What is bankruptcy?

Bankruptcy in Australia is a legal status under the Bankruptcy Act 1966 that recognises a person is unable to pay their debts as they fall due. It releases the bankrupt from most unsecured debts in exchange for surrendering control of certain assets and income above set thresholds for the duration of the bankruptcy. Bankruptcy is administered by the Australian Financial Security Authority (AFSA), a federal agency.

A person becomes bankrupt either by lodging their own debtor's petition with AFSA (voluntary bankruptcy) or by being made bankrupt under a sequestration order made by the Federal Court or Federal Circuit and Family Court at the application of a creditor owed at least 5,000 dollars (involuntary bankruptcy). About 9,500 Australians were made bankrupt in 2023 to 2024, the lowest number in decades, with a parallel group entering Part IX debt agreements and Part X personal insolvency agreements as alternatives.

Bankruptcy normally lasts three years and one day from the date the bankruptcy commences. During the bankruptcy, a registered trustee manages the bankrupt's affairs. The trustee can sell assets above the protected thresholds (which include household goods, tools of trade up to 4,400 dollars indexed, a primary vehicle up to 9,800 dollars indexed, and most superannuation) and require the bankrupt to make income contributions if after-tax income exceeds set thresholds (about 67,300 dollars for a person with no dependants in 2024 to 2025). Travel overseas requires the trustee's permission, and the bankrupt must disclose their bankruptcy when applying for credit above 7,000 dollars.

Bankruptcy releases the bankrupt from most unsecured debts (credit cards, personal loans, unpaid utility bills, most overdrawn bank accounts) when it ends. Some debts are not released, including HECS-HELP debt, child support arrears, court fines, and debts incurred through fraud. After discharge, the person's name remains on the National Personal Insolvency Index permanently, making the bankruptcy visible to future credit applications, although the immediate credit-reporting effect drops off after seven years from the start of the bankruptcy or two years from discharge, whichever is later. Alternatives to bankruptcy that should be considered first include debt agreements, personal insolvency agreements, hardship variations with each lender, and free advice from a financial counsellor on 1800 007 007.