How long does bankruptcy go for – till death and beyond?


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How long does bankruptcy go for – till death and beyond?

An important aspect of personal bankruptcy in Australia is that it usually lasts for a minimum of 3 years, but did you know that it can last until death and even beyond!

We are often asked by debtors and their advisors, including accountants and lawyers, “how long can someone be a bankrupt for?”

The current position is as follows:

Standard period – 3 years and 1 day

The standard period of time that an insolvent debtor is a bankrupt is 3 years and 1 day, commencing on the date that the Bankruptcy Form which includes the Debtor’s Petition and Statement of Affairs, is accepted by the Official Receiver at the Australian Financial Security Authority (AFSA). At the end of that period they are discharged (released) from bankruptcy.

Extended period – up to 8 years and beyond

For a debtor who presents their Debtor’s Petition, the 3- year period starts when the Official Receiver accepts their Debtor’s Petition and they become a bankrupt.

However, if the debtor becomes a bankrupt by way of a Sequestration Order made by the Court on the application of one or more of their creditors, they may not file the Bankruptcy Form until weeks, months or even years later. So, whilst they became a bankrupt when the Court made the Sequestration Order, they will not be discharged from bankruptcy until the end of the 3-year period starting from when they filed their Bankruptcy Form. If they do not file their Bankruptcy Form for whatever reason, they will remain a bankrupt indefinitely. AFSA records that there are:

  • 2,310 persons who remain a bankrupt for more than 10 years;
  • another 1,515 continuing bankrupts between 5 and 10 years;  and
  • more again for lesser periods.

If the bankrupt engages in “bad behaviour” as detailed in the Bankruptcy Act before and/or during their bankruptcy, the Trustee of their bankrupt estate can lodge an objection to their discharge from bankruptcy which will extend the 3 year period to either 5 years or 8 years depending on the nature and extent of the bad behaviour.

Till death and beyond

If a bankrupt never files their Bankruptcy Form with the Official Receiver during their lifetime , they will die as an undischarged bankrupt. The executor/administrator could then complete the requisite Bankruptcy Form.

Likewise, if the NSW Trustee & Guardian is appointed as the Financial Manager of the financial affairs of an incapacitated undischarged bankrupt who has not filed their Bankruptcy Form, the Financial Manager can do so on their behalf.

Lost in delivery

In circumstances where the requisite Bankruptcy Form was completed by the bankrupt but was ‘lost in delivery’ and was not formally filed with the Official Receiver, with neither the bankrupt nor the trustee being aware, this leads to an injustice to the bankrupt.

Section 33A of the Bankruptcy Act was enacted to address that unfairness.*  It provides that if the Court is satisfied that a bankrupt believed on reasonable grounds that their Bankruptcy Form had already been filed at a time before it was actually filed, the Court may so order and consequently, the 3 year period starts on the day determined by the Court.

When the reality hits home

It is when a person who remains a bankrupt after many years tries to borrow money, or is the beneficiary under a will, or goes to buy real estate, that the lurking legal issues are activated, and complexities arise.

In many cases, unless section 33A applies, the only way a bankrupt can end their bankruptcy and remove the legal impediment of bankruptcy is to file their Bankruptcy Form, belatedly, and wait out the 3 years. **

Others who do not, or refuse to, can cause other problems, and these may require policy and law reform attention.

Reform

One reform could be to allow some cut-off point in time, say x years, and absent any further issues arising, and there is an automatic discharge.  One criterion for allowing this is that the trustee has made all reasonable attempts to obtain a Bankruptcy Form but has been unsuccessful; and that should include having AFSA use its own powers, under s 77C, to try to have the bankrupt comply.

In practice

As to what a trustee does with such bankruptcies, once no further reasonable efforts can be made to obtain the Bankruptcy Form, the administration of estate can be finalised.  Once the trustee notifies the Official Receiver of that and this is recorded on the NPII, the seven-year period of liability for the trustee begins to run.

Shortened period – less than 3 years

At any time after the debtor becomes a bankrupt, they can have their bankruptcy annulled (ended) in one of the following ways:

  • The Trustee of their bankrupt estate receives sufficient funds to pay in full all the creditor’s claims and the Trustee’s costs of administering their bankrupt estate;
  • Their creditors pass a special resolution to accept an offer by the bankrupt which will provide for a return of less than 100 cents in the $ in full satisfaction of their claims and the Trustee’s costs of administering their bankrupt estate;  or
  • The Court determines that the Sequestration Order should not have been made due to procedural errors.

Possible changes due to COVID – 1-year bankruptcy

Due to the negative impact of COVID on the Australian economy, it is expected that there will be a significant increase in the number of bankruptcies commencing sometime in 2021. To address this increase, dVT Group’s sources advise that the Government will possibly re-visit the proposal that the standard 3-year period be reduced to 1 year. We will keep you updated on the progress on this issue.

Special thanks to Michael Murray and Bob Cruickshanks for their contribution to this article. 

Questions?

If you have any questions regarding bankruptcy, please call Anthony Bagala or Mark Robinson, both registered trustees in bankruptcy at dVT Group on 02 9633 3333 or by email mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

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*   See Jovanovski v Official Receiver, Australian Financial Security Authority [2018] FCCA 1193 at [150]

** Excluding annulment, etc.