Personal Bankruptcy Basics
When an individual debtor goes bankrupt, the rules differ from company insolvency — and so do your options for recovery.
What you'll learn
- What bankruptcy is and how it begins
- The role of the bankruptcy trustee
- How creditors prove and rank
- What happens to debts at the end
6 min read
What bankruptcy is
Bankruptcy is a formal process that applies to individuals — including sole traders and personal guarantors — who cannot pay their debts. It can begin when a person chooses to enter it, or when a creditor takes formal steps to make them bankrupt. Once it starts, an independent trustee takes control of the person's financial affairs and deals with their creditors collectively.
The trustee's role
The trustee gathers and may realise certain assets, investigates the bankrupt's affairs, and distributes available funds to creditors according to the order set by law. Some property and a portion of income are protected, and the rules around what can be recovered are detailed. Direct collection by individual creditors generally stops once bankruptcy begins, replaced by dealing with the trustee.
Proving your debt
As with company insolvency, you usually need to lodge a formal claim with the trustee to share in any distribution. Have your invoices, agreements, and any guarantee documents ready. Unsecured creditors commonly rank behind secured and priority claims, so the amount actually recovered can be modest. The principles overlap with lodging a proof of debt.
When it ends
Bankruptcy runs for a defined period, after which the person is usually released from most provable debts. That means debts unpaid at the end may no longer be recoverable from them. Because outcomes hinge on assets, income, and timing, weigh the cost of pursuing a likely-bankrupt individual carefully, and consider professional support for live debts.
A note on advice
This is general information only, not legal, financial, or tax advice. Bankruptcy is governed by detailed rules and timeframes, so obtain qualified advice on your specific position.
Key takeaways
- Bankruptcy applies to individuals, including sole traders and guarantors.
- A trustee takes control and deals with creditors collectively.
- You usually lodge a claim to share in any distribution.
- Most provable debts are released when bankruptcy ends.
Frequently asked questions
Can I still chase a bankrupt person directly?
Generally no — collection usually moves to the trustee once bankruptcy begins. Lodge your claim instead. General information only.
Does a personal guarantee help if the company fails?
It may let you pursue the guarantor individually, but if that person is also bankrupt, the same process applies. Seek advice.
Will I recover my debt in full?
Rarely. Unsecured creditors often rank low, and recovery depends on the assets and income available.
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