How Bankruptcy Works in Australia: Voluntary and Involuntary Bankruptcy Explained

Bankruptcy in Australia starts voluntarily, when a debtor lodges a petition against themselves under section 55 of the Bankruptcy Act 1966, or involuntarily, when a creditor owed $10,000 or more forces a sequestration order after a bankruptcy notice goes unanswered for 21 days, and either route puts a trustee in charge of the bankrupt's affairs until automatic discharge, which normally lands 3 years and 1 day after the bankruptcy begins.

This page covers how bankruptcy starts, who administers it, and how long it lasts. For the paperwork and fees involved in actually filing, see how to apply for bankruptcy. For what property is protected and what a bankrupt's income contributions look like, see what you keep and lose in bankruptcy. For the effects on a credit report, a directorship or overseas travel, see consequences of bankruptcy. For a Part X arrangement that is sometimes confused with annulment, see personal insolvency agreements. Start at the bankruptcy hub for an overview of the whole topic, including debt agreements and the alternatives to formal bankruptcy.

Voluntary bankruptcy: the debtor's petition

A debtor can present a petition against themselves to the Official Receiver at AFSA under section 55(1) of the Bankruptcy Act. The petition must be in the approved form and accompanied by a statement of affairs (section 55(2)). The Official Receiver must reject the petition unless the debtor has an Australian connection, meaning they are personally present or ordinarily resident in Australia, have a dwelling or place of business here, or carry on business here (section 55(2A)). Once the Official Receiver accepts the petition, the debtor becomes bankrupt by force of the section, effective from the date of acceptance (section 55(4) to (4A)).

In practice, this is a two-form online process through AFSA's Online Services portal, a Debtor's Petition and a Statement of Affairs submitted together, with each applicant needing their own account and joint or partnership applicants all needing to submit on the same day. The mechanics of that application, along with the fees involved, are covered separately on the how to apply page.

Involuntary bankruptcy: the creditor's petition

A creditor cannot simply apply to make someone bankrupt. First the debtor has to commit an act of bankruptcy, one of the events listed in section 40 of the Act. These include a conveyance for the benefit of creditors, a disposition that would be void against a trustee, absconding with intent to defeat creditors, and an execution against the debtor's property being held or returned unsatisfied. The most common act of bankruptcy in practice is failing to comply with a bankruptcy notice within its statutory period (section 40(1)(g)).

A bankruptcy notice is issued by an Official Receiver on the application of a creditor holding a final judgment or order for at least the statutory minimum (section 41(1)). The Act's own dictionary defines the statutory minimum as $5,000, or a greater amount if prescribed by regulation; AFSA's current guidance puts the operative figure at $10,000, so treat that as AFSA's current administered figure rather than a number pinned to a specific regulation clause quoted here. The notice must give the debtor the statutory period to comply, a period the Act sets at 21 days by default unless a longer period is prescribed; AFSA's current guidance confirms 21 days is still the figure in use.

A creditor's petition must be founded on an act of bankruptcy committed in the 6 months before the petition is presented. The creditor applies to the Federal Circuit and Family Court or the Federal Court, and if satisfied, the court makes a sequestration order. AFSA searches the National Personal Insolvency Index the day before the hearing to confirm the debtor is not already bankrupt, and a creditor worried about the debtor moving assets can also seek an interim control order under section 50 while the petition is pending.

Who administers your bankruptcy: the trustee

Every bankruptcy has a trustee responsible for administering the estate. The Official Trustee is a statutory body corporate, "the Official Trustee in Bankruptcy," established under section 18. A registered trustee is a private, AFSA-registered insolvency practitioner. Most bankruptcies get a registered trustee from the start because that trustee filed a written consent to act in advance under section 156A; if the person named in that consent does become bankrupt while it is still on foot, the registered trustee becomes trustee automatically. Creditors can also vote at a creditors' meeting to replace the Official Trustee with a registered trustee after the fact, under section 157.

If no registered trustee is in the seat at any point, the Official Trustee is the trustee by default, by force of section 160. So the Official Trustee is not a separate path a debtor chooses; it is the statutory fallback whenever no private trustee has taken the role.

How long bankruptcy lasts: automatic discharge

Section 149 provides that a bankrupt is discharged from bankruptcy, by force of that subsection, at the end of the period of 3 years from whichever date applies: the date the statement of affairs was filed, for a sequestration order, or the date the Official Receiver accepted the petition, for a debtor's petition. AFSA's own consumer guidance describes the identical rule as ending 3 years and 1 day after that date, because a period stated as running "from" a triggering day generally excludes that day itself under the usual day-counting rules for Commonwealth legislation. The two phrasings describe the same discharge date, and this page uses "3 years and 1 day" as the practical, reader-facing figure, citing section 149 for the underlying mechanism.

Extensions: 5 or 8 years

A trustee can extend the standard period by lodging a notice of objection to discharge under section 149A, on one or more of the grounds listed in section 149D(1). The Act splits every ground into two buckets. Some of the more serious grounds extend the bankruptcy to 8 years: certain void transfers under sections 121, 128B or 128C, failing to give the trustee requested information about property or income, intentionally giving the trustee false or misleading information, failing to disclose income or expected income, failing to pay an income contribution, spending money or disposing of property without adequately explaining it to the trustee, failing to return to Australia when the trustee asked, intentionally failing to disclose a liability or a beneficial interest in property, and refusing to sign a document the trustee lawfully required. Any other ground, including a lesser void transfer under section 120 or 122, a section 206A Corporations Act contravention, or misleading conduct over $3,000, extends it to 5 years. Any other ground extends it to 5 years. Both extension periods run from the same date that would otherwise have started the 3-year clock, except for grounds involving leaving or failing to return to Australia, where the extended period runs from the date the bankrupt actually returns.

Ending bankruptcy before discharge: annulment

Bankruptcy does not always run its full course. The Act provides three separate annulment routes, and they are not interchangeable:

• Section 153A, annulment on payment of debts. If the trustee is satisfied that all proved debts, interest and the costs of administering the bankruptcy have been paid in full, the bankruptcy is annulled by force of the section, on the date of the last such payment.
• Section 153B, annulment by the court. A court can annul a bankruptcy if it is satisfied a sequestration order ought not to have been made, or, for a debtor's petition, that the petition ought not to have been presented or accepted, whether or not the debtor was actually insolvent at the time.
• Section 74, a composition or scheme of arrangement. If creditors accept a debtor's proposed composition or scheme of arrangement by special resolution at a meeting, the bankruptcy is annulled by force of section 74 on the day the resolution passes, and the trustee must certify the annulment to the Official Receiver within 2 days.

Section 74 sits in a different part of the Act from the Part X arrangement most people mean when they say "personal insolvency agreement." A composition or scheme of arrangement under section 74 annuls an existing bankruptcy from inside it; a Part X personal insolvency agreement is a separate, formal alternative a debtor can propose instead of ever becoming bankrupt at all. The two are easy to conflate and worth keeping distinct.