with the bankruptcy notice, or made a successful application to set it aside, the creditor may lodge a Creditor’s petition with the Court.
A creditor’s petition is permitted to be issued once you have ‘committed an act of bankruptcy’ by failing to comply with the bankruptcy notice. This is considered a reasonable indicator that you are unable to pay your debts as and when they fall due and payable.
The creditor has six months from the date of the ‘act of bankruptcy’ to file a creditor’s petition with the Court.
A creditor’s petition is a document lodged with the Court by a creditor which asks the Court to make you a bankrupt. A creditor’s petition is filed with an affidavit confirming the details in the creditor’s petition are true, an affidavit of service of the bankruptcy notice, and an affidavit confirming that you have not made an application to the Court to extend time for compliance or cancel the bankruptcy notice.
Once a creditor’s petition has been filed, this commences the proceedings before the Federal Circuit Court. The Court will provide the matter with a date for hearing. The documents filed with the Court then need to be served on you at least 5 days prior to the hearing, usually personally unless the Court makes an order allowing for substituted service.
The creditor then attends the hearing with an affidavit of service for the creditor’s petition and an affidavit confirming the debt is still owing. If the Court is satisfied that the documents are in order, a sequestration order will be made making you a bankrupt.
If you are served with a creditor’s petition, your options generally are:
- Agree to a sequestration order being made;
- Pay the debt in full (which may also include interest and the creditor’s legal costs);
- Negotiate a payment instalment which the creditor agrees with; or
- Oppose the petition.
Opposing a creditor’s petition
If you want to oppose a creditor’s petition, you need to file and serve a notice stating the grounds of opposition, along with a notice of appearance and an affidavit.
The grounds on which you can oppose a creditor’s petition are as follows:
- You did not commit an act of bankruptcy: This means that you need to prove either you were not served with the bankruptcy notice, or you complied with the bankruptcy notice by either paying the amount set out in the notice or coming to a payment arrangement which the creditor accepted. Note that just because you did not receive the bankruptcy notice, this does not necessarily mean that you were not validly served with it.
- You do not owe money to the creditor: Bankruptcy notices are generally based on judgment debts. Where this is the case, Courts are usually hesitant to “go behind” the judgment debt and engage in an assessment of whether the debt is owed, because that is what the Court did when it handed down the judgment. However, the Court does have the power to “go behind” a judgment debt, and in limited circumstances will exercise that power, such as where you can show there is a question as to whether the debt being claimed is truly owing.
- You are solvent: To prove you are solvent you need to demonstrate that you can pay your debts when they fall due from available funds. Establishing that you have a valuable asset is not sufficient, as if the asset cannot be made liquid quickly the Court may still consider you insolvent.
- Any other sufficient cause: This ground relates to cases where there are exceptional circumstances outweighing the public interest in the Court making a sequestration order against someone insolvent. It has been interpreted narrowly by the Courts, and it is uncommon for a debtor to be successful in an application based on this ground.
What happens if I become a bankrupt?
When a sequestration order is made, you are required to fill out a specific form called a ‘Statement of Affairs’. This form requires you to truthfully disclose all relevant details about your financial position, including details of all debts and assets, both current, and recently discharged or no longer owned. This statement must be completed within 14 days of you being made aware of the sequestration order.
The consequences of bankruptcy can be serious, and normally last for three years and one day from the day you file your statement of affairs.
These consequences may include:
- A trustee being appointed to manage your bankruptcy, to whom you must supply records, bank statements and other documents upon demand;
- Your trustee selling your assets, including your house, any investment properties, any vehicles once they exceed a set amount, and any assets you own jointly with a partner;
- Losing your right to take or continue legal action;
- Your name permanently appearing on the National Personal Insolvency Index, being a searchable public register which contains a list of Australian insolvency proceedings;
- You having to request permission from your trustee to travel overseas – it is an offence to travel overseas without obtaining the prior written consent of your trustee;
- If you earn over a set amount, you being required to make compulsory payments to your trustee;
- Restrictions being placed on your employment, or on your capacity to run a business, including being unable to be a Director of a company;
- Your ability to obtain credit following the conclusion of your bankruptcy being affected; and
- You still having debt, as some debts are not covered by your bankruptcy, including court penalties and fines, child support and maintenance, government student loans, and debts incurred after your bankruptcy begins.
The area of bankruptcy is legally complex, and the consequences of being made a bankrupt are serious and wide-ranging. If you have received a bankruptcy notice and would like assistance with your matter, please contact:
Andrew Thorpe, firstname.lastname@example.org
Emma Swords, email@example.com