Australia has recently experienced a rise in the number of corporate insolvencies.
From this, company directors are increasingly finding themselves exposed to personal liability for the debts of their insolvent companies, and in turn, this is expected to lead to a surge in personal insolvencies.
Australian Financial Security Authority (AFSA), which is responsible for regulating the personal insolvency industry, predicts that personal insolvencies will increase by approximately 11% from 13,400 in 2024-25 to 14,950 in 2025-26.
Accordingly, it has never been more important for people in business to be aware of the consequences of bankruptcy so that any myths are dispelled before seeking further assistance.
What is personal bankruptcy?
Bankruptcy is a process administered under the Bankruptcy Act, 1966 (Cth). It can be entered voluntarily or via a creditor’s court action. Once bankrupt, a trustee manages the bankrupt estate, taking control of certain assets to pay creditors. The standard bankruptcy period is three years and one day but can be extended to five or eight years for non-compliance or misconduct by the bankrupt.
What are the major consequences of bankruptcy?
Firstly, it will have a legal and financial Impact, which include:
Assets: All assets vest in the bankruptcy trustee, certain of which are made available for creditors to be paid from (ie the family home, investment properties, shares, digital currencies [1]).
Non-Divisible Assets: Whilst all assets vest in the trustee, certain of these are not divisible (i.e. available for realisation by a trustee) such as superannuation or household property, or if they do not exceed a prescribed value, such as motor vehicles or tools of trade [2].
Debts: Bankruptcy wipes out most unsecured debts (credit cards, loans, utility bills), but some debts remain: court fines, child support, and government student loans (HECS/HELP).
Income: You can keep working, but if your after-tax income exceeds a set threshold, you must contribute half of the surplus to your creditors.[3]
Credit: Your credit file is marked for five years (or longer, if bankruptcy is extended), making it difficult to get new loans or credit cards during that time. Bankruptcy is also listed permanently on the public National Personal Insolvency Index (NPII).
Bank Accounts: You can maintain a bank account for living expenses, but accounts with debts owed to the bank may be offset and closed.
There are certain restrictions during bankruptcy, such as:
You are disqualified from acting as a company director or managing corporations [4].
If self-employed, you must trade under your own name or disclose bankruptcy status when using a business name.
Must inform credit providers if seeking credit over A$7,173.
Cannot travel overseas without permission from your trustee.
Must cooperate fully with the trustee, provide requested information, and report changes in your finances or employment.
Certain professional licenses and qualifications can be suspended or withdrawn in the event of bankruptcy (like building, real estate, or other professional services); always check with relevant authorities.
A question we often receive, is how will bankruptcy impact my employment and professional life?
In most employment circumstances, bankruptcy is not typically grounds for dismissal and isn’t automatically disclosed to your employer. However, roles involving company directorships, financial trust, or certain licenses (depending on which state the license has been issued) may be restricted during bankruptcy. Some professions (law, accounting, building, and real estate) require you to notify your regulatory body and may impose conditions or suspensions until discharge.
The other personal and reputational effects can encompass:
Bankruptcy is a public record, which may affect your reputation, especially in business or small communities.
Relationship stress can occur if joint debts or guarantees are involved.
There is often social stigma, but many find relief from financial stress after bankruptcy.
There are also some specific considerations to be mindful of, depending on which State you are in, which include:
State licensing bodies may suspend licenses for builders, electricians, and real estate agents during bankruptcy.
Unpaid fines to the state (e.g. traffic fines) are potentially not cleared by bankruptcy.
Some public sector roles and positions of trust (like Justice of the Peace) may be affected.
What is life like after bankruptcy
After discharge, restrictions are lifted. A person can be a company director, travel freely, and apply for credit (though lenders may still be cautious).
It is worth noting, the bankruptcy listing remains on your credit file for up to five years and on the NPII permanently, which can impact future financial dealings and some applications (like for certain jobs or licenses).
Key takeaways
With an understanding of the consequences of the bankruptcy, a person can make an informed decision of whether or not to proceed, bearing in mind the financial responsibilities that they are otherwise unable to meet and the cause of the personal insolvency.
The consequences of bankruptcy are wide, and prior to commencing the process, it is recommended that people speak with a professional advisor who can understand their specific circumstances and provide advice on the impact of bankruptcy.
Bankruptcy can be a path to a fresh financial start if managed carefully and understood fully. Take the time to get informed, comply with the rules and seek professional advice as earlier early as possible, which is tailored to individual circumstance, as every scenario has unique aspects.
[1] Further information on how the family home is realised in bankruptcy can be found here: https://worrells.net.au/resources/news/director-penalty-notices-and-the-family-home
[2] Details of prescribed thresholds are available here: https://www.afsa.gov.au/professionals/resource-hub/indexed-amounts
[3] Details of prescribed thresholds are available here: https://www.afsa.gov.au/professionals/resource-hub/indexed-amounts
[4] Section 206B(3) Corporations Act, 2001 (Cth)
