How to apply to set aside a bankruptcy notice

Home
>
News + Insights
>
How to apply to set aside a bankruptcy notice

If you’re facing bankruptcy, it’s worth considering whether you have grounds for setting aside a bankruptcy notice

Navigating your way through debt is stressful, especially when a creditor takes legal action against you. It’s even worse when a creditor secures a final judgment for the debt, because a bankruptcy notice is a potential next step. However, even in this situation, there are questions to ask, circumstances to assess and options to consider before bankruptcy is formalised. Understanding how to apply to set aside a bankruptcy notice is critical.

What is bankruptcy?

If you’re declared bankrupt, it means you can’t pay your debts. There are two types of bankruptcy:

voluntary bankruptcy in which you apply to become bankrupt; or
involuntary bankruptcy in which you owe $10,000 or more. Your creditor can ask a court to declare you bankrupt in some situations.

The person or organisation you owe money to is known as a creditor.

A debtor is a person who:

owes money personally (for example, a credit card debt); or
is in business as a sole trader and owes money through the business (for example, unpaid supplier invoices).

See our article, How to negotiate with creditors in bankruptcy proceedings for more information about how bankruptcy works.

If a creditor has unsuccessfully tried to recover your debt, they may start a debt recovery process. Eventually, it may lead to a final court judgment or order that:

acknowledges that you owe the debt to the creditor; and
requires you to repay it by a specific time.

What is a bankruptcy notice?

If you don’t pay the judgment debt within the required time, and it totals at least $10,000, the creditor can ask the court to issue a bankruptcy notice against you. A bankruptcy notice is a demand that you pay the debt.

The creditor has six months to serve you with the bankruptcy notice from the date the bankruptcy notice was issued. It means they must give you the notice in a way that meets the court’s requirements within six months from when they issued the bankruptcy notice.

If you are a debtor and receive a bankruptcy notice, your situation is serious. You must not ignore it.

What are my options?

Once served with a bankruptcy notice, whatever you decide to do next must happen within 21 days. Otherwise, you may commit an “act of bankruptcy”, which will allow the creditor to apply to a court (using a creditor’s petition) to have you declared bankrupt (a sequestration order).

To avoid an act of bankruptcy, you must either:

repay the debt within 21 days of receiving the notice; or
start a legal process to have the bankruptcy notice set aside (cancelled).

We recommend you seek urgent legal advice if you receive a bankruptcy notice.

Your options include:

Pay the debt

If you decide to pay the entire debt, you must do so within 21 days of receiving the notice. Keep proof of payment and seek confirmation that the creditor has received your payment.

Negotiate payment terms

You can negotiate payment terms with the creditor if you want to pay the debt but can’t pay the total amount. If you agree to a payment plan, we recommend signing a written agreement with the creditor. The creditor should agree to delay applying for a sequestration order until the payment plan terms are fulfilled.

If you wish to negotiate payment terms, we recommend that you seek legal help to ensure that the agreement is in your best interests.

Challenge the bankruptcy notice

If you wish to set aside the bankruptcy notice (also known as challenging the bankruptcy notice), you must act within 21 days from the date the notice is served on you. There are special requirements for applying to set aside the bankruptcy notice. Even after you’ve made the application, the 21-day period will continue unless you have applied to court to have this deadline extended.

First, you must meet the grounds to set aside the bankruptcy notice.

What are the grounds for setting aside the bankruptcy notice?

When you apply to a court to set aside the notice, you must meet one of these grounds:

There are errors or other issues with the bankruptcy notice

Examples include incorrect personal details or incorrect service of the notice on the debtor.

Example

Joanna received a bankruptcy notice by mail. It was for a judgment debt of $130,000 from a company she’d never heard of. The notice didn’t give any details of the debt, and it also referred to the debtor as “Joe,” with a different last name. Joanna’s lawyer recommended they apply to set aside the notice because:

it was incorrectly served
her name was incorrect
it didn’t give her fair notice of the debt
she’d never had any dealings with the creditor company.

The debt is overstated

If you believe the judgment amount in the bankruptcy notice is more than it should be, you may have grounds for setting it aside, provided you have supporting evidence.

Example

Asher had a $150,000 debt for unpaid invoices. However, XYZ Co sought judgment for $250,000 for the same unpaid invoices and didn’t explain the discrepancy. The court entered judgment for $250,000 and XYZ Co issued a bankruptcy notice against Asher. After seeking legal advice, Asher applied to set aside the bankruptcy notice on the grounds the judgment debt was overstated.

You have a claim against the creditor for the same amount as the debt (or more)

These claims are often referred to as counterclaims, set-offs or cross-demands. The amount must be equal to or greater than the amount claimed in the bankruptcy notice, and you must have supporting evidence. There are also other requirements, depending on which claim you pursue.

You don’t owe the debt, or it doesn’t exist

This situation may arise through a miscommunication. There are also other examples, including:

the debtor has already paid the creditor
the debt is in dispute because the goods were faulty
the creditor has taken action against the wrong person.

Example: Neil (part 1)

Neil worked as a sole trader painter and decorator. His work mainly came from XYZ Building Co Pty Ltd, but a year ago, they went out of business. Neil had an arrangement where he would order paint on XYZ’s account with PaintCo and then XYZ would later settle the account. But now PaintCo has filed a creditor’s petition and there is a bankruptcy notice naming Neil as the debtor. Neil seeks legal advice about challenging the bankruptcy notice because XYZ is the debtor.

You have started a separate legal action to challenge the original court judgment or order

This may be similar to, or part of, a counterclaim, set-off or cross-demand.

Example: Neil (part 2)

Neil’s lawyer recommends applying to set aside the original judgment (referred to in the bankruptcy notice) because Neil doesn’t owe the debt. Neil’s lawyer also recommends they apply for an order that the judgment should not be enforced for the time being until there’s an outcome for their application to set aside the original judgment.

The notice is a misuse or abuse of legal processes

The notice may have been issued in bad faith (malicious), or for no good reason.

Example: Neil (part 3)

Neil says the bankruptcy notice is an abuse of process. Its only purpose is to pressure him into paying the debt, rather than a bankruptcy situation where the creditor believes the debtor genuinely can’t pay.

How do I apply to set aside a bankruptcy notice?

Applying to set aside a bankruptcy notice starts with you, as a debtor, seeking urgent legal advice. As your lawyers, we can:

discuss your options and assess the evidence
draft and file the application documents
arrange for service of the documents on the creditor
attend any court hearings on your behalf.

We can also draft and file a further application for an extension of the 21-day compliance period. This gives the court time to consider the application to set aside the bankruptcy notice. It will also block any application from the creditor for a sequestration order until the issue is properly addressed.

Your application must be filed in court within the 21-day period. Once this period expires, it’s usually too late to make an application.

When a court hears the application, it may decide to set aside the bankruptcy notice, extend the time to comply, or dismiss the application. If it dismisses the application, the bankruptcy notice will remain, and the creditor can apply for a sequestration order.

What should I do if I want to set aside a bankruptcy notice?

If you’re served with a bankruptcy notice and want to apply to set it aside, seek our legal advice urgently.

There are many technicalities to check, including:

Whether all details in the notice are correct
Whether it was correctly served
Whether you knew about the original judgment
Whether you have grounds to apply to set aside the notice.

We’ll also discuss your options and work out the best way to proceed.

The final word

You must act quickly if you want to set aside a bankruptcy notice. Contacting marshalls+dent+wilmoth lawyers is the first step. Our bankruptcy team has excellent experience in these applications and can help you navigate the legalities.