Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 328

Bankruptcy: can creditors take your super?

The interaction between bankruptcy, creditors and super are neither intuitive nor widely understood. In this article we explain how an individual’s super could be affected if they become bankrupt.

Any super benefits an individual receives before entering bankruptcy are available to creditors. In addition, any assets purchased with those benefits can be claimed and used to pay creditors.

Contributions made before bankruptcy

A contribution to a super fund can be clawed back and made available to creditors if the contribution was made in an attempt to defeat creditors. The conditions for determining if the contribution was made to defeat creditors include the following:

  • The property would probably have become part of the transferor’s estate had the contribution not been made and therefore available to creditors.
  • The contributor’s main purpose was either to prevent the transferred property being available to creditors or to hinder or delay the process of making property available for division among creditors.
  • The contribution was out of character and not consistent with the existing pattern of contributions.
  • It can be reasonably inferred from all the circumstances that at the time of the contribution the transferor was, or was about to become, insolvent.

Benefits in accumulation phase

In general, all property that belonged to a bankrupt at the start of their bankruptcy is divisible among the creditors of the bankrupt. However, an interest in a super fund is not generally considered property because it is held in trust. This provision is specifically contained in the Bankruptcy Act 1966, which states that the interest of a bankrupt in a superannuation fund is not considered property divisible among creditors.

The protection of super also extends to any lump sum received from a super fund. This means that a bankrupt who receives a lump sum from a super fund could keep that money in their own name and none of it would be available to creditors.

Benefits in pension phase

In contrast to lump sums, pension payments received from super funds are not fully protected.

Pension payments are treated as income and income only receives limited protection from creditors. The level of protection in relation to income is indexed twice a year in March and September.

As at 20 September 2019, the income thresholds are shown in the table below:

Number of dependants

Income limit

0

$58,331

1

$68,831

2

$74,080

3

$76,997

4

$78,164

More than 4

$79,330

Any income greater than the thresholds in the table above is available to creditors.

Case study

Alan is an undischarged bankrupt. He has no dependants and receives income from an account-based pension that was worth $2 million on 1 July 2019. Under the account-based pension rules, he draws the minimum annual pension of $80,000. This is Alan’s only source of income.

Using the table above we can see that because Alan has no dependants, $58,331 is his protected income limit. This means that $21,669 is available to his creditors (calculated as: $80,000 - $58,331 = $21,669).

If Alan commuted his pension back to accumulation phase, none of his super would be available to creditors, including any lump sum withdrawal he makes.

Conclusion

Understanding how super is treated in the unfortunate event of bankruptcy can help make the best of a bad situation.

 

Julie Steed is Senior Technical Services Manager at Australian Executor Trustees. This article is in the nature of general information and does not consider the circumstances of any individual.

 


 

Leave a Comment:

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Economy

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Investing

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Property

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Shares

ASX reporting season: Room for optimism

Despite mixed ASX results, the market has shown surprising resilience. With rate cuts ahead and economic conditions improving, investors should look beyond short-term noise and position for a potential cyclical upswing.

Property

A Bunnings play without the hefty price tag

BWT Trust has moved to bring management in house. Meanwhile, many of the properties it leases to Bunnings have been repriced to materially higher rents. This has removed two of the key 'snags' holding back the stock.

Investment strategies

Replacing bank hybrids with something similar

With APRA phasing out bank hybrids from 2027, investors must reassess these complex instruments. A synthetic hybrid strategy may offer similar returns but with greater control and clearer understanding of risks.

Shares

Nvidia's CEO is selling. Here's why Aussie investors should care

The magnitude of founder Jensen Huang’s selldown may seem small, but the signal is hard to ignore. When the person with the clearest insight into the company’s future starts cashing out, it’s worth asking why.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.