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Obligations of a Bankrupt

Obligations of a Bankrupt, Bankruptcy, handing over assets to trustee

On your Property

The major effect of bankruptcy on the bankrupt is that automatically on becoming bankrupt, the bankrupt’s property becomes vested in the trustee in bankruptcy (s58(1) Bankruptcy Act 1966 (Cth) the ‘Act’)).

Section 5(1) of the Act defines the ‘property of the bankrupt’ as the property divisible among the bankrupt’s creditors, and any rights and powers in relation to that property that would have been exercisable if bankruptcy had not occurred. ‘Property’ is defined very widely in s 5(1), to mean ‘real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property’.

Divisible and non-divisible property is defined is s116 of the Act.

Note that the property vested in the trustee includes:

  1. The debtor’s divisible property at the date of the bankruptcy or the sequestration order;

  2. The debtor’s divisible property at the date of commencement of the bankruptcy (see s115 of the Act), even if the property has been disposed of before the date of the bankruptcy; and

  3. The debtor’s divisible property acquired after the date of bankruptcy but prior to discharge of bankruptcy (‘after acquired property’).

On the your Debts

During the bankruptcy, you are protected from enforcement action by unsecured creditors (see 58(3) of the Act), and at discharge from bankruptcy, you are released from all provable debts (s 153 of the Act). This provides a ‘fresh start’ for you, one of the goals of bankruptcy law.

On the your Life

Various provisions of the Act impose obligations and other restrictions upon the bankrupt during the period of bankruptcy. Non-compliance with some obligations is an offence. The major impacts include:

  1. You are obliged to assist in the administration of the estate, eg. provide information, and books to the trustee, attend the trustee, attend meetings of creditors if required, disclose information about material changes and after-acquired property, and assist in the administration of the estate: s 77 of the Act;

  2. The ‘conduct and examinable affairs’ of you as a bankrupt can be investigated by the trustee: s19AA, and can be examined under oaths: s81 of the Act.

  3. You are required to hand over your passport to the trustee (s77(1)(a)(ii) of the Act), and is restricted from travelling overseas without the consent of their trustee, or with the intent of deferring or defeating his or her creditors: s272(1)(c) of the Act. Doing so is an offence, punishable by up to 3 years imprisonment. In addition, leaving and not returning to Australia; or failing to return by a date specified by the trustee is a ground for objecting to the bankrupt’s automatic discharge: ss149D(1)(a) and (h) of the Act.

  4. If you apply for credit (including buying goods or services on credit) above certain limits (indexed s304A; the current amount is $4,869), you must disclose that their status as an undischarged bankrupt: s269 of the Act. Failure to do so is an offence, punishable by 3 years imprisonment.

  5. The Act does not impose specific restrictions on employment generally. However, s 206B(3) Corporations Act 2001 (Cth) prohibits a bankrupt from managing a corporation. In addition, other professions and trades may impose restrictions on bankrupts.

  6. Failure to immediately disclose to the trustee a change of name or address is an offence, punishable by up to 6 months imprisonment: s80(1) of the Act.

  7. Details of bankruptcy are a public record, and remain permanently on the National Personal Insolvency Index: reg 13.03 and schedule 8 of the Bankruptcy Regulations. In addition, a note of the bankruptcy will be included on your credit information file for 7 years: Privacy Act 1988 (Cth) s18E(1)(ix).

  8. In general, you lose the right to pursue claims against others. These are ‘choses in action’ and thus property that vests in the trustee. Section 60(2) of the Act provides that any proceedings initiated by you personally prior to bankruptcy will be stayed until the trustee elects to continue or discontinue the action. However, the bankrupt can continue actions in their own name in relation to personal injury claims or the death of a spouse or family member: s 60(4) of the ACt.

  9. As to any family law claims – cannot be pursued by the bankrupt – the trustee can be a party to the proceedings, and make submissions in favour of the creditors. In addition, the vesting of the bankrupt’s property in the trustee is subject to an order of the Family Court, for property, spousal maintenance, and maintenance agreement: s59A.

  10. Rash or hazardous gambling or speculation prior to bankruptcy or during the period between the presentation of a petition and the date of bankruptcy can be an offence, punishable by imprisonment for up to 1 year: s271 of the Act.

Impact on your Creditors

Bankruptcy is a collective action, and as a result, unsecured creditors lose their individual rights to take debt enforcement action against the bankrupt. Section 58(3) of the Act provides that once a debtor becomes bankrupt, an unsecured creditor has no other recourse against you than is available under the Act. Thus, the creditor must prove for the debt owing under s84 (1) and (2) of the Act.

However, bankruptcy does not prohibit a secured creditor from realising or otherwise dealing with the security property: s58(5) of the Act.

Section 60(1) of the Act provides for a stay of any other type of proceeding against the debtor, including proceedings by creditors.

Impact on your Family and Associates

The Family Home

Where you have an interest in the family home, the bankruptcy is likely to have a significant impact on other family members who reside in, or have an interest in, that property. In Australia, residential property owned by the bankrupt is included in the property divisible amongst creditors.

There is no exemption for the family home (as there is in some other jurisdictions, eg some states in the USA).

If you holds the sole legal and equitable interest in the property, the property will vest in the trustee, and it will be sold for the benefit of the creditors. A non-bankrupt spouse or other family member will have no right to remain in the property.

If the property is owned jointly by you and another person (eg a non-bankrupt spouse), the bankruptcy will sever the joint tenancy; the bankrupt’s interest will vest in the trustee, and the trustee and the other co-owner will become tenants in common. The trustee will often give the co-owner the opportunity to purchase the trustee’s interest. If this is not possible, the trustee can sell the property, and – once any mortgage and any other payments are made – the balance of the sale funds will be divided between the trustee and the co-owner.

Different considerations arise where a non-bankrupt spouse or other family has an equitable interest in the property, as property that is held by the bankrupt on trust does not vest in the trustee (s116(2)(a) of the Act). We can provide specific advise about this (in an Australian context) in the event it becomes necessary.

Family Law Claims

Family law claims, including property orders, can be continued by a non-bankrupt spouse. The trustee is entitled to be a party to the proceedings, representing the interests of the creditors. Where a property order is being considered, the effect of the order on the creditors of the bankrupt spouse is one of the factors that must be considered: s75(2)(ha) Family Law Act 1974 (Cth).

However, no special weighting is given to the interests of the creditors: see Lemnos v Lemnos [2007] FamCA 1058. Note that this case was successfully appealed on the basis of some of the ways that the trial judge’s exercised discretion but not upon the issue of the weighting, and was remitted to a single judge for re-hearing: Trustee of the property of G Lemnos, a bankrupt & Lemnos and Anor [2009] FamCAFC 20.

If a property order is made requiring the transfer of the bankrupt’s interests in a property to the non-bankrupt spouse, the property will not vest in the trustee: s59A of the Act.

Before deciding to declare bankruptcy, give Grauf O'brien Lawyers a call to discuss potential alternatives or methods to mitigate the effects on your lifestyle.

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