Learn about the three ways that you can end your bankruptcy early. Find out what compositions are, how they work and what happens if the creditors[?] accept your offer.
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Annulment is the cancellation of a bankruptcy. There are three ways you can annul your bankruptcy:
Pay debts in full
This includes interest, realisations charges[?] and your trustee’s fees and expenses. Contact your trustee to discuss this process.
Arrange a composition
Your creditors accept an arrangement we call a composition. This is an offer of something less than payment in full.
Prove it in court
You successfully prove to the court that you should not have become bankrupt. For example - someone stole your identity. We recommend you seek your own legal advice regarding this process.
A composition is an offer to creditors to repay a percentage of your debts. If successful, this annuls your bankruptcy. It’s up to you to decide what you can afford to offer.
You can make an offer using money or assets that your trustee can’t claim. For example - a relative offers to repay your debts.
The steps below outline the process of making an offer.
1. Contact your trustee to discuss the requirements for making an offer.
- If your trustee is the Official Trustee[?] (AFSA) you can find our contact details on our contact us pages.
2. Contact your creditors to see what sort of offer they are willing to accept. This can help you decide whether you want to submit a formal offer to your trustee.
3. Lodge your written and signed offer with your trustee. In your offer:
- set out the terms
- allow for payment of the trustee’s fees and expenses
- allow for payment of the realisations charge. See fees and charges.
- Your trustee will prepare a report about your offer to creditors.
- Your trustee will hold a meeting where creditors can vote to accept or reject the offer.
- Acceptance of your offer requires a 'yes' vote from majority in number of creditors and 75% of the dollar value. We refer to this as a special resolution.
- Your trustee may charge a non-refundable fee to cover the cost of the creditors’ meeting. See fees and charges.
- Your bankruptcy will be annulled immediately, and the NPII updated to reflect this.
- You arrange with your trustee to pay the agreed amount to your creditors.
- You pay your trustee’s fees and charges.
- You are still liable for any debts not covered by bankruptcy.
Case study: Duncan
Duncan is a 45 year old electrician from Melbourne. He is a single parent of two and earns a salary of $70,000 per year.
Duncan has struggled to make ends meet for his family on a single income. He became bankrupt in March 2021 and had credit card and personal loan debts totalling $100,000. He had no assets that could be sold to pay his debts.
The trustee of his bankrupt estate was the Official Trustee (the Australian Financial Security Authority or AFSA).
Duncan’s grandmother recently passed away. He was surprised when her solicitor contacted him and told him his grandmother had left him $200,000 in her will. Duncan let AFSA know, as he knew he needed to report any money or assets he received while he was bankrupt.
AFSA arranged to have the inheritance paid directly to Duncan’s bankrupt estate. AFSA told Duncan there might be enough money to annul his bankruptcy, but a few steps needed to be taken first. One way of annulling your bankruptcy is by paying all debts (including interest on those debts, where interest is charged) plus the trustee’s fees, expenses, and the government ‘realisations charge’*.
As a first step, AFSA needed to contact Duncan’s creditors to confirm their debts. These debts plus the trustee fees, expenses and the realisations charge were paid. There was still enough money that remained for the next step. AFSA then asked the creditors if they were claiming interest on the money owed to them. After assessing these claims, the interest was also paid. As there was enough money to cover all relevant costs, Duncan’s bankruptcy was annulled.
The National Personal Insolvency Index (also known as the Bankruptcy Register) was updated to reflect the annulment, and Duncan was discharged from his bankruptcy. The entire process took about three months**.
Most creditors who are owed money in a bankruptcy can claim interest on the amount outstanding. Trustees verify the claims of creditors (including the amount of debt and the basis and amount of any interest claimed) to make sure they are correct. Interest can only be claimed up to the date the creditors receive payment in full.
In Duncan’s matter, the amount paid to creditors, plus AFSA’s fees, expenses and the realisations charge totalled $150,000. *** This meant $50,000 was returned to Duncan after his annulment.
* A realisations charge is a levy on all realisations made in respect of administrations under the Bankruptcy Act 1966. Registered Trustees charge their fees differently to AFSA. Refer to AFSA’s website for more information.
** Timeframes for an annulment are an estimate. The Bankruptcy Act has statutory timeframes for creditors to lodge a ‘proof of debt’ to make a claim in the estate for their debts and interest claims. Timeframes also apply to payments to creditors (called ‘dividends’) in a bankrupt estate. Timeframes may be longer if creditors do not lodge their claims or respond in a timely manner, if more information is required by the trustee to assess those claims, or a proof of debt is rejected by the trustee.
***Fees charges and expenses vary depending on what work the trustee needs to do in a bankrupt estate.
Case study: Lucy
Lucy is a 24 year old full-time student from Brisbane and works part-time at a café. She shares a rental apartment in the city with another student.
In 2019, the number of Lucy’s shifts at the café decreased. She had to rely on credit cards to cover her expenses, and then started missing payments. By mid-2020, she owed $30,000 to banks. Lucy became bankrupt in August 2020 and the trustee of her bankrupt estate was the Official Trustee (the Australian Financial Security Authority or AFSA).
In September 2021, Lucy wanted to set up a company to start her own café but she could not be a director of a company while bankrupt, unless she got the permission of a court. a. Lucy spoke to her parents about this and they told her they could give her some money to help.. Lucy called AFSA to find out more and was told that she could make a composition proposal* to her creditors to end her bankruptcy early.
Lucy told AFSA that she wanted to go ahead with this. Her parents transferred $20,000 to AFSA to hold in trust until creditors voted on the composition proposal. They also paid for the creditor meeting costs.**
AFSA wrote a report to creditors outlining what Lucy was offering, and the investigations AFSA had made into the bankrupt estate. AFSA had not found anything of concern, or any assets owned by Lucy that might provide a better return to creditors, so it was recommended that creditors should accept the proposal. The creditor meeting was scheduled a month after the report was provided to creditors.***
At the meeting, the creditors accepted the proposal.**** Lucy’s bankruptcy ended on the date of the meeting. The National Personal Insolvency Index (also known as the Bankruptcy Register) was updated to reflect the end of the bankruptcy.
*A composition proposal is where someone who is bankrupt offers their creditors an amount of money which is less than the full amount owed. The offer must include money to pay creditors, the trustee’s fees and expenses, and any government charges, such as the ‘realisations charge.’ Creditors vote on the proposal at a meeting – there is a non-refundable fee for advertising the meeting. If creditors reject the proposal, the money offered is returned and the bankruptcy continues. If the proposal is accepted, the bankruptcy is annulled, which means the bankruptcy effectively ends
** Refer to the AFSA website for fees and charges including the current fee for advertising a meeting of creditors
*** Timeframes for when a meeting of creditors can be held can be different for different bankrupt estates. The Bankruptcy Act has statutory timeframes for creditors to lodge a proof of debt to make a claim in the estate for their debts and interest claims. Timeframes also apply to payments to creditors (called ‘dividends’) in a bankrupt estate. Timeframes may be longer if creditors do not lodge their claims or respond in a timely manner, if more information is required by the trustee to assess those claims, or a proof of debt is rejected by the trustee.
**** For a proposal to pass, it must be accepted by over 50% of creditors in number, and over 75% of creditors in dollar value.