Bankruptcy is a legal process initiated when an individual is unable to pay their outstanding debts to creditors.

Its primary legal function is to provide relief by releasing the individual from a number of their debts and to halt contact from debt collectors.

This process is distinct from corporate insolvency; bankruptcy applies exclusively to individuals, not companies, which undergo separate processes like liquidation or administration.

However, if a business operates as a sole trader or partnership, the individual(s) within that structure can become bankrupt, impacting their personal and business liabilities, as the business itself lacks separate legal personality for bankruptcy purposes.

This distinction between individual bankruptcy and corporate insolvency is a crucial foundational legal principle. For sole traders or partners, this means their personal assets are directly exposed to the bankruptcy process, underscoring the personal liability involved. This highlights that "consumer bankruptcy" is deeply intertwined with personal financial identity, even for small business owners.

The entire framework for personal insolvency in Australia, including bankruptcy, is governed by the provisions of the Bankruptcy Act 1966.

An individual can enter bankruptcy through one of two distinct pathways: they can voluntarily declare themselves bankrupt by filing a debtor's petition, or their creditors can apply to a court to have the individual declared bankrupt, known as a creditor's petition.