DOES ANYONE OWE YOU MONEY?

So you have sent this person lots of letters and he or she insists on not paying what is owed to you… what can you do? If a person owes you money and doesn't want to or can't pay you, one of the options that you have is to force the person into bankruptcy. Bankruptcy laws aim to have the proceeds of the debtor's property distributed among those to whom the debtor owes money. 

WHAT LAWS GOVERN BANKRUPTCY?

The applicable legislation is the Bankruptcy Act 1966, which is a Commonwealth Act. This means that the bankruptcy law is the same Australia-wide and the powers of the courts are not limited by state boundaries. 

WHAT HAPPENS WHEN A PERSON IS DECLARED BANKRUPT?

On a debtor being declared bankrupt, you as a creditor no longer have to deal with the debtor personally. Rather, you submit to a trustee in bankruptcy proof that the debt is owing and then leave it to the trustee to work out what dividend you may be entitled to.

When a debtor is declared bankrupt, a trustee in bankruptcy is appointed. Property of the debtor vests in the trustee who will take steps to sell the property and divide the proceeds among creditors.

However not all property of the bankrupt vests in the trustee in bankruptcy. Property held on trust for others, necessary household furniture and effects, tools of trade (to a certain amount), a motor vehicle (to a certain amount), superannuation and certain types of insurance proceeds are normally outside the reach of creditors.

In addition to collecting in the property of the bankrupt and selling it, the trustee also investigates certain types of transactions that the bankrupt may have entered into and then see if those transactions can be set aside. An example of such a transaction is if the bankrupt had given away property to friends or relatives in order to avoid that property being available to pay creditors. 

HOW LONG DOES BANKRUPTCY LAST?

The state of bankruptcy normally lasts for three years but can be extended to five or eight years if the bankrupt has been unhelpful, has hidden assets from the trustee in bankruptcy, or has been guilty of breaches under the Bankruptcy Act 1966. 

ADVANTAGES AND DISADVANTAGES OF DECLARING A DEBTOR BANKRUPT

What are the advantages of applying for a debtor to be declared bankrupt?

• When the bankruptcy is declared, instead of the court bailiff trying to seize the debtor's assets and sell them, the trustee in bankruptcy takes over management of the bankrupt’s assets. The trustee in bankruptcy may have better resources to obtain a better price for the debtor's assets.
• If many creditors are trying to recover assets from the debtor at the same time, another creditor may recover his or her debt before you if he or she has already obtained a judgment debt against the debtor (a judgment debt is a debt declared by a decision of the court). However, as soon as the trustee in bankruptcy is appointed, any such enforcement that occurred in the previous six months is void and the trustee in bankruptcy will apportion the debts to be paid out to creditors (generally proportionately to the debt amounts).
• If the debtor is favouring another creditor to the detriment of others (in other words, not treating all his or her creditors fairly), then any such favourable arrangement that occurred in the previous six months will be void as soon as the trustee is appointed.
• The costs that you incur in having someone declared bankrupt are payable first out of the proceeds of the bankruptcy before all other debts.
• After bankruptcy is declared the trustee may receive some income. The trustee can interrogate other parties to discover the details of the bankrupt's financial affairs and assess the chances of recovering these assets. A debtor with substantial income (generally over $30,000) must contribute part of his or her income to the bankruptcy trustee.
• Because bankruptcy can be very effective and cause substantial disturbance to the debtor's assets and capacity to work, the threat of bankruptcy is often sufficient to force a debtor to settle with the creditor.

What are the disadvantages of applying for a debtor to be declared bankrupt?

• Taking bankruptcy proceedings can be very costly. If the assets from the bankrupt's estate do not cover the costs, the creditor will be out of pocket. It may take several months or more for the trustee to distribute the bankrupt's assets to the creditors.
• The creditor may have received payments from the debtor, which may have to be repaid to the trustee in bankruptcy if they were made within six months before the bankruptcy was declared.
• If other creditors are not threatening to declare the debtor bankrupt, the creditor may lose the opportunity to obtain payment of the debt in full. In bankruptcy, all creditors can prove their respective debts and receive a proportional payment from the trust property.

THE BANKRUPTCY PROCESS

This is what happens in bankruptcy:

1. you must apply to the Federal Court ("the court") to obtain an order that the debtor be declared bankrupt;
2. the trustee in bankruptcy is appointed to take possession and manage the debtor's property (the trust property) – the trustee may be a government body (the Official Trustee from the Insolvency Trustee Service Australia) or you can seek the appointment of a private trustee (many firms of accountants have someone who has the necessary qualification to be appointed);
3. the trustee in bankruptcy will investigate assets, then sell them;
4. the costs and remuneration incurred by the trustee in bankruptcy and your costs of the court proceedings to obtain the bankruptcy order are taken out of the sale of the assets and paid out, while the remaining moneys are distributed to all creditors (including you) generally equally – this is a simplified explanation of the order in which debts are paid; the Bankruptcy Act sets out a statutory order in which debts and costs are paid.

FURTHER INFORMATION

This Information Outline is provided courtesy of Hall Payne Lawyers who are experienced in this area of law. They are located at Level 9, 344 Queen Street, Brisbane, QLD 4000 or call them on (07) 3221-2044 if you would like more information on the legal topic, or you wish to obtain formal advice regarding your situation.

Hall Payne Lawyers are an established Queensland firm practicing in the areas of employment law (unfair dismissal etc), accident compensation (WorkCover, motor vehicle accident, personal injuries), anti-discrimination & harassment, consumer law, family law, wills & estates, criminal law and conveyancing. Hall Payne Lawyers are a founding member of the Australia-wide PeopleLaw group.