For those struggling to pay off unsecured debts, becoming a Bankrupt can offer insolvent debtors a sense of relief from financial burdens. However, will becoming a Bankrupt truly free you from all the financial obligations you can’t afford to pay?
The short answer is NO.
While personal insolvencies across Australia have increased by 17.6% in the June quarter of 2023, according to statistics released by the Australian Financial Security Authority (AFSA), the reality of what bankruptcy discharges might surprise you. Although most unsecured debts, such as credit cards and personal loans, will be released, not all debts disappear.
In this article, we’ll provide a clear understanding of which debts will not be released if you become a Bankrupt. These debts, commonly known as “non-provable debts,” can continue to affect your financial situation even after filing.
What is a non-provable debt?
A creditor holding a “non-provable debt” is not entitled to lodge a claim in the insolvent debtor’s bankrupt estate, meaning they will not participate in any dividend distributions to ordinary unsecured creditors. In other words, these creditors do not receive payments from the bankrupt estate when creditors with provable debts do.
However, a creditor with a non-provable debt is still entitled to take action to recover their debt both during and after bankruptcy, though they cannot take action to deal with property that has vested in the trustee.
As a result, the Bankrupt individual remains liable for non-provable debts throughout the term of the bankruptcy and even after it has ended.
Common Examples of Non-Provable Debts
- Fines imposed by a Court
Fines levied by the court system are typically mandatory and cannot be discharged through bankruptcy. This exclusion is to ensure that individuals remain accountable for legal penalties imposed, so they are still required to pay these fines after declaring bankruptcy. - HECS/HELP/SFSS Debts
In Australia, debts related to the Higher Education Contribution Scheme (HECS), Higher Education Loan Program (HELP) and Student Financial Supplement Scheme (SFSS) are classified as non-provable. These education loans are tied to specific conditions and government policies, making them non-dischargeable through bankruptcy. Individuals must continue to repay these debts based on their income levels, even after bankruptcy proceedings have concluded. - Proceeds of Crime Legislation Penalties
Penalties imposed under the Proceeds of Crime Act are designed to confiscate assets gained through illegal activities. These penalties are non-provable debts because they are directly linked to criminal conduct and the prevention of benefiting from illicit gains. As a result any fines or asset seizures mandated by these laws remain enforceable regardless of bankruptcy status. - Council or Local Government Property Rates and/or Charges
Property rates and charges levied by local governments or councils are generally considered secured debts. This means that the creditor can take action to sell the property if the rates are not paid for 6 years, to pay the debts or surrender the security to the trustee and prove for the full amount owed. - Motor Vehicle Accident Damages
Damages resulting from motor vehicle accidents can be classified as non-provable debts. This depends on whether the amount that has been determined/assessed has been liquidated. If the damages have been liquidated—meaning a specific amount has been established through a court order or settlement—then the debt is considered provable and can be included in bankruptcy. However, if the amount has not, the debt remains non-provable until a final assessment is made. Therefore, if you have recently been involved in a motor vehicle accident and anticipate damages, it is advisable to wait until the amount you are liable to pay has been established, before you become a Bankrupt. - Traffic & Parking Infringements
Most traffic and parking infringements (fines or penalties not imposed by a Court) are generally provable in bankruptcy in most states and territories. However, the rules can vary depending on where the infringement occurred, as state and territory has its own regulations regarding traffic and parking infringements. If these fines remain unpaid, many state or territorial governments may take enforcement actions, such as suspending your driver’s license or refusing to renew your vehicle registration until the fines are paid or a payment plan is arranged.
In summary, while bankruptcy can offer substantial relief from many types of debt, it is essential to understand that not all unsecured debts are discharged through this process. Before you present your Debtor’s Petition to the Official Receiver at AFSA to become a Bankrupt, it is imperative to be aware which debts will and will not be released if you become a Bankrupt.
To ensure you are fully informed about the implications for your specific situation, consult with AFSA or our office to get precise guidance on how bankruptcy will affect your financial obligations. Being well-prepared and knowledgeable about your debts will help you make informed decisions and navigate your path to financial recovery more effectively.
If you would like further information to clarify how your debts will be treated in bankruptcy, please contact one of our registered trustees in bankruptcy, Anthony Bagala or Alan Ma at dVT Group on (02) 9633 3333 or by email at mail@dvtgroup.com.au.
dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.
By Sophie Bai
September 2024
