If you are owed outstanding payments by a person or company, and they don’t appear to intend on repaying you, what are your options? One possible step you can take is bankrupting your debtor. When a court rules against your debtor, you will have the option to take steps to declare them bankrupt. If you are successful, you may be able to recover what you were owed. However, there are a couple of things you should keep in mind if you are considering this. This article will look at these considerations, and whether bankrupting a debtor is in your best interests.

Creditors vs Debtors

If you are owed money, you are known as a creditor. This situation typically arises when you have provided goods or services to a company, and that company is yet to pay you. The individual or company that owes you money is known as the debtor.

Should You Opt for Bankruptcy?

Bankrupting your debtor may not necessarily be beneficial in all circumstances. The following factors should be taken into account if you are considering this:

Debtor’s financial position

  • What are the financial circumstances of your debtor?
  • Does the debtor have sufficient funds and assets to satisfy your debts? If not, bankrupting your debtor may not be the best course of action as you are unlikely to recover your debts.

Other creditors

  • It is also important to be aware of your status as a creditor; are you a secured or unsecured creditor? (your status determines what your priority is in receiving payments)
  • Are there other creditors? Are they secured or unsecured?
    • Secured creditors have a security interest in the debtor’s assets, and therefore have priority over unsecured creditors.
    • Secured creditors are typically banks or other financial institutions.

Costs and expenses

  • Are you likely to incur any costs or expenses (such as court fees and lawyers’ expenses) in declaring your debtor bankrupt?
  • If the value of the expenses exceeds the value of the debt you are owed, it may not be worth pursuing this course of action.

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Payment plans

In some cases, the better course of action may be to negotiate a payment plan with your debtor. This will allow your debtor to pay off the debt in instalments over a period of time. This option is also beneficial in that legal and other costs are significantly reduced, or not incurred at all.

Other ways to enforce a judgement debt

In Victoria, there are other options you can exercise before opting to bankrupt the debtor. You should generally try and exhaust all of these options before bankrupting debtors. Some of the other options you have include:

  • Warrant to seize property: The creditor can apply for this warrant, which provides the sheriff with the authority to go to the debtor’s residential or business address and demand payment. The sheriff can seize property belonging to the debtor and sell these at an auction, and pay the proceeds to the creditor.
  • Attachment of debt: This is an order that enables the creditor to recover money from a third party that owes the debtor money. The third party is referred to as the garnishee.
  • Attachment of earnings: This is an order that enable the creditors to recover unpaid debts by taking money directly from the debtor’s income.

All of these options have strict application processes, and you should ensure that you are complying with the form requirements. The relevant forms can be found on this link.

How Can I Bankrupt the Debtor?

There are several steps that must be completed to have your debtor made bankrupt. Keep in mind that even if your debtor is made bankrupt, there is a possibility that you may not recover your debts, having regard to your priority as a creditor as well as other considerations.

1. Bankruptcy notice

Firstly, you should conduct a search through the National Personal Insolvency Index to check whether the debtor has already been made bankrupt.

Once you have ascertained that this is not the case, you can apply to the Australian Financial Security Authority (AFSA) to issue a bankruptcy notice. This application must be lodged online, and requires a number of things including:

  • Your details;
  • Debtor’s details;
  • Details about the judgement debt; and
  • Address for service of notice

You should note that to apply for a bankruptcy notice, you need to provide an order from a court proving that:

  • The debtor owes you $20,000 or more; and
  • The order is less than 6 years old.

Lodgement of the application requires paying an application fee to AFSA. Once you have lodged the application, AFSA will consider it, and if it is successful, they will issue the bankruptcy notice and provide you with a copy.

2. Serving the bankruptcy notice

Essentially, a bankruptcy notice is a formal acknowledgement of debts that are owed, and a demand for these to be paid. This notice must be served to the debtor, in one of the following ways:

  • Sent by post or courier to the debtor’s last known address;
  • Left in an envelope at the debtor’s address;
  • Delivered personally to the debtor; or
  • Sent by fax or email to the debtor.


Any of these methods are acceptable, however delivering the notice personally to the debtor is probably the safest option. This will limit the possibility of the notice being lost in the mail, or the debtor claiming that they weren’t served with the notice.

The debtor must be served with the bankruptcy notice within six months from the date it was issued. In some cases, an extension of time may be granted, allowing the notice to be served outside of the six-month period. This will require a further application to be made to AFSA, outlining the reasons for the extension request.

If the debtor can’t be served with the notice for some reason, an application can be made to the court requesting a substituted service, which allows the debtor to be served the notice through a different method.

Once the debtor has been served with the bankruptcy notice, they will have 21 days to comply with the formal demands and repay debts that are owing. If the debtor fails to comply, you can submit a creditor’s petition to the court (see step (3)).

3. Submitting a creditor’s petition

If a debtor fails to comply with a bankruptcy notice, this regarded as an act of bankruptcy. In this way, you can file a for a creditor’s petition.

A creditor’s petition is an application to a court to enforce the payment of unpaid debts. If the application is successful, the court will make an order for sequestration. Sequestration is where a third party, known as the trustee in bankruptcy, will take legal possession of the debtor’s assets and make the relevant payments to the creditors.

The creditor’s petition is filed with either the Federal Court or the Federal Circuit Court, along with the application fee. When the creditor’s petition is successfully filed, the court will set a hearing date. You must have a number of documents ready to submit to the court prior to the hearing. Ultimately, a successful hearing will result in a declaration of bankruptcy and an order for sequestration.

Next Steps

If the debtor is declared bankrupt, AFSA will notify them, and a trustee will be appointed to manage the estate of the bankrupt debtor. The trustee can either be appointed by AFSA, or by the creditor who made the application for bankruptcy.

The trustee will then deal with the bankrupt’s assets and make payments to creditors in order of priority. The trustee’s fees and charges take first priority, followed by secured creditors, and finally unsecured creditors.

Key Takeaways

  • Consider carefully whether bankrupting the debtor is the best course of action for you as a debtor; having regard to factors such as financial considerations and your status as a creditor (secured or unsecured).
  • Ensure you consider all other options to enforce the payment of the debt before proceeding with bankrupting the debtor.
  • Take note of the timing requirements and deadlines for submitting key forms and documents.

 If you or someone you know wants more information or require advice or help, please don’t hesitate to contact us on (03) 9600 0162 or email info@lordlaw.com.au.

For further information please visit our page Litigation and Dispute Resolution.
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By Andrew Lord

Andrew heads Lord Commercial Lawyers as Director and has been in the Legal Industry for over 40 years.

Updated on May 16, 2024


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