Bankruptcy provides a mechanism whereby the following purposes can be met:

• provide for an equitable distribution of the bankrupt’s assets to all creditors
• enable an investigation to take place into the bankrupt’s affairs and the circumstances leading up to their insolvency
• provide relief to the bankrupt by enabling them to be released from the burden of their liabilities, thus enabling them to make a fresh start

There are two ways in which a person may become bankrupt, by way of Debtor’s Petition or alternatively a Creditor’s Petition. Under a Debtor’s Petition a person completes a Statement of Affairs and makes their own application to ITSA. Upon acceptance of the Debtor’s Petition the person becomes bankrupt.

The other way in which people become bankrupt is on the application of a creditor. The creditor applies to the Federal Court of Australia for a Sequestration Order. In order for a creditor to make application to the Court to bankrupt the person, the Court will need to be satisfied that the person has committed an Act of Bankruptcy within a period not exceeding six months prior to the application.

Whilst there are other acts of bankruptcy, the most common Act of Bankruptcy is where a creditor, who has obtained Judgement against the person, issues a Bankruptcy Notice which has been served on the person and the debt owing to the creditor remains unpaid. It is generally the case that the Bankruptcy Notice requires payment within a period of 21 days. The Bankruptcy Petition must be personally served on the person.

The person handling the administration of the Bankrupt Estate is called a Trustee. The Trustee may be a Government Institution (the Official Trustee) or a private individual (a Registered Trustee). A Registered Trustee is only appointed when he/she consents to act as trustee of the person’s bankrupt estate. This consent is required to be filed in the case of a Debtor’s Petition with the debtor’s Statement of Affairs and in the case of a Creditor’s Petition, when the Creditor’s Petition is to be served on the debtor.

The Bankruptcy Act 1966 provides for alternatives to bankruptcy that can be entered into between the debtor and creditors without formally going into Bankruptcy. Bankruptcy is for a period of these years and many restrictions apply to bankrupt during this period. Briefly they are as follows:

Personal insolvency agreement (PIA)

• Under part X of the Bankruptcy Act a PIA is proposed by the debtor to a commercial his/her creditors that results in a letter return to the creditors then might be achieved in bankruptcy.