Don't let a windfall become unlucky
When someone becomes bankrupt their 'divisible' property vests in their trustee bankruptcy. Divisible property is generally all the bankrupt's assets, except for certain classes (i.e. non-divisible property) being household items, tools of trade, means of transport to a certain limit, and certain other assets.
This classification of divisible and non-divisible property applies to all assets owned by the bankrupt at the time of the bankruptcy. But what about property that the bankrupt gets (acquires) after the date of bankruptcy?
Some of this property will be exempt (non-divisible), but some will not.
The concept of after-acquired property is set out in section 58 of the Bankruptcy Act 1966 and provides this vesting of certain property, which can never revest to the bankrupt (section 129AA) unless they notify the bankruptcy trustee of the property they acquire within 14 days. After-acquired property disclosed during bankruptcy must be 'dealt with' within six years of the bankrupt being discharged from their bankruptcy. Taking the standard bankruptcy term of three years, this means that the bankruptcy trustee has the right to realise that after-acquired property for at least nine years. Extensions can apply in certain circumstances—and there's no limit on how many extensions a bankruptcy trustee can apply for.
The two best known types of property that vests as after-acquired property are:
- Prize winnings.
- Inherences from deceased estates.
In these instances, bankrupts lose the right to deal with those assets (property/funds) and their creditors get the benefit from these being realised/distributed. In the case of a windfall—hopefully the bankrupt would win enough to annul their bankruptcy!
The solution is for bankrupts not to purchase lotto tickets in their name and to ask people to amend their Wills to exclude the bankrupt for, at least, the standard bankruptcy period (three years). Once the bankrupt is discharged from their bankruptcy then those Wills can be changed again to include the bankrupt receiving a benefit from the deceased estate.
The underlying theme is that bankrupts must be careful about what property comes into their hands during bankruptcy, as it may not stay there long.
To recap on what people should consider before and during bankruptcy:
- Consider any inheritances you could receive during bankruptcy.
- Change any lotteries or syndicates out of your name or reconsider participating in any type of gambling activities.
- Disclose all property/assets to the bankruptcy trustee.
- Notify the bankruptcy trustee of any property acquired after the bankruptcy starts.
- Be aware and periodically be in conversation with the bankruptcy trustee about what is happening or likely to happen to any property attached to the bankrupt estate—ask if it will be sold or not.
- Comply with the obligations of bankruptcy so that the bankruptcy term is not extended beyond the standard three-year term.
Worrells has assisted thousands of people for over 45 years in personal insolvency matters. We understand the implications of the whole range of personal circumstances and explain, in Plain Talk, what happens and what to expect during a formal insolvency process. Insolvency law doesn't exist to punish people, it exists to help people move past impossible financial challenges to get a fresh start. Worrells is proud to have more registered bankruptcy trustees than any other private firm in Australia. Contact your local Worrells partner to get credible and helpful advice
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.