Chapters

Non-divisible property

The property which a trustee cannot take from a bankrupt is set out in section 116 of the Bankruptcy Act 1966 (Cth) and Bankruptcy Regulations 1996 (Cth), Regulations 6.036.03A and 6.03B. This list includes:

  • necessary household property such as beds and fridges;
  • property of the bankrupt’s that is used to earn income such as the tools of their trade; their plant and equipment and; reference books not exceeding $3500 (indexed) in value and such other discretionary items as the creditors or court may allow;
  • a motor vehicle valued at less than $7050 (indexed);
  • the interest that a bankrupt has in a regulated superannuation fund, or a payment from such a fund received on or after the date of bankruptcy (s116(d)(iii)).
  • the proceeds of certain damages claims for compensation and any property purchased with, or substantially with, the proceeds of such a claim (s116(g)).

Divisible Property

In determining whether or not to seize and sell certain assets, the trustee must consider the costs of seizing and selling the asset in relation to its value (Reg 6.03(4)(e)). The trustee must take into consideration any special or health or medical needs of the bankrupt and/or the bankrupt’s household as well as whether the property is reasonable necessary for the functioning of the household (Reg 6.03(4)).

Divisible property is that which can be taken by the trustee and includes houses, land and motor vehicles worth over $7050 (indexed). Generally, all property owned by the bankrupt at the time that bankruptcy takes place or that is acquired during the bankruptcy is divisible and ‘vests’ in the trustee. The trustee thereby becomes the legal owner of the property ensuring that it is paid off in order to distribute the proceeds to the creditors. Generally, any part share that the bankrupt has in jointly owned or mortgaged property will be sold if commercially practicable.

Offering to Buy an Asset from the Trustee

The trustee may sometimes ask the bankrupt whether they know of anyone who may want to purchase the asset. This may occur, for example where the bankrupt has equity in a house or in those instances in which the asset is unlikely to attract a good price.

Property acquired during Bankruptcy

Any property which comes to the bankrupt during the period of bankruptcy (for example, lottery winnings, an inheritance or a gift) may also be sold or made available by the trustee for payment to the creditors.

The Home

If a bankrupt owns a house subject to a mortgage or is purchasing it on a long-term purchase contract, the bankrupt’s interest in the house would generally have to be realised. If the house is in the bankrupt’s name, or if the husband and wife are joint owners and are both made bankrupt, the trustee will normally sell the house, unless it is mortgaged by the Defence Service Homes Division where the Secretary of the Department of Defence will rarely give permission for the sale to take place (s45A(1)(b)Defence Service Homes Act 1918 (Cth)). If only one spouse becomes bankrupt and owns a house jointly with the other, the trustee will register as joint owner of the house with the non-bankrupt spouse. While the trustee is a joint owner, mortgage payments will not have to be made by the trustee, but the registration of the trustee does not prevent the mortgagee selling the property if the payments fall into arrears. A spouse has three choices:

  • s/he has first option to buy the bankrupt husband’s interest or share in the house from the trustee. The bankrupt’s interest is valued at the time of sale and is paid in cash;
  • if the spouse cannot afford to buy the other spouse’s share, s/he may join with the trustee in a sale of the house, both usually receiving equal shares of any money left over after the payment of expenses and the mortgage;
  • if the spouse refuses to co-operate, the trustee can apply to the Supreme Court, the Federal Circuit Court, or the Federal Court for an order that the house be sold and the proceeds divided.

It is important to find out where the proceeds used to buy the house came from. As mentioned earlier (see ‘Advantages and Disadvantages’), if the house was built with, or substantially with, money from a worker’s compensation award or settlement, with damages awarded in a third party action or with money received on account for personal injury done to the debtor, the debtor’s family or the debtor’s spouse, the house may be protected under the Act and may not be taken and sold to pay the creditors (s116Bankruptcy Act).

Essential Household Services

Policies of different utility and telecommunications agencies vary. In general, bills relating to the period up to the date of bankruptcy will not have to be paid although a continuation of the service after that date will still have to be paid. Often, these agencies will open a new account after the date of bankruptcy and may impose a service restriction. For example Telstra may disconnect its service and then reconnect with a bar on STD calls.

The Car

A bankrupt is able to retain a motor vehicle where the aggregate vale does not exceed the prescribed amount of $7050 (indexed). The court or the creditors may determine that the bankrupt person can retain a vehicle or other property having a value greater than the prescribed amount before the trustee sells the property. The bankrupt must use the vehicle primarily as their means of transport meaning that if it unregistered and not being used as a form of transport the bankrupt will not be able to keep it. If the trustee sells the bankrupt’s car which is valued in excess of the prescribed amount he or she must pay to the bankrupt the prescribed amount.

Income

Bankrupts who earn above a certain income will be required to make contributions to their trustee. The level is dependant on a number of factors including the amount of income and the bankrupt’s number of dependents. Income is defined broadly in the Bankruptcy Act 1966 (Cth) and includes payments from superannuation funds and fringe benefits such as subsidised rent or use of a company car.

The net income that a bankrupt can earn before being required to make contributions to their trustee is called the Actual Income Threshold Amount (AITA). A bankrupt with no dependents as at 1 January 2006 was able to earn AITA of $47,693.10 per year. A dependent is defined in section 139K of the Bankruptcy Act 1966 (Cth) as someone who lives with the bankrupt, is wholly or partly dependent on the bankrupt and does not earn more than ‘the prescribed amount’ which as of 1 July 2012 is $3,181. If the bankrupt has one dependent, their income threshold is increased by 18 percent; by 27 percent for two dependents, by 32 percent for three by 34 percent for four and by 36 percent for more than four dependents.

The AFSA website keeps an updated table showing the current AITA amounts. The amounts are updated quarterly and sometimes twice yearly – 20 March and 20 September. The AITA is updated twice yearly.

Rent

Bankruptcy removes rent debts. Despite this, landlords are still able to evict tenants for non-payment of rent.

Public housing through Housing Tasmania generally does not exclude people who have declared bankruptcy from applying for public housing assistance. However, where a person has declared bankruptcy to avoid a debt to Housing Tasmania the person may be excluded from having an application assessed for up to 6 months. There is no definite course of action, and each case is assessed on a case-by-case basis. For more information, contact the Tenants Union.

Goods on Hire Purchase and Lease

As goods under hire purchase and lease contracts are not owned by the debtor until the end of the agreement, they cannot be taken by the trustee. The trustee may, with the agreement of the owner (usually a finance company), sell the goods for more than the amount owed under the contract and apply the surplus to the bankrupt estate. However, it is common for the finance company to repossess goods when a person becomes bankrupt if the installments are in arrears. If there is money still owing to the finance company after it has sold those goods, that debt will be added to the trustee’s list. However, should the amount still owed by the debtor be small, it may well be that the company will be obliged to refund the balance of the proceeds of the sale of the goods, after the debt has been paid in full.

Goods Subject to a Bill of Sale or other Security

Finance companies often secure loans with a bill of sale or other security over all the household goods of debtors. When a person becomes bankrupt, the company holding the bill of sale has a kind of mortgage over the goods and will normally seize them if payments are in arrears. This can be disastrous for the debtor, who faces losing all of his or her household goods. Although the Act specifically protects such goods, a Bill of Sale or other security overrides that protection.

Money Received by Bankrupt during Bankruptcy

At any time during the bankruptcy, the trustee may take any money or other items which the bankrupt receives, such as gifts, lottery winnings, or money received under a will. If the bankrupt accumulates a significant amount of money and buys some possessions, they may also be taken by the trustee.

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