Struggling to pay your debts can be stressful. This is especially true if creditors are pursuing you for outstanding amounts.
Bankruptcy is one of the solutions available to individuals in this situation. While it is a last resort, bankruptcy offers reprieve from creditors and releases you from most debts.
However, not all debts are cleared by bankruptcy. In this article, we discuss which debts are cleared by bankruptcy, and how secured and joint debts are treated.
Does Bankruptcy Clear All Debts?
Bankruptcy clears most unsecured debts. It does not cover:
- Secured debts (e.g. mortgages and car loans)
- Child support and maintenance
- Spousal maintenance
- HECS/HELP debt
- Court penalties and fines
- Debts incurred after the bankruptcy commences
- Unliquidated debts (e.g. debts where the amount has yet to be determined)
You must continue to make payments against these debts as normal. If you cannot afford to pay these debts, consult your Trustee and the creditor to discuss alternative arrangements.
In cases involving maintenance agreements, the court may discharge you from some/all of your remaining debt under Section 153(2A) of the Bankruptcy Act once you have been discharged from bankruptcy. Speak with your Trustee or a legal representative for further information.
How Secured Debts Are Treated in Bankruptcy
Secured debts are not covered by bankruptcy. The bankrupt is required to make payments as normal. If you cannot afford to pay your secured debts, creditors have the right to repossess and sell the security.
In some circumstances, a creditor may sell the security for less than the remaining balance of the debt. This is called a “shortfall”. You can include the shortfall in your bankruptcy and the creditor can no longer pursue you for it.
If the secured creditor sells the asset for more than the remaining balance of the debt, the bankrupt estate is entitled to the surplus. This money will be used to pay dividends to participating creditors.
Secured creditors also have the option to surrender a security to the Trustee and participate in your bankruptcy. The Trustee will sell or deal with the security for the benefit of all creditors.
Does Bankruptcy Clear Joint Debts?
Joint debts are not cleared by bankruptcy.
It is common for bankrupt individuals to share debts with other people, such as a spouse. Where one of the joint debtors declares bankruptcy, the remaining debtor(s) are 100% liable for the remaining balance.
If the remaining joint debtors cannot afford to pay the debt, they may be able to make alternative arrangements with the creditor.
When dealing with a secured joint debt (e.g. a mortgage shared with your spouse), the remaining debtor is given the option of buying you out of the debt. They can also choose to surrender the security to the Trustee. This is common where one spouse cannot afford to make payments on their own.
Does Bankruptcy Clear ATO Debt?
Bankruptcy clears most debts to the Australian Taxation Office (ATO). The ATO effectively becomes a creditor in your bankruptcy and receives a dividend.
Note that the ATO also has the power to withhold your tax returns during bankruptcy, even if they are listed as a creditor. The ATO applies any money that is withheld to your debts, or to debts that are held by another Commonwealth agency (e.g. child support and maintenance).
The ATO is often willing to negotiate payment arrangements with debtors. If you are struggling to pay a tax debt, speak to a professional adviser about your options.
Explore Whether Bankruptcy is the Right Option With SV Partners
Bankruptcy is an effective way to find relief from your creditors and deal with overwhelming debt. But it’s also a drastic solution that carries lasting effects, so it’s important to seek professional advice before making an application.
SV Partners has a team of Registered Trustees with vast experience in personal insolvency. If you are struggling to pay your debts on time, we can discuss your options and explore whether bankruptcy is the best choice for you.
We treat bankruptcy as a last resort. Wherever possible, we will work with you to develop alternative solutions, such as Personal Insolvency Agreements. These provide similar relief from creditors but reduce the impact on your life.
Contact us to learn more about which debts are cleared by bankruptcy and to book a confidential consultation.
