Last reviewed and updated: May 2026
Any payment to you as a creditor (someone the person owes money to) will depend on the amount of money that can be obtained from the trustee in bankruptcy selling the assets of the bankrupt and from any money in the bankrupt’s bank accounts or held in cash.
The bankrupt may also be required to make contributions from his or her income. If there is sufficient money to pay creditors — and often there is not — you will be paid a percentage of what is available, for example 10 cents in the dollar.
Understanding your rights as a creditor in a bankruptcy is essential if you want to maximise your recovery and protect your legal position.
What Happens to Debts in Bankruptcy?
When a debtor is declared bankrupt, the administration of their affairs passes to a trustee in bankruptcy. The trustee takes control of the bankrupt’s assets, investigates the estate, and distributes available funds to creditors.
Most debts are provable debts in bankruptcy — meaning they can be lodged as claims in the estate and paid (if funds allow) as part of the dividend process. Provable debts include:
- Unpaid invoices and trade debts
- Loans and credit card debts
- Court judgments
- Damages for breach of contract
- Rent arrears
Some debts are not provable and do not receive a dividend, including:
- Fines and penalties payable to the Crown
- Debts incurred by fraud (though these survive discharge)
- Unliquidated claims for personal injury (in some circumstances)
Proving a Debt in Bankruptcy: The Proof of Debt
If the trustee believes there may be a dividend to pay creditors, they will write to known creditors inviting them to lodge a proof of debt. This is a formal document setting out the nature and amount of the debt owed to you.
A proof of debt must be supported by documentary evidence. This typically includes:
- Unpaid invoices or statements of account
- The contract or agreement giving rise to the debt
- Correspondence evidencing the debt
- Court judgments or orders
- Any security documents (for secured creditors)
Once the trustee receives your proof, they will assess it and either admit it (in whole or part), reject it, or request further supporting material. A rejected proof can be appealed to the Federal Court.
Priority Creditors vs Unsecured Creditors
Not all creditors are equal in bankruptcy. The Bankruptcy Act 1966 (Cth) sets out a strict order in which creditors are paid:
- Secured creditors — Those holding a mortgage, charge, or registered security interest over specific assets are paid first from the proceeds of those assets. They do not compete with unsecured creditors for those assets.
- Trustee’s costs and remuneration — The cost of administering the estate is paid before any distribution to creditors. This can substantially reduce the pool available.
- Priority unsecured creditors — This includes certain employee entitlements (wages, superannuation, leave) under the Fair Entitlements Guarantee where applicable.
- Unsecured creditors — Trade creditors, lenders without security, and judgment creditors rank equally among themselves and share in whatever remains.
In practice, unsecured creditors often receive nothing, or a very small percentage of their debt. Bankruptcy administration is expensive, and assets are frequently insufficient to cover even the trustee’s costs.
What Are Your Dividend Prospects?
Your dividend prospects depend entirely on the assets available in the estate. Before making an estimate, consider:
- The total value of the bankrupt’s realisable assets (excluding protected assets such as superannuation and tools of trade)
- The cost of the trustee’s fees and disbursements
- The total amount of proven debts across all creditors
- Whether any secured creditors have prior claims over major assets
In many personal bankruptcies — particularly those of individuals without significant assets — the trustee’s investigation concludes with no dividend at all. This is a hard commercial reality, and it affects how much time and cost you should invest in pursuing the debt.
Objection to Discharge
As a creditor, you have the right to object to the bankrupt’s discharge in certain circumstances. Under section 149D of the Bankruptcy Act, a trustee can file a notice of objection that extends the bankruptcy period from 3 years to 5 or 8 years. Grounds for objection include the bankrupt:
- Failing to disclose assets or income
- Failing to make required income contributions
- Leaving Australia without consent
- Failing to assist the trustee
Creditors cannot file objections directly, but can alert the trustee to conduct that justifies an objection. This can be a useful tool where a bankrupt appears to be hiding assets or income.
Secured Creditors and Their Position
If you are a secured creditor — for example, you hold a mortgage over the bankrupt’s real property, or a registered security interest (PPSR registration) over personal property — your position is significantly stronger than that of an unsecured creditor. You are entitled to:
- Realise your security independently of the bankruptcy
- Keep the proceeds up to the value of your secured debt
- Prove in the bankruptcy for any shortfall (the balance you are still owed after realising your security) as an unsecured creditor
If you have not properly registered your security interest on the Personal Property Securities Register (PPSR), you may find your “security” is void in the bankruptcy — a catastrophic outcome. Always ensure your registrations are current and correct.
Clawback: Preferences Paid Before Bankruptcy
The Bankruptcy Act gives trustees powerful clawback powers. If you received a payment from the debtor in the lead-up to their bankruptcy, the trustee may be able to recover that payment from you.
The key provisions to understand are:
- Unfair preferences (s 122): A payment or transfer made to a creditor within 6 months before bankruptcy (or 4 years if the creditor is a related party), at a time when the debtor was insolvent, and that gives that creditor a better outcome than they would otherwise receive in the bankruptcy. The trustee can set this aside and recover the payment.
- Undervalued transactions (s 120): Transfers of property at less than market value in the 5 years before bankruptcy can be set aside.
- Transactions to defeat creditors (s 121): No time limit — if a transfer was made with the intention of defeating creditors, the trustee can recover it regardless of when it occurred.
If you received a payment shortly before the bankruptcy and you knew (or suspected) the debtor was insolvent, seek legal advice immediately — the trustee may be coming to you for that money back.
Similar Rules Apply in Company Liquidation
Similar requirements and priorities apply when a company goes into liquidation. The equivalent provisions under the Corporations Act include unfair preference claims, uncommercial transactions, and insolvent trading claims against directors. Creditors in a liquidation also prove their debts with the liquidator, and priority rules apply in much the same way as in personal bankruptcy.
Frequently Asked Questions
Do I automatically get paid if I have a court judgment against the bankrupt?
Not automatically. A court judgment proves that the debt exists and its amount, but it does not guarantee payment in a bankruptcy. You must still lodge a proof of debt with the trustee. The judgment makes your proof easier to establish, but payment depends on whether there are sufficient assets in the estate after the trustee’s costs and any secured and priority claims are paid first.
Can I still pursue the bankrupt personally while they are bankrupt?
Generally, no. Once a sequestration order is made, an automatic stay operates against most legal proceedings by creditors against the bankrupt personally. You cannot continue to sue the bankrupt or enforce a judgment against them personally for provable debts. Your remedy is through the bankruptcy process — lodging a proof of debt with the trustee.
What if I received a payment from the debtor last month and they just went bankrupt?
This is a clawback risk. If the payment was made within 6 months of the bankruptcy, the debtor was insolvent at the time, and the payment gave you a better outcome than you would receive in the bankruptcy, the trustee can demand repayment. You should seek legal advice immediately. There are defences available in some circumstances — for example, if you gave new consideration (provided fresh goods or services) in exchange for the payment.
How long does the bankruptcy administration process take?
The standard bankruptcy period is 3 years and one day from the date the bankrupt files their Statement of Affairs. However, the administration of the estate can continue beyond discharge — the trustee can still sell assets and pay dividends after the bankrupt is discharged. Complex estates with significant assets or litigation may take 5-10 years to fully resolve.
How Boss Lawyers Can Help
If someone who owes you money has gone bankrupt or is threatening to, early advice is critical. We regularly act for creditors in bankruptcy matters — advising on proof of debt lodgement, preference claim exposure, secured creditor enforcement, and objections to discharge. We also act for trustees and debtors navigating the process.
Contact Mark Harley at Boss Lawyers on 1300 267 711 or visit bosslawyers.com.au.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
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For expert legal advice on commercial disputes in Brisbane and Queensland, speak with our commercial litigation lawyers Brisbane. Call 1300 267 711 or contact us online.
