What happens to my money?

More information you should know about different types of payments and if your trustee can claim them in bankruptcy.

How payments from the Coronavirus Economic Response Package affect people in bankruptcy

Economic support payments - are not claimable by your bankruptcy trustee as income or as an asset, regardless of whether you receive the payments before or after the date of bankruptcy.

COVID-19 supplement payments - are claimable by the trustee if you receive them before the date of bankruptcy and it remains in your bank account when you become bankrupt. During bankruptcy these payments are included in your after-tax income amount. If your after-tax income exceeds a set amount, you may have to make compulsory payments[?]

More information about these types of payment are available at Services Australia.

Early access to superannuation -  Should you receive payments from your superannuation under the Coronavirus Economic Response Package, there is no change to the way this payment is treated in bankruptcy. See Is my superannuation affected? for details on what happens to your super during bankruptcy.

The Australian Taxation Office has more information about super payments on their website at Early access to your super.

Is my superannuation affected?

It depends on when and how you receive super. You must inform your trustee if you receive any super before and/or after your bankruptcy begins.

Super payments you receive before bankruptcy:

  • Are claimable by your trustee.
  • Your trustee can claim assets you purchase with those funds e.g. a house

Super payments you receive during or after bankruptcy:

  • Are not claimable by your trustee if it is a lump sum payment.
  • Your trustee cannot claim assets you purchase with those funds e.g. car

An exception is where your super isn’t in a regulated fund, approved deposit fund or an exempt public sector scheme. Your trustee can claim super not held in these types of funds. Refer to your super fund provider if you are unsure which type of fund your super is in.

Super you receive as income:
During bankruptcy, super you receive as an income stream (e.g. a pension) forms part of your assessable income. If your income is over a set amount, you may need to make compulsory payments[?].

Self-managed super funds
Someone who is bankrupt can’t be a trustee of a self-managed super fund.  If you have a self-managed fund you must advise your trustee. You must cease acting in this position and notify the ATO within 28 days. See the ATO website for more information on removing yourself as a trustee.


Case study: Karen

Superannuation in bankruptcy


Karen is a 63 year old retired teacher from Swan, Western Australia. Karen found it hard to manage her debts after retiring from her full time job. She became bankrupt in March 2018.

Karen had $659,000 in her regulated super fund. Karen’s car was recently written off in an accident. She did not have insurance to cover the damage. In October 2019 (while still bankrupt), she applied to release a $50,000 lump sum from her super fund. This amount was approved and deposited into her bank account in November 2019.

Karen used some of this money to buy a new car. She used the rest of the money to send her grandchildren to visit family in England.

AFSA received a phone call from a creditor of Karen’s bankrupt estate. The creditor was angry that Karen had bought a new car and paid for an overseas holiday. The creditor demanded the trustee take the car as an asset in the bankrupt estate.

AFSA contacted Karen and discussed the new car purchase and holiday payment with her. Karen told AFSA she paid for them with money from her super fund. AFSA asked her to provide evidence.

Karen was able to provide full evidence of the payment transfers from the regulated superannuation fund to her bank account. Her bank account showed full payment to the car dealer and to the travel agent. It was clear these payments had been made using the superannuation money.

Under the Bankruptcy Act, Karen’s lump sum superannuation withdrawal after bankruptcy is protected from her creditors. Assets purchased with this money are also considered to be protected. This means that those assets remain safe and cannot be taken for the benefit of creditors.

*These case studies do not constitute legal or financial advice. You should consider whether the options referred to in the case studies are appropriate for you, and seek advice if necessary, before taking any action.

How are compensation payments treated?

Whether you can keep compensation you receive depends on the type of payment. When you receive a compensation payment, you must inform your trustee. Your trustee can request supporting documents to determine whether they will claim it. If they claim it, they can use it to help repay your debts.

Note: This information is a guide only, as the legal treatment of these payments can be complex. You may wish to seek your own legal advice.

Your trustee is not able to claim:

  • compensation for personal injury or wrong done to you or your family. For example, payments for an injury due to a car accident.
  • life insurance or endowment payments that you/your partner receive after you became bankrupt.
  • assets you buy wholly or substantially with these payments.

We also refer to these types of payments as protected money[?]

Your trustee is able to claim:

  • life insurance or endowment payments that you/your partner receive before you became bankrupt.
  • compensation payments you receive that do not relate to personal injury or wrong done to you. For example, payments for illness that is not a result of a personal injury.

If you are unsure what the compensation was for, we encourage you to get your own legal advice.

What happens if I receive an inheritance?

If you receive an inheritance, your trustee is able to claim this to help repay your debts. This applies if the right to an inheritance arises before or during your bankruptcy.

You, or the executor of the will must notify your trustee of the inheritance within 14 days of becoming aware of the entitlement. If you receive the inheritance before your bankruptcy begins, you will need to put this information in your application. When you enter bankruptcy, your trustee can request supporting documents.

Advise of inheritance


Case study: Renee

Getting an inheritance while bankrupt
 

Renee is a 52-year-old mother and grandmother from Newcastle, New South Wales. She works in an aged care home and earns about $35,000 a year.

After her divorce in 2013, Renee struggled with the increased cost-of-living expenses. More than 30% of her income went to renting her home.

She had to borrow money to pay for everyday expenses, and owed $15,000 to a range of creditors – banks, lawyers and utilities. She didn’t own any assets that could be sold to cover her debts.

In mid-2016, Renee became bankrupt. Her trustee is the Official Trustee (AFSA).

In late 2017, Renee’s mother passed away. The executor of her mother’s will told Renee she was due to receive an inheritance of $45,000. Renee let AFSA know, as she knew she needed to report any money or assets she got while she was bankrupt.

AFSA contacted the executor and told them they needed to pay the inheritance directly to AFSA.

AFSA used the money to pay a government levy, its fees for administering the bankruptcy, plus Renee’s debts and interest*. Altogether this totalled about $31,500.

Once everything was paid in full, Renee’s bankruptcy was annulled – which meant the bankruptcy finished early. Renee received the remaining $13,500 from her inheritance.

*There were no legal costs or other fees involved in this situation. If there were, the cost to annul the bankruptcy would be higher.

*These case studies do not constitute legal or financial advice. You should consider whether the options referred to in the case studies are appropriate for you, and seek advice if necessary, before taking any action.

The Bankruptcy Act[?] does not impose any restrictions to prevent you being an executor of a will during bankruptcy.

Executors are encouraged to ensure the people receiving an inheritance are not bankrupt by doing a Bankruptcy Register Search.

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Can I buy/be given shares?

Shares and dividends are assets that the trustee can claim. This also applies to restricted shares and shares in your employer's business or a private company.

What happens to my cryptocurrency?

Cryptocurrency is virtual (paperless) currency that people can purchase and invest in. A commonly known type of cryptocurrency is Bitcoin, however there are many other types.

If you become bankrupt, cryptocurrency is an asset that your trustee can claim. This is because it is a digital asset that may be sold for profit or gain, similar to shares. This applies whether you have acquired the currency prior to bankruptcy or during the bankruptcy. You must inform your trustee if you own or acquire cryptocurrency.

You will normally have a security key to access the cryptocurrency. You will need to provide it to your trustee if they request it.

If your trustee sells the cryptocurrency, you will need to pay any capital gains tax. See the Australian Taxation Office resource Tax treatment of cryptocurrencies in Australia - specifically bitcoin for more information.