Debts in Bankruptcy | Do all my debts disappear if I go bankrupt?

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By Liyan Tay and Connie Tam

Liyan Tay

When contemplating bankruptcy a debtor should be aware of how their debts and liabilities are treated during bankruptcy and after discharge from bankruptcy.  Most debts are covered in bankruptcy and a debtor will not have to repay them once they are bankrupt.  However, there are a few types of debts which are treated differently.

Some of the common factors regarding debts are outlined below:

Secured debts – these debts are tied to a specific property (e.g. mortgage, car loan, hire purchase agreement). A secured creditor will have certain rights and are able to take possession of the property if the debt is not serviced.  Usually following bankruptcy a secured creditor will take possession of its asset and sell it.  The secured creditor can also surrender the asset to the trustee and be an unsecured creditor in the estate (less common).

Unsecured debts – ordinary debts for which there is no security over an asset or property

Provable Debts – creditors with provable debts are entitled to participate and be paid dividends in a bankruptcy.

Non-Provable Debts – creditors with non–provable debts are not entitled to participate or be paid in a dividend in the bankruptcy. These creditors will be entitled to take their own action to recover their debts during and after bankruptcy (except on property that vests in the trustee).  The bankrupt will remain liable to these creditors during and after the bankruptcy term.

Extinguished Debts – debts that are extinguished are ones that the bankrupt does not have a liability to pay after discharge from bankruptcy.

Not-Extinguished Debts – debts that the bankrupt will have to continue to pay even after discharge from bankruptcy. Debts may also be provable and not extinguished, meaning the creditor may participated in a dividend in the bankruptcy and continue collecting the remaining balance after the bankruptcy ends.

Below is a summary of various debts and the impacts and treatment of them in bankruptcy.

TypeEffects and Implications
Credit cards, personal loan, hire-purchase arrangement (e.g. furniture, electronics), taxation debts, trade debts incurred by bankrupt, personal guarantee, director penalty notices, veteran affairs debtsDebts are provable and extinguished.Creditors will be able to participate in a dividend in bankruptcy and will be unable to pursue the debtor after bankruptcy.
Secured debts – vehicle loan, mortgage on property, chattel mortgageDebts are provable and extinguished.However, secured creditors will be able to take possession and sell the item if not paid.
Essential Services – water, gas, electricity, mobile phone, school fees, medical bills, pay TV, rental on premises, trade debtors, accountants fees, legal fees, child care feesDebts are provable and extinguished.However, if the debts are not paid, the creditor may choose to discontinue supply or provide a service.
Essential Services – water, gas, electricity, mobile phone, school fees, medical bills, pay TV, rental on premises, trade debtors, accountants fees, legal fees, child care feesDebts are provable and extinguished.However, if the debts are not paid, the creditor may choose to discontinue supply or provide a service.
Court imposed fines, government student loan HECS / HELP feesDebts are not provable and not extinguished. Bankrupt will be liable for debts during and after bankruptcy.
Council / local government rates, property rates and chargesDebts are not provable and not extinguished.Council rates and charges are secured in that they attach to the property and the council and take possession of the property and sell if the debts are not paid.
Mechanic fees and storage feesProvable and extinguished.However, if the assets are in the possession of the mechanic / storage facility, the creditor is entitled to a ‘lien’ over the goods and may refuse to release the goods until the outstanding debts are paid.
Child support, child maintenance, spousal maintenanceProvable but not extinguished.
Proceeds of crime legislation penaltiesNot provable and not extinguished.
Statute-barred debtsNot provable and cannot be pursued.
Court ordered restitutionProvable and extinguished.However, the debtor maybe imprisoned if payment is not made.
Motor vehicle accident damagesDependent on whether the debt has been liquidated with some damages being covered by bankruptcy and others not.
Traffic finesDependent on the state the fine was incurred. However, if the fines are not paid the bankrupt’s licence maybe suspended.
Overseas debtsDependent on the country where the debt was incurred and its legislation, the debtor may not be allowed to enter the country or the overseas creditor may pursue you if you travel back to the country.

Any debts incurred after the date of bankruptcy is not covered by bankruptcy and the debtor will be liable for payments on these debts.

Want to know more?

If you would like to know more about debts in bankruptcy, please contact Insolvency & Reconstruction Associate Director Liyan Tay for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

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