I am surprised that more bankrupts do not use the provisions of the Bankruptcy Act to get out of bankruptcy earlier. Many of them will not have the opportunity to do so, but many more than currently use these provisions could if they wanted to.
Discharge from Bankruptcy
A bankruptcy usually ends with the bankrupt being discharged three years after the Statement of Affairs is lodged with ITSA. This may happen significantly more than three years after the start of the bankruptcy, if the bankrupt does not lodge their Statement of Affairs in a timely manner.
If the bankruptcy was started by a debtor’s petition, the Statement of Affairs would have been filed with the debtor’s petition and the bankruptcy will end 3 years after acceptance of the debtor’s petition.
If the bankruptcy was started by a sequestration order (an Order of the Court), the Statement of Affairs would not have been filed at that time. The bankrupt will have to complete a Statement of Affairs and send it to ITSA. As the bankruptcy ends 3 years after the filing of the Statement, the longer it takes for the bankrupt to file it, the longer the bankruptcy will continue. If the Statement of Affairs is never filed, the bankruptcy will continue until the death of the bankrupt.
Historically the Bankruptcy Act contained provisions that allowed for the early discharge of bankrupts in certain circumstances. Those provisions were removed from the Act many years ago, but there are still an avenue for bankrupts to have their bankrupted ended (by annulment, not by discharge).
Getting out of bankruptcy
There are three ways that a bankruptcy may be annulled. An annulment is a complete undoing of the bankruptcy, as if the bankruptcy never had happened. Two of the three ways will leave the ex-bankrupt without any further obligations to the trustee (once the costs have been paid), the other swaps the bankruptcy for another agreement.
It is this other one that should be able to be used by more bankrupts.
1. A section 73 proposal
This is a formal proposal put to creditors under section 73 of the Bankruptcy Act. It provides a mechanism for bankrupts to propose a compromise agreement to their creditors as an alternative to the continuation of the bankruptcy. If the creditors accept the proposal, the bankruptcy is effectively exchanged for an obligation under the section 73 agreement.
Both sides should benefit from such a proposal. The creditors would expect to receive a larger distribution than they would receive under the continued bankruptcy (and usually by the time these are proposed, there will be no further distribution), and the bankrupt would be released from the restriction of the bankruptcy.
To start the process, the bankrupt forwards a written proposal to their trustee requesting that a meeting of creditors be called to consider the proposal. The trustee will conduct any necessary investigations into the benefits of the proposal, issue a report and call a meeting for the creditors to vote on the proposal.
The proposal is put to creditors at a meeting called under the same provisions as bankruptcy meetings. The creditors attending that meeting vote on the proposal. The proposal must be accepted by a special resolution, which is both a majority in number of the creditors present and voting, and at least 75% of the dollar value of the creditor’s debts present and voting.
It is becoming more common for bankrupts to end their bankruptcy during the three year term by making a proposal after the trustee has conducted their investigation and realised any divisible assets. Once the creditors know exactly what return (if any) they are likely to receive from the estate, they may be more receptive to a proposal that will give them even a slightly better return.
The only thing that a bankrupt needs is something to offer their creditors. This will eliminate some bankrupts who cannot get funds from relatives to provide some other benefit to creditors. But some percentage of bankrupts will have that opportunity.
2. Court Annulment
Usually the Court will only annul a bankruptcy when it can be shown that the bankruptcy should never have been commenced. This may happen where the proper legal process was not followed in initially bankrupting the person, if there was no debt outstanding to that creditor at that time, or if the bankrupt is actually solvent.
Bankrupts seeking an annulment through the court should be aware that the ex-trustee has the right to use the assets in his or her possession to pay outstanding remuneration and outlays, and if insufficient, may seek payment from the ex-bankrupt.
3. Payment of all debts and costs of the estate
If the estate has sufficient funds to pay all of the bankrupt’s debts, and all of the costs of the estate, ARC and other charges, the bankruptcy will be annulled. This happens because the bankrupt is no longer insolvent, as there are no more debts.
But for this type of annulment to occur, all costs and debts of the estate have to be paid. These include:
(a) all provable debts of the estate, including any interest that has accrued on interest bearing debts since the date of bankruptcy;
(b) the Asset Realization Charge (ARC) payable to ITSA;
(c) the expenses and remuneration of the Trustee; and
(d) any other charges or statutory costs of the estate.
This type of annulment generally happens when the sale of some asset provides enough money to pay these costs, or when a friend or relative provides these funds.
This type of annulment is not uncommon where the bankrupt has equity in their residential home or other ‘fixed’ assets or non-liquid assets.