The modern law of bankruptcy essentially evolved from a social desire to keep commercial matters, of most types, separate from the developing criminal regime; essentially an alternative to “debtor’s prison”. Under the Bankruptcy Act 1966 (Cth), bankruptcy is in effect a legal status wherein, once declared bankrupt a person:

  • with some exceptions, obtains the benefit of protection from further claims from creditors (s 58(3));
  • certain restrictions are placed on the debtor including the appointment of a trustee in bankruptcy; and
  • the person’s property (with some exceptions) is made available, for distribution among creditors (ss 109, 116).


Bankruptcy is commonly defined as “a process where people who cannot pay their debts give up their assets and control of their finances, either by agreement or court order, in exchange for protection from legal action by their creditors.”

Did you Know

  • In Ancient Greece if a citizen could not pay their debts, their family and their servants were forced into “debt slavery”.
  • Genghis Khan was known to prescribe the death penalty to any person who declared bankruptcy three times.
  • In Medieval Britain, bankrupts were seen as “criminals” and the aim of much bankruptcy legislation was to prevent bankrupts escaping their creditors. This is reflected in the first common law bankruptcy legislation, the English Statute of Bankrupts of 1542.
  • Subsequent legislation such as the Bankrupts Act 1705 (England) and Bankrupts (England) Act 1825 allowed debtors to declare bankruptcy voluntarily or to otherwise be discharged from liability without serving whole gaol sentences.
  • Early Australian legislation was State specific, with each State having its own legislation.
  • The Commonwealth subsequently passed major legislation relating to personal bankruptcy on a Federal level in 1924 and 1966 through the Bankruptcy Acts. Such legislation bore the hallmarks of the bankruptcy regime we know today focussing on the vesting of assets and administration of a bankrupt’s affairs in such a way as to endeavour to remediate creditors for their losses, where possible.
  • There were more recent amendments through the Bankruptcy Legislation Amendment Acts of 2002, 2004 & 2010 however much of these changes have not fundamentally changed the overall nature of the bankruptcy regime.


A useful way to approach bankruptcy is to view it as a temporal exchange wherein personal assets and financial control is traded for release of certain debts. A person can become bankrupt regardless of their age including if they are a minor or a foreign national.  A person with mental illness or intellectual disability cannot become bankrupt as they cannot commit an act of bankruptcy, however their estate can be placed into bankruptcy by their legal personal representative.  As a matter of completeness, a partnership cannot become bankrupt, however one or all of its partners, if natural persons can become bankrupt in the ordinary course. There are essentially 2 ways in which a person can become bankrupt, either:

  • Voluntarily through a debtor’s petition.
  • Involuntarily by way of creditor’s petition.