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Getting out of bankruptcy: How does a bankruptcy end?

A bankruptcy usually ends with the bankrupt being discharged from bankruptcy at the end of the automatic three-year period, which is the end of the legal process.

How does a bankruptcy end?
A bankruptcy usually ends with the bankrupt being discharged from bankruptcy, which is the end of the legal process. No action is required of the bankrupt and trustee to obtain a discharge, as it is purely an operation of the Bankruptcy Act 1966 three years after a Statement of Affairs is lodged.

The bankrupt estate may continue after discharge while the trustee finalises the estate, and the discharged bankrupt may have some ongoing obligations, but they will no longer be ‘bankrupt’.

When is a bankrupt discharged?
A bankrupt is automatically discharged three years after their completed Statement of Affairs is filed with the Australian Financial Security Authority (AFSA)—unless a trustee files an ‘objection to the discharge’.

If the bankruptcy commenced via a debtor’s petition (i.e. a voluntary bankruptcy, where a person chooses to bankrupt themselves), the Statement of Affairs must have been filed at the same time, so therefore the bankruptcy ends three years after the debtor’s petition is accepted.

If the bankruptcy commenced via a sequestration order (an order of the court), the Statement of Affairs would not have been filed at that time. The bankrupt must complete and lodge a Statement of Affairs with AFSA. The longer the delay in filing the Statement of Affairs, the longer the three-year bankruptcy period is prolonged. If the Statement of Affairs is never filed, the bankruptcy will continue until the death of the bankrupt; however, the estate’s conduct will continue until completed.

Can a bankrupt get out of bankruptcy before discharge?
Yes. The bankruptcy can be annulled. An annulment reverses the bankruptcy, as if it never happened.

How is a bankruptcy annulled?
There are three ways of annulling a bankruptcy:

  1. The trustee obtains sufficient monies to pay all of the estate’s debts and costs.
  2. A section 73 proposal is accepted by the bankrupt’s creditors.
  3. The bankrupt convinces the court the bankruptcy should never have been commenced.

What are the debts and costs of the estate?
The costs and debts are:

  • All provable debts of the estate.
  • The Asset Realisation Charge (ARC), which is currently 7 percent and is payable to AFSA.
  • The trustee’s expenses and remuneration.
  • Any other charges or statutory costs of the estate.

For a bankruptcy to be annulled by all debts and costs being paid, the trustee must have sufficient money to satisfy all the pre-bankruptcy debts, the bankruptcy costs and the statutory charges. Generally, this type of annulment happens when the sale of an asset provides enough money to pay these costs, or when a friend or relative provides the funds.

What is a section 73 proposal?
A section 73 proposal is a formal proposal presented to creditors under section 73 of the Bankruptcy Act. It provides a mechanism for bankrupts to put forward a proposal to their creditors as an alternative to the bankruptcy continuing. If creditors accept a section 73 proposal, the bankruptcy is exchanged for an obligation under the section 73 agreement.

Why would the court annul a bankruptcy?
Usually, the court will only annul a bankruptcy when it can be shown that the bankruptcy should never have been commenced. This happens:

  • where the proper legal process was not followed in initially bankrupting the person
  • if there was no debt outstanding to a petitioning creditor at the time
  • if the bankrupt is actually solvent.

A bankrupt who successfully obtains an annulment through the court should be aware that the ex-trustee has the right to use assets in their possession to pay outstanding remuneration and outlays, and if the net value is insufficient, they may seek payment from the ex-bankrupt.

The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

Last Updated: 3.11.2017