Bankruptcy

What Debts Are Covered?

Read on to find out what debts are covered in Bankruptcy

We’re often asked “what debts are covered in bankruptcy?” and a lot of time, people are surprised by the answer.

In our experience, this is sometimes due to trusted friends or family members un-knowingly providing misinformation or it can just be because people make assumptions about what debts are or aren’t covered without knowing what the legislation says.

Before launching into the below table, let’s get a handle on the terminology first.

What’s a “Provable Debt”?

A provable debt as per Section 82 of the Bankruptcy Act 1966 (Cth) is a debt that entitles a creditor to participate in dividends paid from the bankrupt estate.

A non-provable debt means that the creditor is not entitled to participate in dividends (ie the creditor does not receive any payments from the bankrupt estate when other creditors receive payments).

A creditor with a non-provable debt is entitled to take action to recover its debt both during and after your bankruptcy (although it may not take action to deal with property that has vested in the trustee).

You will remain liable for any non-provable debts during your bankruptcy and after you’ve been discharged.

What does “Extinguished” mean?

If a debt is extinguished by bankruptcy, you’ll have no liability in relation to that debt after your bankruptcy ends.

Most unsecured debts and shortfalls on secured debts, provided that they were incurred before the date of your bankruptcy, are extinguished.

Debts that are not extinguished are those which you’ll still have to pay after your bankruptcy has ended.

Some debts that are not extinguished after bankruptcy are still provable, meaning that the creditor can participate in dividends in the bankruptcy AND still pursue you after your bankruptcy ends.

Other debts are not extinguished and are also not provable, meaning that the creditor can still take action to recover the debts during and after your bankruptcy.

TYPE OF DEBT PROVABLE? EXTINGUISHED? FURTHER INFORMATION
Credit Cards ✓ ✓ N/A
Car/Vehicle Loans ✓  ✓ If a car/vehicle is secured to the loan, the lender is able to repossess the assets (ie the car/vehicle) should you fail to make your contractual repayments. Additionally, the vehicle asset threshold will apply to the equity in vehicles under finance. To learn more about how vehicles are assessed in bankruptcy, visit our section on vehicles
Mortgages (ie Homeloans) ✓ ✓ If a property (like a house or unit) is secured to the loan, the lender is able to repossess the assets (ie the house or unit) should you fail to make your contractual repayments. Additionally, your interest in the property may become an asset of your bankrupt estate. To learn more about how property is treated visit our section on property
Chattel Mortgages ✓ ✓ If an asset (like a vehicle, house or unit) is secured to the loan, the lender is able to repossess the assets (ie the vehicle, house or unit) should you fail to make your contractual repayments. Additionally, your interest in any property may become an asset of your bankrupt estate. To learn more about how property is treated visit our section on property
Council or Local Government Property Rates × × Rates and charges are generally secured, meaning the creditor can take action to sell the property in order to pay the debts. Alternatively, the creditor can surrender its security to the trustee and prove for the full amount owed
Furniture and Electronic Goods Bought via a Hire-Purchase Agreement ✓ ✓ The creditor can take possession of the assets if repayment terms are not satisfied
Water ✓ ✓ While this debt is provable, your access to this service may be discontinued or restricted if repayment terms are not satisfied
Gas ✓ ✓ While this debt is provable, your access to this service may be discontinued or restricted if repayment terms are not satisfied
Electricity, Telco & Pay TV Accounts ✓ ✓ While this debt is provable, your access to this service may be discontinued or restricted if repayment terms are not satisfied
School Fees ✓ ✓ Provable however the student may not be able to continue studying at the school if repayment terms are not satisfied
Medical and Pharmacy Fees ✓ ✓ Provable however the Doctor or Pharmacy may suspend further treatment or services to you if repayment terms are not satisfied
Unpaid Residential Rent ✓ ✓ Even though the debt is provable, the landlord/agent may be able to evict you for non-payment. This will depend on relevant state/territory laws
Mechanics’ Fees ✓ ✓ If the car is still in the possession of the mechanic, he/she can refuse to return it to you until the fees are paid
Motor Vehicle Accident Damages It depends on whether the amount has been liquidated It depends on whether the amount has been liquidated Some damages are covered by bankruptcy but others are not
Traffic Fines It can depend on where the fine was incurred as the legislation varies between states It can depend on where the fine was incurred as the legislation varies between states  If traffic fines are not paid, the state/territory government may refuse to register your vehicles and may suspend or refuse to renew your licence
Fines Imposed by a Court × ×
Trade Debts Incurred by Individuals (eg Sole Traders, Partnerships) ✓ ✓
 Company Debts Provable if you gave a Personal or Director’s Guarantee  Extinguished if you gave a Personal or Director’s Guarantee
Director Penalty Notices (ATO) ✓ ✓
Personal Guarantees ✓ ✓
HECS/HELP/SFSS × ×
Income Tax Debts ✓ ✓ Some tax debts can be secured debts under tax legislation. A debt for a year (or part-year) prior to bankruptcy is provable, even if a tax return has not been lodged. You may need to lodge a split return for the financial year in which you became bankrupt
Veterans’ Affairs debts ✓ ✓
Debts to the Department of Human Services (ie Centrelink) It depends on the type of debt and/or when a reconciliation is conducted It depends on the type of debt and/or when a reconciliation is conducted
Child Support ✓ ×
Child & Spousal Maintenance ✓ ×
Unexpired Leases ✓ ✓ The creditor (landlord) has a duty to mitigate its loss
Business GST debts ✓ ✓
Accountants’ & Lawyers’ Fees ✓ ✓ If work has been done but not given to you (eg financial statements have been prepared but not lodged or supplied to you or a contract has been prepared but not supplied to you), the accountant or lawyer can retain the work done until their fees are paid
Personal Debt (ie loans from family and/or friends) It depends on the terms of the agreement or arrangement ✓  Your trustee will need to investigate these debts in detail. If valid security was offered, the creditor may be able to take possession of and sell any secured assets should the debt not be repaid
Debts Incurred Overseas Some are provable Most are not extinguished It will depend on the legislation in the country where the debt was incurred
Proceeds of Crime Penalties × ×
Statute-barred Debts × N/A These debts cannot be pursued for reasons other than bankruptcy
Court-ordered Restitution ✓ ✓ Although the debt is provable, you may be imprisoned if you don’t pay
Child Care Centre Debts ✓ ✓ Provable but, if not paid, service may be discontinued
Debts incurred after the date you became Bankrupt × ×
Debts incurred by Fraud ✓ ×/✓ It’s important to note that this is a very complicated area of law. If the creditor takes action to pursue you for the debt by way of a default judgment before the date of your bankruptcy, the debt may no longer be considered to be a “debt incurred by fraud”.  Meaning that the debt will be extinguished upon your discharge from bankruptcy. If you’re dealing with a debt incurred by fraud – get in touch with us to discuss it further

Need to talk to an expert about bankruptcy? 

Give us a call on 1300 369 168 or make an online enquiry today. 

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