What happens to my money?

10 min read

More information you should know about different types of payments and if your trustee can claim them in bankruptcy.

How payments from the Coronavirus Economic Response Package affect people in bankruptcy

Economic support payments - are not claimable by your bankruptcy trustee as income or as an asset, regardless of whether you receive the payments before or after the date of bankruptcy.

COVID-19 supplement payments - are claimable by the trustee if you receive them before the date of bankruptcy and it remains in your bank account when you become bankrupt. During bankruptcy these payments are included in your after-tax income amount. If your after-tax income exceeds a set amount, you may have to make compulsory payments

More information about these types of payment are available at Services Australia.

Early access to superannuation - Should you receive payments from your superannuation under the Coronavirus Economic Response Package, there is no change to the way this payment is treated in bankruptcy. See Is my superannuation affected? for details on what happens to your super during bankruptcy.

The Australian Taxation Office has more information about super payments on their website at Early access to your super.

Can I keep cash or money in a bank account?

The trustee can take any cash or money you have in a bank account at the date of bankruptcy, but will leave you with enough for modest living expenses.

During your bankruptcy, you can keep income that you save. However, if your after-tax income exceeds a set amount, you may have to make compulsory payments. This amount changes with how many dependants you have.

See Income and employment for more information about compulsory payments and earning income during bankruptcy.

While you can keep income you earn after your date of bankruptcy, you can’t keep any property or assets purchased with this money.

Is my superannuation affected?

It depends on when and how you receive super. You must inform your trustee if you receive any super before and/or after your bankruptcy begins.

Super payments you receive before bankruptcy:

are claimable by your trustee
your trustee can claim assets you purchase with those funds, e.g. a house.

Super payments you receive during or after bankruptcy:

are not claimable by your trustee if it is a lump sum payment
your trustee cannot claim assets you purchase with those funds, e.g. car.

An exception is where your super isn’t in a regulated fund, approved deposit fund or an exempt public sector scheme. Your trustee can claim super not held in these types of funds. Refer to your super fund provider if you are unsure which type of fund your super is in.

Super you receive as income:
During bankruptcy, super you receive as an income stream (e.g. a pension) forms part of your assessable income. If your income is over a set amount, you may need to make compulsory payments.

Self-managed super funds
Someone who is bankrupt can’t be a trustee of a self managed super fund. If you have a self managed fund you must advise your trustee. You must cease acting in this position and notify the ATO within 28 days. See the ATO website for more information about removing yourself as a trustee.

Case study: Karen

Superannuation in bankruptcy

Karen is a 63-year-old retired teacher from Swan, Western Australia. Karen found it hard to manage their debts after retiring from their full-time job. They became bankrupt in March 2018.

Karen had $659,000 in their regulated super fund. Karen’s car was recently written off in an accident. They did not have insurance to cover the damage. In October 2019 (while still bankrupt), they applied to release a $50,000 lump sum from their super fund. This amount was approved and deposited into their bank account in November 2019.

Karen used some of this money to buy a new car. They used the rest of the money to send their grandchildren to visit family in England.

AFSA received a phone call from a creditor of Karen’s bankrupt estate. The creditor was angry that Karen had bought a new car and paid for an overseas holiday. The creditor demanded the trustee take the car as an asset in the bankrupt estate.

AFSA contacted Karen and discussed the new car purchase and holiday payment with their. Karen told AFSA they paid for them with money from their super fund. AFSA asked them to provide evidence.

Karen was able to provide full evidence of the payment transfers from the regulated superannuation fund to their bank account. Their bank account showed full payment to the car dealer and to the travel agent. It was clear these payments had been made using the superannuation money.

Under the Bankruptcy Act, Karen’s lump sum superannuation withdrawal after bankruptcy is protected from their creditors. Assets purchased with this money are also considered to be protected. This means that those assets remain safe and cannot be taken for the benefit of creditors.

*These case studies do not constitute legal or financial advice. You should consider whether the options referred to in the case studies are appropriate for you, and seek advice if necessary, before taking any action

How are compensation payments treated?

Whether you can keep compensation you receive depends on the type of payment. When you receive a compensation payment, you must inform your trustee. Your trustee can request supporting documents to determine whether they will claim it. If they claim it, they can use it to help repay your debts.

Note: This information is a guide only, as the legal treatment of these payments can be complex. You may wish to seek your own legal advice.

Your trustee is not able to claim:

compensation for personal injury or wrong done to you or your family. For example, payments for an injury due to a car accident
life insurance or endowment payments that you/your partner receive after you became bankrupt
assets you buy wholly or substantially with these payments.

We also refer to these types of payments as protected money.

Your trustee is able to claim:

life insurance or endowment payments that you/your partner receive before you became bankrupt
compensation payments you receive that do not relate to personal injury or wrong done to you. For example, payments for illness that is not a result of a personal injury.

If you are unsure what the compensation was for, we encourage you to get your own legal advice.

What happens if I receive an inheritance?

If you receive an inheritance, your trustee is able to claim this to help repay your debts. This applies if the right to an inheritance arises before or during your bankruptcy.

You, or the executor of the will must notify your trustee of the inheritance within 14 days of becoming aware of the entitlement. If you receive the inheritance before your bankruptcy begins, you will need to put this information in your application. When you enter bankruptcy, your trustee can request supporting documents.

Advise of inheritance

Case study: Renee

Getting an inheritance while bankrupt

Renee is a 52-year-old parent and grandparent from Newcastle, New South Wales. They work in an aged care home and earns about $35,000 a year.

After their divorce in 2013, Renee struggled with the increased cost-of-living expenses. More than 30% of their income went to renting their home.

They had to borrow money to pay for everyday expenses and owed $15,000 to a range of creditors – banks, lawyers, and utilities. They didn’t own any assets that could be sold to cover their debts.

In mid-2016, Renee became bankrupt. Their trustee is the Official Trustee (AFSA).

In late 2017, Renee’s mother passed away. The executor of their mother’s will told Renee they were due to receive an inheritance of $45,000. Renee let AFSA know, as they knew they needed to report any money or assets they got while they were bankrupt.

AFSA contacted the executor and told them they needed to pay the inheritance directly to AFSA.

AFSA used the money to pay a government levy, its fees for administering the bankruptcy, plus Renee’s debts and interest*. Altogether this totalled about $31,500.

Once everything was paid in full, Renee’s bankruptcy was annulled – which meant the bankruptcy finished early. Renee received the remaining $13,500 from their inheritance.

*There were no legal costs or other fees involved in this situation. If there were, the cost to annul the bankruptcy would be higher.

The Bankruptcy Act does not impose any restrictions to prevent you being an executor of a will during bankruptcy.

Executors are encouraged to ensure the people receiving an inheritance are not bankrupt by doing a Bankruptcy Register Search.

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Can I buy/be given shares?

Shares and dividends are assets that the trustee can claim. This also applies to restricted shares and shares in your employer's business or a private company.

What happens to my cryptocurrency?

Cryptocurrency is virtual (paperless) currency that people can purchase and invest in. A commonly known type of cryptocurrency is Bitcoin, however there are many other types.

If you become bankrupt, cryptocurrency is an asset that your trustee can claim. This is because it is a digital asset that may be sold for profit or gain, similar to shares. This applies whether you have acquired the currency prior to bankruptcy or during the bankruptcy. You must inform your trustee if you own or acquire cryptocurrency.

You will normally have a security key to access the cryptocurrency. You will need to provide it to your trustee if they request it.