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Overview of Debts in Personal Bankruptcy – Part 1


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What is the intention of bankruptcy?

To free an insolvent person from their financial obligations arising from debts incurred prior to that person becoming bankrupt. Bankruptcy is currently for three (3) years and the bankrupt is discharged from bankruptcy one day after their third anniversary year in bankruptcy.

What happens upon discharge of bankruptcy?

The bankrupt is released from basically all categories of unsecured debts at the end of the bankruptcy.

There are certain (very few) debts from which the bankrupt is not released, and there are other debts from which the bankrupt is released but that, if not paid, will cause the loss of service or supply.

How do creditors react upon bankruptcy?

Creditors (except secured creditors – like those who hold a mortgage or physical security) are not permitted to take action to recover those debts and, instead, they have the right to lodge claims in the bankrupt estate and participate in a dividend.

The rights of these creditors to claim in the estate extends only to those debts that were owed up to the date of bankruptcy and does not extend to debts incurred after the date of bankruptcy.

How are debts treated in bankruptcy?

The Bankruptcy Act 1966 (the Act) has various provisions on how debts are treated.

This means that debtors, bankrupts, creditors and trustees do not have the power or discretion to determine how debts will be treated.

The below outlines how certain debts are treated in bankruptcy, however, it can also be applied to debt agreements, personal insolvency agreements and Part XI administrations, as the provisions of the Act in relation to provable debts apply equally to these administrations.

Section 82 of the Act: all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which they may become subject before their discharge by reason of an obligation incurred before the date of bankruptcy are provable in their bankruptcy.

There are Different Types of Debts

These include:

  • Secured and unsecured debts
  • Provable and non-provable debts
  • Extinguished and non-extinguished debts
  • Debt relating to ongoing services
  • Statute barred debts

Unsecured Debts

Are debts for which security is not held over the bankrupt’s property

Secured Debts

Are tied to a specific property, for example:

  • Mortgage – real property becomes the security
  • Hire purchase / rent to buy – items of furniture / electronics etc are the security

What Happens to Secured Debts?

  • A secured creditor will have certain rights to take possession of the property if the debt is not paid
  • The contract or agreement and its nature will specify whether the debt is secured or not

Provable Debts

  • Entitles a creditor to participate in dividends paid in a bankrupt estate

Non-Provable Debts

  • Not entitled to participate in dividends. The creditor does not receive any payments from the bankrupt estate when other creditors with provable debts receive payments
  • Is entitled to take action to recover its debt during and after bankruptcy although they may not take action to deal with property that has vested in the trustee
  • The bankrupt will remain liable for the debts during the term of the bankruptcy and after discharge

Examples of non-provable debts:

  • Debts incurred after the bankruptcy begins (e.g. income tax debt)
  • Penalties and fines imposed by a Court
  • Council and Water rates – not provable in bankruptcy as they attach to the property for which the rates relate to. In other words, they are secured against the property.

Disclaimer: 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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