What are the different ways a bankruptcy can end?

A bankruptcy usually ends with the bankrupt being discharged from bankruptcy three years after a Statement of Affairs is lodged. However, other mechanisms can end a bankruptcy earlier, or annul the bankruptcy entirely.

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

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

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 (a court order), 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.

However, other mechanisms can end a bankruptcy earlier, or annul the bankruptcy entirely. An annulment reverses the bankruptcy, as if it never happened. There are three ways of annulling a bankruptcy:

  1. The bankruptcy trustee obtains sufficient monies to pay all of the bankrupt 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 commenced.

Further to point one above, the bankrupt estate’s 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 bankruptcy 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.

A section 73 proposal is a formal proposal presented to creditors under section 73 of the Bankruptcy Act 1966. 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.

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-bankruptcy 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.

Last updated: 3.11.2017