Debts that are not caught by bankruptcy – a quick guide
“Bankruptcy” used to be a punishment for those who could not pay their debts. In Medieval Europe, individuals who could not pay their debts were imprisoned and had to work off their debts with hard labour.
In the present time, bankruptcy is much less of a punishment and can be viewed as a means for an individual (debtor) to rehabilitate themselves financially. That is, while they lose certain assets, they are given a fresh start.
But even though a debtor is released from the majority of their unsecured debts at the end of bankruptcy, there are certain debts from which the bankrupt will not be released.
The rules that govern the release or non-release from debt in bankruptcy is governed by the Bankruptcy Act 1966 (Act), meaning that debtors, bankrupts, creditors, and even the bankruptcy Trustee do not have the power to determine how the debts will be treated.
The debts that will stay with the bankrupt (should the debt remain unpaid) are characterised as non-provable debts and are not extinguished by the bankruptcy.
Further, there are some categories of debts are provable in the bankruptcy but are not extinguished by the bankruptcy.
Provable versus non-provable debts
A provable debt is one that entitles the creditor to participate in the dividends paid in the bankrupt estate, where in contrast, a non-provable debt does not entitle the creditor to participate in the dividend. The bankrupt will remain liable for non-provable debts both during the term of the bankruptcy and after the bankruptcy has ended.
For example, Council or local government property rates are not provable and are not extinguished for the bankrupt. Namely, rates are generally secured, which means that the creditor can take action to sell the property to pay the debt.
In contrast, a debt such as school fees are provable and the bankrupt is extinguished from liability for payment, however the student may not be permitted to remain at the school.
This is another important point to consider, as there are certain debts that even if provable, if unpaid, the creditor is within their rights to cease the service or supply.
This is generally categorised as a debt for an ongoing service, and may also include services such as internet connection, motor vehicle registration and electricity. However, there may be certain State/Territory requirements with respect to the disconnection of essential services, however the Act does not specifically address these circumstances.
Extinguished versus not extinguished debts
As mentioned above, there are certain debts that are not extinguished and the bankrupt will still have to pay them after the bankruptcy has concluded.
Some debts that are not extinguished after bankruptcy are provable (meaning that the creditor can still participate in the dividend) and still collect the balance after the bankruptcy ends.
There are other debts that are not extinguished that are not provable, which means that the creditor cannot participate in the dividend but are still within their rights to take action to recover the debts during and after the bankruptcy.
For example, debts that are not extinguished may include:
|Debts incurred by fraud – but such debts are not extinguished: s. 153(2)(b) of the Act||Unliquidated damages arising otherwise than by reason of contract, promise or breach of trust: s. 82(2) of the Act|
|Child support and maintenance debts: s. 82(1A), but not extinguished unless the Court ordered otherwise: s. 153(2)(c)||Debts incurred after the date of bankruptcy: s. 82(1)|
For a comprehensive list of provable, not provable, extinguished and non-extinguished debts in bankruptcy, please see below:
|Type Of Debt||Provable/Not Provable||Extinguished/Not Extinguished||Further Information|
|Car loan||Provable||Extinguished||If the loan is secured, the creditor can take possession of the car and sell it if repayment terms are not satisfied|
|Mortgage||Provable||Extinguished||The creditor can generally take possession of the property and sell it if repayment terms are not satisfied|
|Chattel mortgage||Provable||Extinguished||The creditor can generally take possession of the property and sell it if repayment terms are not satisfied|
|Council Or local government property rates and/or charges||Not provable||Not extinguished||Rates and charges are generally secured, which means that the creditor can generally take action to sell the property to pay the debts or surrender the security to the trustee and prove for the full amount owed|
|Furniture, electronics etc. bought on a hire-purchase arrangement||Provable||Extinguished||The creditor can generally take possession of the property if repayment terms are not satisfied|
|Water rates||Provable||Extinguished||Provable but, if not paid, supply might be discontinued or restricted|
|Gas||Provable||Extinguished||Provable but, if not paid, supply might be discontinued|
|Electricity||Provable||Extinguished||Provable but, if not paid, supply might be discontinued|
|Telephone||Provable||Extinguished||Provable but, if not paid, supply might be discontinued|
|Pay television||Provable||Extinguished||Provable but, if not paid, supply might be discontinued|
|School fees||Provable||Extinguished||Provable but, if not paid, the student(s) may not be permitted to remain at the school|
|Doctor’s fees||Provable||Extinguished||Provable but, if not paid, the doctor may choose to no longer treat the debtor/bankrupt|
|Pharmacy accounts||Provable||Extinguished||Provable but, if not paid, the pharmacy may choose to no longer allow the debtor/bankrupt to operate an account|
|Unpaid residential rent||Provable||Extinguished||Even though the debt is provable, the landlord/agent may generally be able to evict the bankrupt for non-payment. This will depend on relevant State/Territory laws|
|Mechanic’s fees||Provable||Extinguished||If the car is still in the possession of the mechanic, he/she may be able to refuse to return it until the fees are paid|
|Motor vehicle accident damages||It depends whether the amount has been liquidated||It depends 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 different States and Territories have different legislation||It depends on where the fine was incurred||If traffic fines are not paid, the State/Territory government may refuse to register the bankrupt’s vehicle and may suspend or refuse to renew the bankrupt’s licence|
|Fines imposed by a Court||Not provable||Not extinguished|
|Trade debts, incurred in the Individual’s name (ie, not in a company’s name)||Provable||Extinguished|
|Company debts||It depends whether the debtor/bankrupt guaranteed the debt||It depends whether the debtor/bankrupt guaranteed the debt|
|ATO Director Penalties / Director Penalty Notices||Provable||Extinguished|
|Personal guarantees (eg, a parent who has guaranteed their child’s mortgage)||Provable||Extinguished|
|HECS/HELP/SFSS Debts||Not provable||Not extinguished|
|Income tax debts||Provable||Extinguished||Some tax debts can be secured debts under tax legislation. A debt for a year (or part-year) prior to the bankruptcy is provable, even if a tax return has not been lodged. The bankrupt may need to lodge a split return for the financial year in which the bankruptcy occurred|
|Veterans’ affairs debts||Provable||Extinguished|
|Debts to the Department Of Human Services (Centrelink), including family assistance debts||It can depend on the type of debt and/or when a reconciliation is conducted||It can depend on the type of debt and/or when a reconciliation is conducted|
|Child support||Provable||Not extinguished|
|Child maintenance||Provable||Not extinguished|
|Spousal maintenance||Provable||Not extinguished|
|Unexpired leases||Provable||Extinguished||The creditor (landlord) has a duty to mitigate their loss|
|Business GST debts||Provable||Extinguished|
|Accountant’s fees||Provable||Extinguished||If work has been done but not given to the bankrupt (eg, financial statements have been prepared but yet not given to the bankrupt), the accountant can retain the work done until the fees are paid|
|Lawyer’s fees||Provable||Extinguished||If work has been done but not given to the bankrupt (eg, a contract has been prepared but not handed over), the lawyer can retain the work done until the fees are paid|
|Loans from family and/or friends||It depends on the terms of the agreement or arrangement||Extinguished||The 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 the security if the debt is not repaid|
|Debts incurred overseas||Some are provable||Most are not extinguished. This will depend on the legislation in the country where the debt was incurred|
|Proceeds of crime legislation penalties||Not provable||Not extinguished|
|Statute-barred debts||Not provable||The debts cannot be pursued for reasons other than the bankruptcy|
|Restitution (Court-ordered)||Provable||Extinguished||Although the debt is provable, if the bankrupt does not pay he or she may be imprisoned|
|Child care (eg, debts to a child care centre)||Provable||Extinguished||Provable but, if not paid, service may be discontinued|