What is Property of my Estate? Beware of after-acquired assets

One of our bankrupts recently in an attempt to justify a higher level of deposits to their bank account advised that a significant amount of the banking’s to the account were in fact cheques from

the local club for poker machine winnings. The bankrupt emphasised they were windfalls, so therefore were not income for the purposes of income assessments under the Bankruptcy Act 1966 (The Act). Bankrupts whose net income is above an indexed threshold are required to contribute 50% of the income which exceeds the threshold, to their estate. The threshold amount is indexed and the indexed amount also depends on the number of dependants a bankrupt has.
He was correct in regards to this provided his occupation was not that of a professional gambler, however what he was not aware of was these winnings are divisible property in his estate pursuant to section 58 (1) (b) of the Act which states; – “after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.”

Such property in this case was acquired by the bankrupt when he received a cheque from the club for poker machine winnings. He now had an asset being his windfall from the poker machines.

Property is defined in the Act as real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.

So the bankrupt acquired an asset (poker machine winnings) after his bankruptcy commenced but before his discharge making this asset an after-acquired asset described under section 58 (1) (b) of the Act. Therefore, these winnings are divisible in his Estate and has now after discussion with the bankrupt he has arranged to forward the winnings to his Trustee for distribution amongst his creditors.

The lesson is to be aware of what is property available to a bankrupt Estate. Examples of other assets that would fall under section 58 (1) (b) if acquired after the bankruptcy commenced but before discharge are:

  • Assets received as a result of being the beneficiary of a deceased estate where the person willing such assets passes away post the date of bankruptcy and such assets become available after the commencement of the bankruptcy. This circumstance would differ to if the bankrupt was entitled to the assets of a deceased estate prior to bankruptcy.
  • Lottery winnings
  • Gifts of significant value, in stating the gift is a vesting asset all gifts received are divisible property, however practically it is likely to only be gifts of significant value to which the Trustee would be interested in recovering.

In reviewing vesting assets either before or after the commencement of the bankruptcy it is important to know what assets are available to a Trustee in the Estate of any bankrupt. All property is divisible pursuant to section 116 of the Act, however some sub sections of this section provide certain exemptions. Property and assets not divisible include:

  • Property held by the bankrupt on trust for others
  • Household property (not including valuable collectors’ items etc)
  • Personal property with sentimental value, is a type of property described by the Bankruptcy Regulations or is identified by a special resolution of creditors before the Trustee realises such property.
  • Property used by the bankrupt in earning his / her income to a limit describe in the regulations (currently $3,600) or is identified as a resolution passed by the creditors or by an order by the court
  • Property used by the bankrupt primarily used for transport whose aggregate value does not exceed the amount described by the regulations (currently $7,350)
  • Subject to several other sections, policies of life insurance, superannuation and approved deposit funds.

This list is not exhaustive but gives a guide as to the common assets that are not divisible amongst a bankrupt’s creditors or have some limitations placed upon them.

The key is to be informed of these and other aspects of bankruptcy prior to lodgement of a debtor’s petition. It is always recommended that the debtor have a discussion with a qualified and experienced Bankruptcy Trustee prior to lodging a debtor’s petition in order to understand their rights and obligations under the Bankruptcy Act.

Should The Bankrupt Pay

In the past and certainly nowadays there is a general view in the community that bankruptcy is a form of punishment. Is this the case? This article discusses the perception of bankruptcy being a punishment as well as it being a new start.
The Australian Law Reform Commision in its report on insolvency in 1995 said the history of bankruptcy showed that it was a way forward for a person with a hopeless financial position to obtain relief from creditor pressure and make a new start. They went on to say it also protects the community from hopelessly insolvent persons as bankrupt are limited in the financial dealings in which they can engage.

Of course disgruntled creditor who has not been paid sometimes after many promises and letdowns would argue that bankruptcy should be a punishment for people they perceive have deceived them and caused them hardship because the bankrupt is unable to pay.

So there is always a balance, Experience indicates that the majority of bankrupts are basically honest people who have taken a financial risk or are poor managers of money or alternatively have some form of addiction. I say basically honest because many soon to be or bankrupts do desperate things not within their normal character.

The old adage “you cannot get blood out of a stone” is of course relevant. You could punish bankrupts and be totally negative, however, would the creditors get a better return?

The Bankruptcy Act allows bankrupts to retain certain assets (non-divisible assets) such as household furniture, tools of trade and a basic motor vehicle to be used as a primary means of transport. These give the bankrupts a dignified standard of living; allowing them to earn an income to provide for themselves and their family and to also hopefully make contributions to their estate for distribution to their creditors.

The anger of creditors in wanting bankrupts punished is totally understandable and in some cases justified, however punishment alone does not give any return to those aggrieved. Bankrupts needs to also be given the opportunity to make a contribution to their creditors and to be rehabilitated and to feel they are making a good contributor to society.

So the best result for bankrupts and creditors is for the best possible realization from the estate but with bankrupts seeing some light at the end of the tunnel, eg on discharge after three years with the knowledge that they have atoned for past mistakes or sins.

Working for a bankruptcy trustee you learn to read a situation quickly and apply the best method within the law of obtaining a win/win position for all concerned. A trustee, of course, works within the Bankruptcy Act. It is mostly a matter of not what you have to do but how you approach what you have to do that can change the outcome of a situation.

The Bankruptcy Act along with a good dose of logic and common sense give the opportunity for bankrupts and their creditors and the community to benefit from what appears to be a daunting final nail in the coffin, ie bankruptcy.