Relevantly to our clients, bankruptcy can occur in one of two ways:
on the application of the creditor.
The client (i.e. the debtor) can file for bankruptcy voluntarily through AFSA. To do this, the client needs to satisfy the Official Receiver that their petition is valid and in order (section 55 of the Bankruptcy Act). The advantages of the debtor’s petition are:
the client can choose the timing of their bankruptcy; and
the client will not be exposed to the same costs as he/she would be if the creditor bankrupts him/her.
Following the issue of a Bankruptcy Notice (these notices are issued by AFSA and provided to the client by the creditor), a debtor has 21 days to pay or come to an alternative arrangement. When there is no arrangement, a Creditor’s Petition can be brought before the Federal Court of Australia or the Federal Circuit Court (most commonly the Federal Circuit Court – the rules, forms and procedures are the same in each court for bankruptcy cases) seeking to make the debtor bankrupt. The Creditor’s Notice will contain a time and date for the client to attend court.
The creditor will need to satisfy the court that the debtor owes them more than the minimum amount (currently $5000 – current figures are available on the AFSA website) (interest and costs may take a lower amount above this threshold) and that the client is unable to pay the debt.
Once the debtor is made bankrupt a private trustee will be appointed. Private trustees charge extremely high fees for administering a bankruptcy and the debtor is liable for these fees – this is of particular concern if the debtor has significant equity in their home and the debt is small.