Introduction to bankruptcy
What is bankruptcy?
Bankruptcy is a process where people who cannot pay their debts give up their assets and control of their finances, either by agreement or court order, in exchange for protection from legal action by their creditors.
A bankruptcy case may be heard by the Federal Court or the Federal Circuit Court. Most bankruptcy cases are heard by the Federal Circuit Court. The rules, forms and procedures are the same in each court for bankruptcy cases.
How does the Court declare someone bankrupt?
A person who claims that you owe them money can ask the Federal Court or the Federal Circuit Court to declare you bankrupt. This person is called a creditor and their application is called a Creditor’s Petition. The creditor will give you a copy of the Creditor’s Petition which includes a time and date for you to attend court. To declare you bankrupt the creditor must prove to the Court that you have committed an act of bankruptcy.
The most common act of bankruptcy is failing to follow the instructions in a bankruptcy notice. This notice is issued by the Australian Financial Security Authority (AFSA) (formerly Insolvency and Trustee Service Australia) and then given to you by the creditor. The main instruction is that you pay the amount of a judgment debt within the time specified in the bankruptcy notice.
At the hearing the Court decides whether or not you have committed an act of bankruptcy. Among other things the Court will consider whether:
- you are the person who owes the money
- the amount of the debt shown in the bankruptcy notice is correct, and
- you are able to pay your debts.
If you do not agree to being made bankrupt, you need to complete some forms and file them with the Court at least three days before the hearing. The steps you need to follow are explained in more detail under the heading ‘steps if you do not agree to being made bankrupt’.
Where will the hearing be?
The Creditor’s Petition will show the time, date and place of the hearing. If you are not sure, call or visit a registry near you. You can also check Federal Law Search through the Federal Court’s website.
A list of cases is usually posted on a noticeboard near the entrance of the court building. There may be several hearings with the same time and date as your case. You should wait in or near the courtroom until your case is called. It is a good idea to sit in the courtroom for a little while so that you can see what happens at a hearing.
What happens at the hearing?
Your case may be heard by a Judge or a Registrar. If your case is heard by a Registrar you are entitled to ask that it be heard by a Judge.
When your case is called you should walk to the long bar table at the front of the courtroom and tell the Judge or Registrar your name. You should stand up when you are speaking and also when the Judge or Registrar is speaking to you.
At the hearing you need to tell the Court your response to the Creditor’s Petition.
You have three options:
- You agree to being made bankrupt.
- You do not agree to being made bankrupt and explain the reasons why.
- You might ask for an adjournment because you need more time.
If you agree to being made bankrupt
At the hearing tell the Judge or Registrar that you agree to being made bankrupt. The Judge or Registrar will check the Creditor’s Petition. If it is correct he or she will make an order to declare you bankrupt. This is called a sequestration order.
If you do not agree to being made bankrupt
The most common reasons or grounds for not agreeing to being made bankrupt are that you:
- did not commit the act of bankruptcy set out in the Creditor’s Petition
- do not owe the money claimed by the creditor, or
- are able to pay all your debts.
There may be other grounds as well.
What if you need more time?
If you need more time to prepare your case you may ask for an adjournment. An adjournment is when a hearing is deferred or postponed to a later date.
At the hearing tell the Judge or Registrar you want an adjournment and the reason why. The Court will also ask the other side whether it agrees to an adjournment. The Court does not automatically grant an adjournment but will do so if it thinks your reasons for requesting it are valid.
Even after your case comes before the Court you and the creditor may negotiate to settle the creditor’s claim and sometimes the Court will grant an adjournment to enable these negotiations to take place.
If you are granted an adjournment you may be ordered to prepare a further affidavit. If you ask for an adjournment and it is granted, you may also be ordered to pay the creditor’s legal costs for the day of the hearing.
Steps if you do not agree to being made bankrupt
- Get a Bankruptcy Form 4 (notice of appearance) from the Court and complete it.
- Get a Bankruptcy Form 5 (notice stating grounds of opposition) from the Court and complete it.
- Prepare an affidavit (you may use Federal Court Form 59 or a Federal Circuit Court affidavit). In your affidavit you should set out the facts which support your reasons for not agreeing to being made bankrupt. You can attach documents to the affidavit. You must swear or affirm that the contents of the affidavit are true before a person authorised to witness affidavits; for example, a lawyer or Justice of the Peace.
- Once you have completed the forms, you need to file the original and two copies of each form with the Court. You can file the forms in person, by post or, in certain circumstances, by fax or electronically via the internet.
- After you have filed the forms, you need to deliver or post one copy of each form to the creditor's solicitor or the creditor. This is called serving the documents.
If you have not completed these steps and do not agree to being made bankrupt, you need permission from the Judge or Registrar at the hearing to complete them.
- At the hearing tell the Judge or Registrar that you do not agree to being made bankrupt. You also need to give the Judge or Registrar information about why you do not agree to being made bankrupt.
What happens if you are made bankrupt?
If the Judge or Registrar makes a sequestration order a trustee will be appointed to manage your financial affairs. Your trustee will notify you of your bankruptcy in writing. The trustee will explain his or her role and your responsibilities as a bankrupt. The trustee will also give you a statement of affairs which you must complete and file with the Official Receiver (AFSA). Your period of bankruptcy runs for three years from the date you file your statement of affairs with AFSA.
There are several legal outcomes of your bankruptcy; for instance:
- You will be released from responsibility for most of your existing debts. However, the trustee can sell your assets or property to pay your creditors.
- Any house or your share of a house that you own may be sold to pay your creditors.
- Any assets which you acquire while you are bankrupt may be sold by the trustee.
- You must not obtain credit from another person, or pay for goods or services by cheque for more than a specified amount without telling the person that you are bankrupt. The credit limit is updated quarterly, for an up-to-date figure contact AFSA.
- If you run a business while you are bankrupt you must keep all proper accounts showing your business transactions and financial position.
There are other consequences of becoming bankrupt. For more information, contact AFSA.
Updated August 2013
Interpreters for hearings
If you need an interpreter to understand what is being said at a court hearing, you will need to arrange for any interpreter that you or your witnesses may require.
If you can not afford to pay for an interpreter, the registry may be able to arrange an interpreter for you. If you want the Court to arrange an interpreter you must contact the registry at least one week before the hearing. If you do not contact the registry within one week of the hearing, the Registry may not be able to arrange an interpreter in time and the hearing may be delayed.
You can also call 131 450 and speak to the registry through a telephone interpreter.
Interpreters to communicate with Registry
If you need an interpreter to communicate with Registry staff you can call 131 450 (the Translating & Interpreting Service) and speak to an interpreter. Ask them to set up a three-way conversation between you, an interpreter and your nearest Federal Court of Australia District Registry. If you live in Western Australia, you may directly contact the Registry staff, who will arrange a telephone interpreter for you.
It is your responsibility to arrange and pay for the cost of a translator to translate documents sent to you by the Court or the respondent.
Need more information?
For more information, including access to the Act, Rules and any of the forms mentioned in this guide, call or visit a Registry near you.
What other information can the Courts provide?
The Courts can give you information about:
- where to get legal help or legal representation
- court procedures.
Court staff cannot provide you with legal advice.
For general enquiries about bankruptcy contact your local AFSA office or go to their website