Bankruptcy and liquidation

When your business runs into financial trouble, take the time to seek advice and support as soon as possible, to understand what options are available. Bankruptcy or liquidation should be a last resort.

Seek advice and support

If your business is struggling with debt, it may feel like bankruptcy or closing your business is the only option.

Before you do anything, seek advice from a professional. They can suggest different ways of repaying your debt that don't involve bankruptcy or closing your business.

If you don't have an accountant or a financial advisor, try calling a free financial counsellor in your area, or contact by phone, web chat or online enquiry form.

It’s also important to know there are personal counselling services around Australia that can help you through stressful times.

Understanding bankruptcy and liquidation

Bankruptcy and liquidation are ways of dealing with debt that can't be repaid.

Bankruptcy only applies to individuals (not companies). When you become bankrupt, you are declared by law to be unable to pay your debts. It will get rid of most of your debts and debt collectors will stop contacting you. Bankruptcy lasts for 3 years and can affect your financial future, so it should be considered as a last resort.

Liquidation only applies to companies. When a company can't pay its debts and goes into liquidation, it stops operating. Company assets are sold in an attempt to pay off the debts.

How they apply to your business

If you operate your business as a sole trader or partnership, you or your partners can become bankrupt as individuals (the business itself doesn't become bankrupt).

If you operate your business as a company and it has unmanageable debt (known as being insolvent), it cannot continue operating. The three most common options are liquidation, voluntary administration and receivership.

Ways to deal with debt (for sole traders and partnerships)

If your business has a lot of debt, seek help straight away from a professional, such as an accountant or a free financial counsellor . They will assess your situation and give you advice on how to manage the debt.

They may suggest asking your creditors (people or businesses you owe money to) to give you more time to pay your debt, or accept a smaller payment to settle the debt.

Your financial advisor or counsellor may also talk to you about the four options for dealing with debt that are available under the Bankruptcy Act 1966 :

  • Declaration of intention

  • Debt agreement

  • Personal insolvency agreement

  • Bankruptcy

Debt agreements and personal insolvency agreements are 'acts of bankruptcy'. This means:

  • if your creditors don't accept the agreement, they can choose to take you to court and make you bankrupt

  • your agreement proposal will be permanently listed on the National Personal Insolvency Index . Any member of the public can view the index.

Read more about the four options below, and remember to discuss them with your financial advisor or counsellorbefore making any decisions.

Declaration of intention

You can freeze most of your debts for 21 days by lodging a declaration of intention (DOI). This gives you some time to consider what you can do to manage your debt, to avoid 'acts of bankruptcy'.

To lodge a DOI, you must meet certain conditions. Read more about DOIs on the Australian Financial Security Authority (AFSA) website.

Debt agreement

In a debt agreement, you can offer to settle your debts by:

  • paying a lump sum that may be less than the amount you owe

  • repaying your debt in instalments

  • freezing the debt for a certain time, so you won't need to start repaying it until you get back on your feet.

To make a debt agreement, the majority of your creditors will need to accept it. You must also meet certain conditions to be eligible, including having your income, assets and debt under a certain limit.

For more information on debt agreements , visit the AFSA website.

Personal insolvency agreement

A personal insolvency agreement (PIA) lets you pay off your debt in a way that suits your financial situation. It's like a debt agreement, but your debt, income and assets don't have be under a certain limit.

There's a chance that you'll end up paying more by signing a PIA than by declaring bankruptcy, so make sure you understand the consequences of each before deciding.

To read more about PIAs , head to the AFSA website.


There are two ways to become bankrupt:

you can volunteer to become bankrupt

  • your debtors (people or businesses you owe money to) can apply for you to be made bankrupt.

Becoming bankrupt means a registered trustee will take control of most of your finances and try to pay off your debts. They may sell your assets (though you can keep some types of assets , like personal belongings) and take any income you earn over a certain limit.

Your bankruptcy will be permanently recorded on the National Personal Insolvency Index , and included in your credit report for seven years.

Bankruptcy usually lasts for three years. During this time, you'll be restricted in what you can do. For example, you won't be able to run a business or work in some trades and professions.

Find out more about bankruptcy and what the restrictions are on the AFSA website.

Ways to deal with debt (for companies)

Unlike sole traders and partnerships, companies are independent legal entities. Different arrangements are used to manage company insolvency (unmanageable debt).

If your business is struggling with debt, seek help straight away from a professional, such as an accountant or a free financial counsellor . They will assess your situation and give you advice on how to manage the debt.

They may suggest asking your creditors (people or businesses you owe money to) to give you more time to pay your debt, or accept a smaller payment to settle the debt.

Voluntary administration

If your company goes into voluntary administration, an administrator is appointed to take control of it. The administrator must not be a part of your company. They'll try to either:

  • save your company or your company's business

  • put your company in a position where it can best pay off its debts, without going straight into liquidation.


If your company isn't saved by the voluntary administrator, it will go into liquidation. Liquidation involves winding up the company so that it can repay debts (even if it can't pay the full amount). A person who isn't a part of your company will be appointed to take care of the winding up process.


Your company may go into receivership if a secured creditor decides to appoint someone (known as a receiver) to collect and sell the company's assets, in order to pay off the debt the company owes them. A secured creditor is someone who has secured a debt owed by the company through a claim to company assets.

Different conditions may apply depending on the agreement with the secured creditor (for example, in some agreements, they are only allowed to sell certain assets of the company to pay off the debt).

Your company can be in receivership and voluntary administration at the same time.

How employees are affected by bankruptcy and liquidation

If your business has closed due to liquidation or bankruptcy, there may not be enough funds to pay your employees their entitlements.

Under the Fair Entitlements Guarantee , eligible employees may be able to claim certain unpaid entitlements such as wages, leave, and redundancy pay.

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