Bankruptcy can be a daunting experience, both emotionally and financially. For individuals or business owners facing insolvency, understanding what happens to your assets in bankruptcy and how to legally prepare can make a critical difference in protecting your future. In Australia, the process is governed by the Bankruptcy Act 1966, and there are strict rules on what assets can be taken by the trustee and what can be retained. best asset protection security
In this article, we break down the key facts about asset treatment in bankruptcy—and the smart, legal steps you can take before a crisis hits.
What Is Bankruptcy?
Bankruptcy is a legal process that releases a person from most debts, allowing them to make a fresh start. It typically lasts for three years and one day, but it can be extended under certain circumstances. During this period, your finances are managed by a bankruptcy trustee, and many of your assets can be sold to repay creditors.
What Happens to Your Assets in Bankruptcy?
✅ Assets You Usually Keep:
Household goods and personal items (e.g., clothing, furniture).
A motor vehicle worth up to a certain threshold (indexed; approximately $9,100 as of 2025).
Tools of trade or equipment up to a set value (approx. $4,200).
Superannuation, provided it remains in a complying fund and was not accessed improperly.
Certain compensation payments and life insurance proceeds.
❌ Assets That Can Be Taken:
Real estate (including the family home) owned or partly owned.
Vehicles above the threshold.
Shares, investments, and bank account balances.
Valuable collections (e.g., art, jewellery).
Tax refunds for income earned before bankruptcy.
Assets transferred below market value in the years prior (can be clawed back).
How Far Back Can the Trustee Look?
Trustees have powers to investigate and reverse transactions that occurred before bankruptcy, especially if assets were:
Transferred to avoid creditors,
Sold below market value, or
Given away to relatives or friends.
The clawback period can be up to 5 years, depending on the nature of the transfer and whether the debtor was insolvent at the time.
How to Legally Prepare for Asset Protection
If you're concerned about future financial risks or insolvency, it's important to prepare proactively and legally—well before bankruptcy becomes a reality.
1. Use Trust Structures
Assets held in a discretionary (family) trust are not legally owned by you, which may protect them in bankruptcy.
Be cautious—if you are the appointor or trustee, the structure must be set up and operated properly.
2. Separate Personal and Business Assets
Operate your business through a company and avoid commingling personal and business finances.
Don’t offer personal guarantees unless absolutely necessary.
3. Contribute to Superannuation
Super is generally protected in bankruptcy, but contributions must be genuine and consistent.
Large or irregular contributions made to defeat creditors can be reversed.
4. Keep Good Records
Maintain clear documentation for asset ownership, income, and any transfers.
Transparency helps in proving legitimacy and preventing unnecessary clawbacks.
5. Seek Professional Advice Early
Legal and financial advisors can help structure your affairs with asset protection in mind.
The earlier you act, the more options you’ll have.
Warning: Avoid Illegal Transfers
Attempting to hide or transfer assets to defeat creditors is a criminal offence. Australian bankruptcy law includes serious penalties for misconduct, including imprisonment.
