Quick answer
Bankruptcy is a legal process under federal law that releases an individual from most of their debts when they can't pay them. A trustee takes control of the person's assets that can be sold, and restrictions apply for the period, usually three years. In Australia only people go bankrupt; an insolvent company goes into liquidation instead. Lenders can see a bankruptcy long after it ends.
Key points
- Applies to individuals, including sole traders and partners, never to companies
- Usually lasts three years, with a trustee managing divisible assets
- An undischarged bankrupt generally can't manage a corporation
- Stays on the credit report for years and on the NPII permanently
Bankruptcy is the federal legal process that frees a person from debts they can no longer pay, in exchange for handing control of their saleable assets to a trustee and living with restrictions for a set time. It’s administered under the Bankruptcy Act, and the Australian Financial Security Authority (AFSA) runs the system.
The word gets used loosely in business conversation, so one point is worth stating early: companies don’t go bankrupt in Australia. A company in trouble goes into liquidation, administration or a restructure. Bankruptcy is personal. It reaches a business through the people who own it.
How does someone end up bankrupt?
Two routes lead there. A person can apply themselves through a debtor’s petition, usually when the debts are clearly beyond reach. Or a creditor owed enough money can ask the Federal Court or Federal Circuit and Family Court for a sequestration order, typically after serving a bankruptcy notice that went unpaid.
For business owners, the debts that tip things over are often not the business’s own bills. They are personal liabilities that grew out of the business: a personal guarantee called on after the company failed, a director penalty notice for unpaid PAYG or super, or trade debts run up as a sole trader, where there’s no legal line between owner and business.
What changes while you’re bankrupt?
The usual term is three years. During that time a trustee, either AFSA’s Official Trustee or a registered private trustee, can sell divisible assets, and you may have to make income contributions if you earn over a threshold. The effects that matter most for business owners:
| Area | What applies while undischarged |
|---|---|
| Running a company | Generally barred from being a director or managing a corporation |
| Trading as a sole trader | Allowed, but disclose the bankruptcy if your business name doesn’t include your own name |
| Borrowing | Must disclose before getting credit above an indexed amount |
| Overseas travel | Needs the trustee’s permission |
A mid-term note for anyone already past this point: if you’ve been discharged and are now rebuilding, our page on business loans after a discharged bankruptcy maps which lenders open up and when, or you can tell us where things stand.
Why it matters in business lending
Lenders treat bankruptcy as one of the heaviest marks on a credit history. Credit reporting bodies keep it for five years from the date it began or two years beyond discharge, whichever ends last, and on the National Personal Insolvency Index for good. Application forms ask about it directly, and the answer will be checked.
That doesn’t close the door forever. Banks tend to come back last, once the listing has cleared and there’s clean trading to point to. Property-secured and private lenders often move earlier because the property or asset carries much of the risk.
An Australian example
A Ballarat mechanic traded as a sole trader for nine years. A large customer collapsed owing $70k, the workshop fell behind with suppliers, and a parts wholesaler served a bankruptcy notice. Rather than fight it, the mechanic filed a debtor’s petition.
Because the workshop was trading under the name “Ridge Road Auto”, the mechanic had to tell customers and suppliers about the bankruptcy while it lasted. They kept working under the trustee’s oversight, were discharged after three years, and two years later the credit listing dropped off. A non-bank lender then funded a hoist upgrade with equipment finance, with the bankruptcy disclosed upfront and four clean years of statements doing the persuading.
Related terms
Compare bankruptcy with insolvency, the wider condition of not being able to meet bills on time, and with a Part IX debt agreement, a formal alternative that avoids bankruptcy. Voluntary administration is the company-side process people sometimes confuse with it.
Rebuilding after a bankruptcy?
Plenty of capable operators have a bankruptcy behind them, and we’d rather hear the full story than have it come up halfway through an application. Our enquiry asks a handful of questions and is done in roughly a minute. Filling it in triggers no credit enquiry, so there’s nothing new added to a file you’re working hard to repair. Your details don’t get forwarded to a queue of lenders. Someone who handles post-bankruptcy lending reads your answers, then phones you. Be specific about discharge dates and what you’ve traded since; that is exactly what decides which lender to approach first.
Frequently asked questions
Can a company go bankrupt?
No. In Australia bankruptcy is only for individuals. A company that can't pay its debts may go into voluntary administration, small business restructuring or liquidation, which are run under the Corporations Act and overseen by ASIC rather than AFSA.
Can I keep running my business while bankrupt?
A sole trader can usually keep trading, with limits. If you trade under a business name that doesn't include your own name, you must tell people you deal with that you're bankrupt, and you must disclose it before taking credit above a threshold that AFSA indexes. You generally can't be a director or manage a company.
How long does bankruptcy last in Australia?
Usually three years, counted from when the trustee accepts your statement of affairs. A trustee can object to discharge, which can extend it to five or eight years in some circumstances.
How long will lenders see my bankruptcy?
On your credit report, until the later of five years from the date you became bankrupt or two years after it ended, under the OAIC's rules. The National Personal Insolvency Index keeps the record permanently, and most lenders search it.
Does a company's liquidation make me bankrupt?
Not automatically. A liquidation deals with the company's debts. You only face personal risk if you've signed personal guarantees, received a director penalty notice, or have other debts in your own name you can't pay.