Last reviewed and updated: May 2026
Bankruptcy is a process where people who cannot pay their debts give up their assets and control of their finances, either by agreement or court order, in exchange for protection from legal action by their creditors.
Understanding bankruptcy — what it means, how it works, and what alternatives exist — is essential for anyone facing serious financial difficulty in Australia. This guide explains the key concepts in plain terms.
Personal Bankruptcy vs Corporate Insolvency
It is important to distinguish between personal bankruptcy and corporate insolvency. Bankruptcy applies only to individuals — natural persons who cannot pay their debts as and when they fall due. The governing legislation is the Bankruptcy Act 1966 (Cth).
When a company cannot pay its debts, it does not go bankrupt — it goes into liquidation, voluntary administration, or receivership under the Corporations Act 2001 (Cth). The consequences and processes are quite different. Directors of insolvent companies face their own personal liability risks, but that is separate from individual bankruptcy.
Which Court Handles Bankruptcy?
A bankruptcy case may be heard by the Federal Court or the Federal Circuit and Family Court of Australia. Most bankruptcy cases — particularly uncontested matters — are heard by the Federal Circuit and Family Court. More complex matters, or those involving significant assets, are often dealt with in the Federal Court.
How Does a Court Declare Someone Bankrupt? Sequestration Orders
A person who claims that you owe them money can ask the Federal Court or the Federal Circuit and Family Court to declare you bankrupt. This person is called a creditor, and their application is called a Creditor’s Petition. The court order that declares a person bankrupt is called a sequestration order.
Before a creditor can file a Creditor’s Petition, they must first establish an act of bankruptcy. The most common act of bankruptcy is failing to comply with a Bankruptcy Notice — a formal demand for payment of a debt of at least $10,000. If the debtor fails to pay or make arrangements within 21 days of service, the creditor can then file their Petition.
Alternatively, a person can declare themselves bankrupt voluntarily by filing a Debtor’s Petition with the Australian Financial Security Authority (AFSA). This is sometimes called voluntary bankruptcy.
The Role of the Bankruptcy Trustee
Once a sequestration order is made (or a Debtor’s Petition is accepted), a trustee in bankruptcy is appointed. The trustee’s job is to:
- Take control of the bankrupt’s assets and affairs
- Investigate the bankrupt’s financial circumstances
- Realise (sell) assets to pay creditors
- Receive and adjudicate proofs of debt from creditors
- Distribute available funds to creditors in order of priority
- Report any offences to AFSA
The trustee is usually the Official Trustee in Bankruptcy (a government agency, AFSA) or a registered private trustee. The trustee acts in the interests of creditors, not the bankrupt person.
Effects on Assets
When you become bankrupt, most of your assets vest in the trustee — they pass out of your hands and into the trustee’s control. The trustee can sell these assets to pay creditors.
However, not all assets are lost. Protected assets under the Bankruptcy Act include:
- Ordinary household furniture and personal items up to a threshold value
- Tools of trade up to a threshold value (currently around $4,200)
- A vehicle up to a threshold value (currently around $9,600)
- Superannuation (generally protected — a major reason some people prefer bankruptcy over other options)
- Compensation for personal injury or death
- Life insurance policies (in some circumstances)
Your family home is at risk if it has equity. The trustee can force a sale even if the home is jointly owned with a non-bankrupt spouse, though the process can be complex and take time.
Effects on Income
If you earn income above a threshold (which varies based on your dependants), you must make compulsory contributions from your after-tax income to the trustee. In 2025-26, the threshold for a single person with no dependants is approximately $63,000 net. Half of any income above the threshold must be paid to the trustee.
Effects on Travel
A bankrupt person cannot travel overseas without the written consent of their trustee. Failure to obtain consent is a criminal offence under the Bankruptcy Act. Trustees may withhold consent if they believe the travel would harm the administration of the estate.
How Long Does Bankruptcy Last?
The standard period of bankruptcy is three years and one day from the date you file a Statement of Affairs with AFSA (or from the date of the sequestration order if you were made bankrupt by a creditor). After this period, you are automatically discharged from bankruptcy in most cases.
However, your trustee can object to discharge, which extends bankruptcy to 5 or 8 years. Grounds for objection include failing to disclose assets, failing to make income contributions, failing to co-operate with the trustee, or leaving Australia without consent.
Early Discharge
In limited circumstances, an annulment of bankruptcy is possible before the three-year period ends. This can occur if:
- You pay all provable debts in full (including trustee costs and interest)
- The court annuls the bankruptcy on the grounds that it should not have been made
- Creditors accept a composition or scheme of arrangement — essentially a deal to accept less than full payment
Alternatives to Bankruptcy
Bankruptcy is not the only option for individuals in serious financial difficulty. Two formal alternatives exist under the Bankruptcy Act:
Part IX — Debt Agreements
A Debt Agreement (Part IX) is a legally binding arrangement between you and your creditors to pay an agreed amount — typically less than the full debt — over a period of time (usually 3-5 years). It is available to people with relatively modest debts, income and assets (thresholds apply). A Debt Agreement appears on your credit file and the National Personal Insolvency Index (NPII) permanently.
Part X — Personal Insolvency Agreements (PIAs)
A Personal Insolvency Agreement (Part X) is a more flexible arrangement that can be used regardless of the level of debt or assets. You appoint a controlling trustee, who calls a meeting of creditors to vote on your proposed agreement. PIAs can involve lump sum payments, asset transfers, or structured payments. They are also recorded permanently on the NPII.
Life After Bankruptcy
Bankruptcy has significant and lasting consequences:
- Your bankruptcy is permanently recorded on the National Personal Insolvency Index (a public record)
- Your credit file records the bankruptcy for five years from the date you became bankrupt, or two years after discharge — whichever is later
- You may be disqualified from managing a corporation under the Corporations Act
- Some professional licences and government positions are affected
- You cannot be a trustee, executor, or receiver while bankrupt
- Overseas travel requires trustee consent for the duration of the bankruptcy
Despite this, many people do rebuild after bankruptcy. The three-year discharge period means that, for many, bankruptcy is a faster path to a fresh start than years of unmanageable debt.
Frequently Asked Questions
Can I keep my superannuation if I go bankrupt?
Generally, yes. Superannuation held in a complying superannuation fund is protected from creditors in bankruptcy. This is one of the key reasons some financial advisers consider superannuation contributions valuable from a creditor-protection standpoint. However, if you made contributions specifically to defeat creditors, the trustee may be able to claw those back.
What happens to my jointly owned property if I go bankrupt?
The trustee can deal with your share of jointly owned property, including your family home. If the property has equity above your co-owner’s share, the trustee can apply to court to force a sale. The co-owner will receive their portion of the equity, and the trustee takes your share for creditors. This process can take time but is a very real risk.
Can a creditor still sue me after I’m discharged from bankruptcy?
For most provable debts, discharge releases you from personal liability. However, some debts survive bankruptcy — including child support, fines, debts incurred by fraud, and HECS-HELP debts. Your trustee can provide a list of what is and is not released on discharge.
What is the difference between a Bankruptcy Notice and a Creditor’s Petition?
A Bankruptcy Notice is a formal demand for payment. It is the first step — if you don’t pay or comply within 21 days, you commit an act of bankruptcy. A Creditor’s Petition is the next step — it is the court application asking a judge to make a sequestration order declaring you bankrupt. They are two separate documents with different legal consequences.
How Boss Lawyers Can Help
If you are facing bankruptcy proceedings — whether as a debtor or a creditor — early legal advice is critical. Our team regularly act in bankruptcy matters across the Federal Court and Federal Circuit and Family Court of Australia. We can advise on alternatives to bankruptcy, defend against Creditor’s Petitions, assist creditors to recover debts in bankrupt estates, and guide you through the entire 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.
