What happens to my Super?

What Happens to Your Superannuation in Bankruptcy: Exploring Personal Insolvency Agreements

Fortunately, there is an alternative to bankruptcy known as a Personal Insolvency Agreement (PIA). This formal arrangement provides individuals with an opportunity to address overwhelming debt without resorting to bankruptcy.

Bankruptcy may appear as an appealing solution for individuals burdened by high debts. However, it's crucial to understand that declaring bankruptcy comes with significant long-term consequences and should only be considered as a last resort.

A PIA offers a flexible approach for individuals to reach an agreement with their creditors regarding debt settlement. It is a legally binding agreement where the individual commits to repaying their creditors either fully or partially through installment payments or a lump sum.

To propose a PIA, certain conditions must be met:

The individual must be insolvent.

They must be present in Australia or have an Australian connection.

They should not have proposed another PIA in the preceding six months.

For a PIA to be effective, the insolvent individual needs to appoint a controlling trustee who will take charge of their property. The controlling trustee thoroughly examines the proposal, investigates the individual's financial affairs, and provides a report to the creditors.

Within 25 working days of the trustee's appointment, a creditors' meeting is held to discuss the proposal. The creditors evaluate the proposal and decide whether to accept or reject it. If the proposal is accepted, the creditors become bound by the terms of the agreement. If it's rejected, the creditors can either vote in favour of bankruptcy or leave the final decision to the individual.

It's important to note that when an individual appoints a controlling trustee, they commit an "act of bankruptcy." Creditors can leverage this to apply to the courts and force the individual into bankruptcy if the attempt to establish a PIA fails.

Now, let's address the question of what happens to superannuation during bankruptcy.

Bankruptcy is a legal process initiated when an individual is unable to repay their debts. It provides relief by releasing the individual from most debts, offering a fresh start. There are two ways to enter bankruptcy: Voluntary Bankruptcy and Sequestration Order, initiated by creditors through a court process.

Once declared bankrupt, the Australian Financial Security Authority appoints a trustee who manages the bankruptcy. The trustee oversees several aspects of the bankruptcy process.

Here's what happens to superannuation in bankruptcy based on different scenarios:

  1. Superannuation Received Before Bankruptcy:

2. Superannuation Received During or After Bankruptcy:

However, there is an exception. If the superannuation is not held in a regulated fund, approved deposit fund, or an exempt public sector scheme, the trustee can claim it.

3. Superannuation Received as Income:

During bankruptcy, any super received as an income stream, such as a pension, is considered part of your assessable income.

If your income exceeds a specific threshold, you may be required to make compulsory payments.

4. Self-Managed Super Funds:

If someone declares bankruptcy, they cannot continue as a trustee of a self-managed super fund.

Individuals with a self-managed fund must inform their trustee and cease acting as a trustee within 28 days. The Australian Taxation Office (ATO) provides further information on removing oneself as a trustee.

Understanding the implications of bankruptcy on superannuation is vital for individuals considering this route. It's recommended to seek professional advice from financial experts or consult the ATO website for comprehensive information on bankruptcy and superannuation.