Debt Recovery -
Bankruptcy or Liquidation?

In considering this action as a debt recovery method, you should seek legal advice from a Solicitor or Lawyer.

Usually bankruptcy or liquidation is the last step you would take after you have exhausted all other debt recovery Court actions. It should not be started without proper inquiries as to the debtor's assets and a proper risk analysis. 

After all, it will cost you, if the debtor ultimately has nothing.

Bankruptcy or liquidation results in the financial destruction of the debtor. Sometimes, it might make you feel good, to financially destroy a debtor. However, it is expensive, and if you are not going to get what it costs you back, let alone the debt owed to you, you really have to question why you are taking this action.

However, sometimes, the only way to force a Debtor to pay, or to get your money, is to take the extreme action of bankruptcy or liquidation. This is a court action you take, to try and collect the debt.

Both bankruptcy and liquidation have similar procedures, but it depends upon whether the Debtor is an individual, or a company, which dictates the Court action you take. 

As with any other debt recovery action, there can never be a guarantee that you will collect the money owing to you. However, it may very well be that this course of action is really the only chance you will ever have to collect your money.

This advice considers the procedures involved, and when you would choose bankruptcy or liquidation.

BANKRUPTCY

Bankruptcy is the debt recovery action that is taken against a person. If successful, it will result in the debtor handing over nearly all of their goods and assets to a 3rd party called a Trustee, to manage and to pay all of the Debtor's debts.

The debt must be over $2,000.00, to take action to bankrupt a debtor. Keep in mind though, that a debt may start out at less than this amount, but it can increase to above $2,000.00, if you take other legal debt recovery actions to recover the money through the Courts. This is because the Court fees and prescribed legal costs in debt recovery collection can be added to the debt.

You have 6 years from the date of the court judgement debt to make a debtor bankrupt. After that time, you have another 6 years to take other debt recovery action through the Courts to collect the debt, provided the debtor has not gone bankrupt in the meantime.

If you really want to bankrupt the Debtor, you should have a Solicitor or Lawyer do it for you.

Bankruptcy Notice.

• Prepare a bankruptcy notice, and forward it to ITSA (Insolvency and Trustee Service Australia) with the fee, which is presently $400.00.

The ITSA site provides a wealth of information including current fees. Click this link to view it.

• You should do a search on the Debtor to ensure that the Debtor has not already been made bankrupt or is in the process of going bankrupt. 
• This is important because ITSA will take your money and blindly issue a bankruptcy notice. They will not check to see if the Debtor is already bankrupt, and, they will not refund the $400.00, even though you later discover the Debtor has already been made bankrupt and your application was really a waste of time.

• You should lodge at least an original and 2 copies of the bankruptcy notice you prepare with the $400.00 with ITSA.

• You will then receive the stamped bankruptcy notice and the copies from ITSA.

• When you receive the stamped bankruptcy notices back from ITSA, you should arrange to serve the stamped bankruptcy notice on the debtor. It must be personally served on the debtor. 

• The person who serves it will have to provide an affidavit of service. This has to be provided to the Court.
•  If you cannot locate the debtor you cannot make them bankrupt. You can apply to the Court for an order of substituted service, but this all costs money and takes time.

• Wait 21 days after personal service or substituted service of the bankruptcy notice on the debtor.

Creditors Petition.

• After 21 days, if the debt remains unpaid, you then prepare and file an application, known as a creditor's petition in the Federal Magistrates Court, or the Federal Court, and lodge it together with the Court fees.

• The Federal Magistrates court has cheaper filing fees, and will achieve the same outcome.

• This is the start of the Court proceedings to bankrupt the Debtor. You then have to personally serve the creditor's petition on the Debtor or seek an order for substituted service. See the link above on Service to learn more about substituted service.

• The creditor's petition will have a date to attend court, and provided the Debtor does not oppose your application, and you have provided all of the necessary documents to the Court, the Debtor will be made bankrupt.

It may very well be that as a consequence of the above steps, that the Debtor negotiates with you, to pay the debt, to avoid bankruptcy. This is usually the outcome you really want.

When a Debtor is made bankrupt, it is called sequestration of the Debtor's estate.

You can nominate a Trustee to handle the Debtor's estate, which requires a consent by the proposed Trustee to be obtained and served on the Debtor before the Court date. 

There are advantages in nominating a Trustee, and you should discuss this with your legal advisor. If you have not nominated a Trustee, ITSA, will nominate the Trustee. The Trustee is responsible to determine the assets and debts of the Debtor and to sell them, and distribute the proceeds amongst all of the Debtor's creditors.

The advantage of this means of debt recovery is that if the debtor does have ample assets, you are likely to collect the money owing. It is also another way of putting pressure on a debtor to pay, so the debtor can avoid avoid bankruptcy. It will usually only work if the debtor does not want to go bankrupt.

The disadvantages are, that it is an expensive way of trying to collect your money. On average it will cost you about $3,000.00 to make someone bankrupt. There is no guarantee that you will get the money owing to you, as it will depend on what the Debtor owns.

In most cases, the Court will also order you to be paid the costs of making the debtor bankrupt, but it will usually be for an amount less that what you have actually paid. You will only recover this expenditure, if there are enough assets in the Debtor's estate.

If the Debtor pays you before you start the Court proceedings, you usually won't recover the costs and fees spent on filing and serving the bankruptcy notice.

You spend your money to bankrupt someone, but when it comes to dividing the money, you get no priority. You are considered an unsecured creditor, and will receive your share of what is left with every other Creditor. 

The only priority for payment to you, is the re-imbursement of any Court awarded costs or expenditure.

LIQUIDATION

Liquidation is the debt recovery action take to wind up a company, for unpaid debts. It is a similar process to bankruptcy with some minor variations.

Instead of a bankruptcy notice, you serve a Statutory Demand for payment. The company has 21 days after service of the Statutory Demand, to pay, after which you then can start the Court proceedings.

The same comments about the advantages and disadvantages of bankruptcy apply to liquidation.

Finally

In both cases, if you taking these courses of action, you should have a solicitor or lawyer doing the work for you. Both can be mine-fields, if the wrong things are done.

The correct documents have to be completed, and any mistakes may provide a technicality, for the debtor to get away, meaning you have to start the process all over again, with all of the additional costs.

Debt Collection and Debt Recovery can be quite involved and complicated. You really should let the professional debt collection agent or solicitor advise you as to the best course of action, and look after it for you.

It will cost you money, but in most cases, provided the debtor has assets, you should recover the additional costs you spend.

Phone 02-4333 1690    Fax 02-4333 5144

Debt Collection and Debt Recovery can be quite involved and complicated. You really should let the professional debt collection agent or solicitor advise you as to the best course of action, and look after it for you. It will cost you money, but in most cases, provided the debtor has assets, you should recover the additional costs you spend.