Personal bankruptcy is never a decision that is to be taken lightly. It is almost always the very last resort for someone in financial distress. Typically people facing personal bankruptcy struggle to sleep at night with the thought of unpaid bills weighing on their mind. The pressure usually mounts from the constant phone calls from creditors and the bill reminders arriving in the mail.

It is best to act now before it becomes too late to file for personal bankruptcy on a voluntary basis. Here at Bankruptcy Australia we specialize in personal bankruptcy applications.

Personal Bankruptcy can be caused by many reasons but the most common reasons are:

• Divorce;
• On-going medical expenses;
• loss of income for a sustained period;

Many people still struggle with the stigma which society once placed on un-discharged bankrupts.  In the modern world the stigma of bankruptcy is significantly less than what it used to be.

In most cases bankruptcy only lasts three (3) years so if you are struggling with insurmountable debt it may be best that you file for bankruptcy as soon as possible so you can start afresh.

Personal bankruptcy can actually provide a significant amount of relief to people truly in need.  It is most appropriate for people on a low to moderate income with few or no assets. Personal Bankruptcy is available for all Australians with unsecured debt which they cannot repay. Bankruptcy will stop the threatening phone calls from creditors and the constant bill reminders from creditors.

You can also rest assured that personal bankruptcy doesn’t mean you will always have bad credit as your credit file will be restored after approximately 7 years. In most cases you will be able to start afresh after 7 years with a clean slate.

And you don’t have to worry about losing all of your assets either as essential assets like your motor car and household furniture will be protected (subject the statutory limits prescribed by the Bankruptcy Act)

A trust is a legal structure which is typically used to split income amongst family members and to protect family assets. That is why many trusts are referred to as “family trusts”.

A trust has several participants including a settlor, a trustee and beneficiaries.

The Settlor is the person who creates and settles the trust for the benefit of the beneficiaries. The Settlor must be a separate person to the Trustee and the beneficiaries.

The Trustee is the person or corporate entity who administers the trust assets for the benefit of the beneficiaries. The Trustee legally owns the trust assets but holds the assets “on trust” for the beneficiaries.

The beneficiaries are natural persons or companies who have been listed to receive income or capital distributions from the trust. While the beneficiaries do not legally own the trust assets, they can hold a “beneficial interest” in the trust assets.

The two most common forms of trust are:

• Discretionary Trust
• Unit Trust

What is a Discretionary Trust?

A discretionary trust is usually used for family situations and is commonly referred to as the family trust. In a discretionary trust, the beneficiaries do not have a fixed entitlement or interest in the trust assets. It is at the complete discretion of the Trustee to calculate and make distributions to the beneficiaries. Whilst the Trustee has complete discretion to calculate and make distributions, the Trustee must only make distributions to the listed beneficiaries.

For example, if a discretionary trust has 5 listed beneficiaries, the Trustee could make an income distribution to 2 of the 5 listed beneficiaries. In practice, that could mean that a husband and wife receive an income distribution, whereas their children, being the other beneficiaries, receive nothing.

What is a Unit Trust?

A unit trust is similar to a company where the unit holder (the beneficiary) holds a fixed amount of units in the trust. When the Trustee makes a distribution to the unit holders, it must be strictly in accordance with the unit holders’ entitlements. For example, if there are 2 unit holders in a unit trust holding an equal amount of units, the Trustee must make a distribution of 50% to each unit holder.

Trusts and Bankruptcy

In the context of bankruptcy, it is critical to establish the type of the trust involved. There are a number of key differences between a discretionary trust and a unit trust in bankruptcy.

Discretionary Trusts and Bankruptcy

If a discretionary trust is in place (more commonly referred to as a family trust) and a listed beneficiary becomes bankrupt, the trustee of the trust has complete discretion whether to “include” or “exclude” the bankrupt beneficiary in any further trust distributions.

The Bankruptcy Trustee (on behalf of the bankrupt beneficiary’s creditors) is entitled to copies of the trust deed and trust accounts. However, the Bankruptcy Trustee cannot demand that the trustee of the trust include the “bankrupt beneficiary” in future trust distributions.

Therefore, a discretionary trust can be a very effective structure to protect family assets from a Bankruptcy Trustee.

A Bankruptcy Trustee is entitled to challenge any transfer of assets into a family trust if they were made with the intention to avoid or defeat creditor claims. If assets are transferred with that intention, the transaction may become void against the Trustee in Bankruptcy under section 121 of the Bankruptcy Act.

In other words, the transfer of assets into the family trust could be “attacked” or “clawed back” by the Bankruptcy Trustee.

Unit Trusts and Bankruptcy

If a unit trust is in place and the listed beneficiary becomes bankrupt, the trustee of the trust does not have any discretion and must pay the bankrupt beneficiary all distributions in accordance with the trust deed. The Bankruptcy Trustee may even be able to force the Trust to be wound up and the trust assets to be distributed to the unit holders.

Restrictions on Advice and Assistance

This area of law is very complicated. This article only provides a basic outline of trusts and their role in bankruptcy. We do not warrant the accuracy of the information on this site. You should seek independent legal advice if you have a family trust and are considering bankruptcy.

The Bankruptcy Act sets out a regime for the assessment of income whilst you are bankrupt. Subject to criteria you may become liable to pay compulsory income contributions for 3 years whilst you are bankrupt.

Bankruptcy Income & Thresholds

There is no limit on the level of income which a bankrupt can earn.  However, if you exceed the statutory thresholds (as listed below), you will pay 50% of your after tax bankruptcy income which exceeds the statutory thresholds.  The bankruptcy thresholds (which are listed below) are based on the number of dependants you have. A dependent is defined as a person who is dependent on the bankrupt for financial support and doesn’t earn more than $3,160 p.a.

*current as at September 2011

Feel free to use our income contribution calculator to see if you may be liable for compulsory contributions.  This calculator should only be used as a guide.  If you are already bankrupt and you are seeking clarification on an assessment you have received from your Trustee, we recommend that you speak directly with your Bankruptcy Trustee or Bankruptcy Regulation at ITSA.

Income Contribution Calculator

What income is assessed?

A bankrupt’s derived income is to be assessed under the income contribution regime.  Income in bankruptcy can be deemed to be derived even if the bankrupt hasn’t actually received the income (refer to Inspector General in Bankruptcy –v- McGushin [2009 FCA 662). The Trustee in Bankruptcy will issue an income contribution assessment as soon as practicable after the beginning of each contribution assessment period.  A Trustee in Bankruptcy will therefore typically issue 3 assessments, however, if the bankruptcy term is extended more assessments could be issued.

The following are examples of the types of income which will be included in the income assessment:

• Annuity or pension from an superannuation fund
• Termination pay
• Annuity or pension from an insurance fund
• Income from a trust fund
• Fringe benefits
• Income provided to a third party other than the bankrupt

What income is excluded from an assessment?

The following are examples of income which is not included in an income contribution assessment:

• Child Support or similar maintenance payments
• An amount received pursuant to the Social Security Act
• Legal Aid Scheme payments
• Family Tax benefits

What type of evidence can a Trustee obtain to assess income?

A Trustee in Bankruptcy may call for supporting information when conducting an income contribution assessment.  The type of information the trustee may call for could be:

• Payslips
• Bank Statements
• Group certificates
• Tax Returns
• ATO notice of assessments
• Contract of employment
• Pension or allowance statement
• Business Activity Statements
• Financial Statements

For a self employed bankrupts, the Trustee in Bankruptcy may need to scrutinise these documents in more detail as the Trustee is entitled to deny a deduction for depreciation and donations for the purposes of income contribution assessments

Fridge Benefits – are they included in the assessment?

If a bankrupt received fridge benefits (as defined by the Income Tax Assessment Act) then the value of those benefits will be included by Trustee in the income contribution assessment.

The fridge benefit does not need to be provided by the bankrupt’s employer for it to be assessed as income.  The fridge benefit may be provided by a third party (refer to Skalkos v Nicols [2009] FCA 346). In that case, the court said “it is now quite clear what is included is a benefit that is provided in any circumstances by any person to a bankrupt”

The following is a list of the most common type of fridge benefits which would be included by a Trustee in an income contribution assessment:

• Provision of Motor Vehicle
• Debt Waiver
• Interest free or below market interest loan
• Expense payments (such as educational expenses)
• Provision of free or low cost housing
• Provision of free or low cost air travel

The Bankruptcy Act exempts free or low cost housing as long as the value of the housing does not exceed $250 per week.

Review of income assessment

If a bankrupt does not agree with the assessment made by the Trustee, then the bankrupt must make an application to the Inspector General in Bankruptcy (IG) within 60 days of receiving the notice of assessment from the Trustee.  If the bankrupt is dissatisfied with the IG’s decision, then the bankrupt can make an application to the Administrative Appeals Tribunal.

Collection of Income Assessments

If a bankrupt fails to pay the income contributions (as assessed) by the Trustee, then the Trustee can make an application to the Official Receiver under Section 139ZL and garnishee the bankrupt’s wages.  The value of the garnishee could be approximately 20% of the bankrupt’s wages until the outstanding contributions are paid in full.

Furthermore, if the bankrupt fails to pay the income contributions (as assessed) by the Trustee, the Trustee can file an objection to the bankrupt’s automatic discharge.  This could result in the bankrupt’s bankruptcy term being extended to 8 years in total.

Restrictions on advice & assistance

This area of bankruptcy law is very complicated and this site only provides an outline of the key aspects of the regime.  If you are already bankrupt and you are seeking clarification on an assessment you have received from your Trustee, we recommend that you speak directly with your Bankruptcy Trustee or Bankruptcy Regulation at ITSA.

If you apply for credit above this amount ($4,965 current as at April 2011) then you must disclose to the credit provider that you are bankrupt.  If you fail to disclose your status as a bankrupt and apply for credit more than this amount then you will commit a criminal offence under the Bankruptcy Act and you could be prosecuted.

Your Trustee in Bankruptcy could also object to your automatic discharge which could also result in your bankruptcy term being extended up to a total of 5 years (ie an additional 2 years after the standard 3 year bankruptcy term).

Disclosing your bankruptcy status to the proposed credit provider does not guarantee that your credit application will be successful as it will be at the discretion of your credit provider to accept your application.

It is also important to note that whilst you are an un-discharged bankrupt you cannot purchase any assets regardless of the value, otherwise that asset will vest in your Trustee in Bankruptcy as “after acquired property”, therefore, a bankrupt should not apply for credit to purchase any asset.

• Bequests
• Gifts
• lottery winnings
• inheritance

So if you as an undischarged bankrupt receive cash or property from an inheritance, bequest, gift or lottery winnings, then that cash or property will vest in your Trustee in Bankruptcy and you will be required to give up the cash or property to your Trustee in Bankruptcy.

It is important to note that the money of a bankrupt – ie cash at bank – resulting from income which has been assessed under the statutory income contribution regime – does not fall under the principle of “after acquired property”.  For example if a bankrupt holds cash at bank after being assessed for income statutory income contributions, then that cash at bank does not fall under the definition of “after acquired property” and can be kept by the bankrupt, however, if the bankrupt then purchases an asset (ie a motor vehicle) with that cash then the asset would vest in the Trustee in Bankruptcy under the principle of “after acquired property”.

• Cash at Bank – limit of up to $2,000
• Motor vehicle – limit of up to $7,050
• Tools of trade – limit of up to $3,500
• Superannuation
• Household goods and clothing

Cash at Bank in bankruptcy
At the time of becoming bankrupt, you are entitled to keep $2,000 from the proceeds in your bank account (applying the ITSA Bankruptcy administration practice note). Therefore if you have more than that amount in your account at the date of bankruptcy, then the Trustee in Bankruptcy would be entitled to claim the excess amount. For example if you had $3,000 in your bank account at the date of bankruptcy, then your Trustee in Bankruptcy could claim $1,000 from your bank ($3,000 – $2,000).
Motor vehicle in bankruptcy
You will be entitled to keep your motor vehicle if (at the date of bankruptcy) it is worth less than $7,050. If your motor vehicle is worth more than $7,050 your Trustee in Bankruptcy would be entitled to sell the motor vehicle, however, the Trustee would need to provide you with the protected amount ($7,050) from the sale proceeds.
If your motor vehicle is assessed to be worth more than the protected amount ($7,050) then it would be best to try and reach agreement with your Trustee in Bankruptcy to pay the amount which exceeds the protected value. A bankrupt cannot own assets so your spouse or a family member would need to purchase the vehicle from the Trustee in Bankruptcy and pay the excess amount over the protected value. For example if you became bankrupt and your motor vehicle was assessed to be worth $10,000, then your spouse or a member of the family could offer to buy the vehicle from the Trustee in Bankruptcy for approximately $2,950 ($10,000 – $7,050).
Tools of trade in bankruptcy
You will be entitled to keep your tools of trade (at the date of bankruptcy) if they are worth less than $3,500. If your tools of trade are worth more than $3,500 (collectively) your Trustee in Bankruptcy would be entitled to sell them, however, the Trustee would need to provide you with the protected amount ($3,500) from the sale proceeds.
If your tools of trade are assessed to be worth more than the protected amount ($3,500) then it would be best to try and reach agreement with your Trustee in Bankruptcy to pay the amount which exceeds the protected value. A bankrupt cannot own assets so your spouse or a family member would need to purchase the tools of trade from the Trustee in Bankruptcy and pay the excess amount over the protected value. For example if you became bankrupt and your tools of trade were assessed to be worth $10,000, then your spouse or a member of the family could offer to buy the tools of trade from the Trustee in Bankruptcy for approximately $6,500 ($10,000 – $3,500).

Superannuation in bankruptcy
Superannuation is generally protected in bankruptcy so as to allow a discharged bankrupt a pension in retirement. The only exception to this general rule is if you made significant contributions into your superannuation fund prior to bankruptcy. The Trustee in Bankruptcy would need to establish that the contributions made into the superannuation fund were made to defeat creditors. The test for the Trustee in Bankruptcy would be to examine the pattern of contributions into the superannuation fund. So if for example you made regular contributions into the superannuation fund (direct from your wage) then those contributions would not be challenged. However, if you made regular contributions into the superannuation fund (directly from your wage) but then arranged for a “lump sum payment” contribution to be paid prior to bankruptcy, then the Trustee in Bankruptcy would most likely challenge the “lump sum payment”.
If the Trustee in Bankruptcy challenged a “lump sum payment” which was to defeat creditors the Trustee could apply to the Official Receiver for a notice to be issued under Sec. 139ZQ to be issued to recover the “lump sum payment”.

Household goods and clothing
Necessary house-hold items are also protected in bankruptcy. The Bankruptcy Act anticipates a minimum standard of living and as such as a bankrupt you will be entitled to retain necessary household items including:

• Sufficient household furniture including:
• Bedding, linen, towels and other household effects
• General household items including:
• Educational, Sporting and recreational items
• Kitchen equipment, cutlery, crockery etc
• Fridge / Freezer
• Heating and cooling equipment
• Telephone equipment
• Television (1) & Stereo/HiFi (1) & Video recorder (1)
• Sporting equipment
• Washing Machine & Clothes Dryer

If you become bankrupt and hold more property than what is listed above, then it would be at the discretion of your Trustee in Bankruptcy to collect and sell it for the benefit of creditors. It is possible for a bankrupt to retain sentimental property if that property was disclosed and a special resolution is passed by creditors for the sentimental property to be retained by the bankrupt.

Try our compulsory income contribution calculator to see if you would be liable for compulsory income contributions.

Sections 120, 121 & 122 of the Bankruptcy Act sets out the types of transactions which may be void as against the Trustee in Bankruptcy.

Undervalued Transactions

Section 120 of the Bankruptcy Act allows the Trustee to “claw back” certain transactions where that transaction involved a transfer of the bankrupt’s property for less than its value.

Transfers to Defeat Creditors

Section 121 of the Bankruptcy Act allows certain transfers of assets to be voided where that transfer was intended to prevent that asset from becoming available to creditors of the bankrupt estate. There is no time limit involved but the Trustee must be able to show that the bankrupt was, or was about to become, insolvent.

Preferential Payments

Section 122 of the Bankruptcy Act allows certain payments made to creditors within the 6 months before the commencement of the bankruptcy to be recovered by a Trustee, should those payments prove to be “preferential” to the recipients.