Rights and Responsibilities

Overview

Once a person becomes bankrupt the rights of creditors with ‘provable’ debts owed to them change. Further information is available on what is a provable debt.

Enforcement of Debts - unsecured
Enforcement of Debts - secured
Dividends
Right to Appoint Trustee

Enforcement of Debts - Unsecured Creditors

The effect of bankruptcy is to convert a creditor's right to recover the debt directly from the debtor to a right to lodge a claim with the trustee, called a proof of debt, and to share in any distribution of available property or income. Unsecured creditors are entitled to vote at any meeting of creditors.
After bankruptcy unsecured creditors cannot enforce a remedy against the bankrupt or property of the bankrupt. They are also prohibited from commencing legal proceedings or taking fresh steps in any proceedings except with the permission of the court. Legal actions such as the issue of a summons and most garnishees must be stopped by the creditor. Some garnishees relating to Commonwealth debts can remain in force.
Where a creditor onsells their debt to another agency, they should inform the purchasing agency of the bankruptcy to avoid the acquiring agency incurring an expense in attempts to recover, only to discover the bankruptcy. It will also assist with the administration of the bankruptcy and provide the purchasing agency with an opportunity to lodge a claim in the bankruptcy where no proof of debt has been lodged by the orginating creditor and at the same time obtain the necessary authority to prove to the trustee that they are now the creditor by subrogation in the event of a dividend.

Enforcement of Debts - Secured Creditors

A bankruptcy does not affect the rights of a secured creditor to deal with its security.
Creditors who hold valid security over assets or property of a bankrupt are, within the terms of their security, entitled to sell the assets in order to recover the amounts owing. Fully secured creditors are not entitled to participate in a dividend or vote at a meeting of creditors.
A creditor who holds security over property belonging to other parties is not a secured creditor within the context of the bankruptcy law. They have rights in the estate as an unsecured creditor and rights pursuant to the terms of the security to deal with the other persons property. This is a complex area of law and more information can be obtained from the trustee or a solicitor.
Creditors holding security of less value than their debt have a part of their debt which is considered as unsecured. They can deal with their security and are also able to claim in the bankruptcy for any losses that arise or are expected to arise from the sale of the security. They are entitled to vote at any creditors meetings for the loss or expected loss.
Secured creditors who sell secured property must forward an accounting of the sale to the trustee.
A bankrupt may make arrangements with secured creditors to make payments in respect of a secured debt in order to retain the use of the property. However the property may vest with the trustee who is entitled to sell it and collect any surplus on sale.

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Dividends

A dividend will be paid to unsecured creditors from funds received in excess of those amounts required to pay the cost and fees of the administration and priority claims.
The Bankruptcy Act sets out the charges and fees payable to ITSA for administering a bankruptcy. Further information is available on ITSA’s charges and fees. Charges and fees payable to a registered trustee are authorised by the creditors at a meeting.
To participate in a dividend a creditor must lodge a proof of debt with the trustee. If a proof of debt has not been lodged the trustee is required to give known creditors notice of the intention to declare a dividend. The creditors then have an opportunity to lodge a proof of debt and participate in a dividend. Creditors should keep the trustee advised of any change of address.
Specific information is available on how to complete a Proof of Debt form.
In most cases, creditors are advised at the date of bankruptcy whether a dividend is likely to be paid.
If property is available and a distribution to creditors is likely the trustee will request creditors lodge completed proofs of debt. In order to establish the claim to the trustee's satisfaction documentary evidence is usually required. The Proof of Debt forms (Form 08) are available here.
If a creditor or debtor is dissatisfied with the trustee's decision to accept or reject a claim, they should discuss their concerns with the trustee. If the matter can not be resolved either party can apply to the court for a review of the trustees decision.

Right to appoint trustee

An estate can be administered by a private trustee or by the Insolvency & Trustee Service Australia (ITSA).
A creditor considering taking bankruptcy proceedings against a debtor can obtain the consent of a private trustee to administer the bankruptcy. In the absence of such a consent ITSA becomes the trustee.
A debtor intending to become bankrupt can also arrange to have a private trustee consent to administer their bankruptcy.
Creditors have the right to change trustees by resolution at a meeting of creditors convened by the current trustee at the request of a creditor.
For further information please click on the following link meetings of creditors.

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	Page Last Updated: 11/09/2009 Contact us \| Online feedback form \| Privacy Policy \| Disclaimer & Copyright