30 Sep 2019

Enforcing income contributions in bankruptcy


3 min

Draconian methods to ensure creditor recoveries.

Many readers would know that bankrupts can be required to pay their bankruptcy trustee approximately one-half of their after-tax income if above a certain threshold for the benefit of the bankrupt estate. That income contribution becomes a debt to the bankruptcy trustee and survives bankruptcy once discharged.

Collecting income contributions can be problematic when a bankrupt refuses to pay the assessed amount. To assist in the recovery of these amounts, a bankruptcy trustee has two major powers under the Bankruptcy Act 1966 to enforce payment:

  1. Section 139ZL notices.

  2. Supervised accounts.

A section 139ZL notice is very similar to a garnishee order. The Officer Receiver issues these upon a bankruptcy trustee’s application and serves the notice on parties that owe the bankrupt money that otherwise would not be divisible property. Typically, a bankrupt’s employer would receive these and are requested to direct a portion of the bankrupt’s wage payments to the bankruptcy trustee instead of paying directly to the bankrupt. This process works well when the bankrupt is employed by a third party but, unsurprisingly, not so well when the bankrupt is self-employed. Draco

This is where the supervised accounts regime comes in.

Under the provisions a bankruptcy trustee has wide-ranging powers to deal with the bankrupt’s post-bankruptcy financial affairs. This includes making a ‘determination’ that requires the bankrupt to establish a separate account (supervised account) where all monies the bankrupt earns, must be deposited into.

The bankruptcy trustee controls the supervised account who discretionally (and reasonably) allows withdrawals to assist in the bankrupt’s cost of living. The purpose is to guarantee that the balance of funds reduces/pays off outstanding income contributions for the benefit of creditors.

Clearly these powers are extreme and are used in limited circumstances as the threat alone of these draconian powers is enough to force the most recalcitrant bankrupts into line.

However, the powers outlined above are not an absolute. A bankrupt can challenge the income assessment or oppose the section 139ZL notice or supervised account determination by applying to the Inspector General via the Australian Financial Security Authority (AFSA), the Administrative Appeals Tribunal (AAT) or the courts.

As can be seen above, the powers available to the bankruptcy trustee (while not absolute) are wide reaching and formidable to ensure that recoveries for the bankrupt estate’s creditors are maximised.

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