It is a common misconception that when you are discharged from a bankruptcy you are ‘debt free.’ Although being discharged from bankruptcy means you will be released from most of your debts, you are not automatically released from all of them, and will not necessarily be able to consider yourself debt free.
Here is a look at some of the different types of debt you may have accrued, and an outline of how they are treated with regards to bankruptcy.
Most of the time, you will be released from all your unsecured debts when you are discharged from bankruptcy. Unsecured debts will usually include:
- Unsecured personal loans
- Credit card debts
- Store card debts
- Student loans (but not HECS/HELP debts)
While you will usually be released from secured debts when you are discharged from bankruptcy in much the same way you will be free of unsecured debt, it is a slightly more complex scenario given the fact the initial debt was secured in the first place.
For instance, if the trustee sells your home and there is no money left after the property is sold and the mortgagee is still owed some funds, the mortgagee can lodge a claim in the bankruptcy but cannot chase you for the rest of the funds. This means that you will be released from you secured loans once you are discharged from bankruptcy. Such a scenario also highlights the potential consequences of both failing to keep up with repayments on a secured debt and of bankruptcy.
It is important to understand that if you are declared bankrupt your outstanding debts are treated differently depending on the type of debt.
Debts Not Covered During a Bankruptcy
You still have to pay certain debts despite becoming bankrupt. These include penalties, fines, and child support payments. Depending on the specific payments you fail to make, you could be liable to increased penalties or fines, interest being added onto the sum you already owe, civil action, or even criminal prosecution. If you have outstanding penalties and fines related to traffic or parking infringements your driving license and motor vehicle registration may be suspended.
In some cases, a failure to repay certain debts to the Commonwealth may lead to the Australian Taxation Office withholding your tax refund, in order to cover any outstanding debts owed to the Commonwealth.
Should you be declared bankrupt, you should ensure you notify your bankruptcy trustee of any of these debts that you are liable for, as they will consider these when assessing your circumstances and determining whether you are able to contribute anything to your creditors.
Fraudulently Accrued Debts
If any additional investigations occur into your debts, and it is determined that these have been accrued due to fraudulent actions on your part, then you will still owe the balance to the creditor when you are discharged from the bankruptcy.
Dealing with Bankruptcy
It is important to understand that if you are declared bankrupt your outstanding debts are treated differently depending on the type of debt. You should not treat bankruptcy as an opportunity to become ‘debt free,’ and even if you feel bankruptcy is the only solution for your financial difficulties, you may still find that you owe significant sums to a variety of creditors.
If you do decide to voluntarily declare yourself bankrupt, or a creditor looks to have you declared bankrupt, ensure you are fully aware of how all your debts will be treated.
Please seek independent legal advice for specific cases. This article is for general information only.
This article contains general comments and recommendations only. It is not intended to be and should not be construed as legal advice. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action, you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.