Which of my debts are covered by bankruptcy?
There are three main types of debts that are covered by bankruptcy:
- Secured debts are debts that are secured by an asset, like a bill of sale of a vehicle. The creditor of a secured debt is able to reclaim the relevant asset from you and sell it for compensation if you fail to cover your payments. If the amount the secured asset sells for does not cover the debt owed to the creditor, they are entitled to file a claim in you bankruptcy for their losses.
- Unsecured debts are debts that are not secured by any of your assets – for example mobile phone and credit card bills. In most cases, unsecured creditors don’t have the right to reclaim the items you purchased with the funds they advanced to you. When you go bankrupt unsecured debtors can take no further action against you, but are able to lodge a claim to your trustee for compensation in the bankruptcy.
- Guaranteed Debts are debts that are owed to the guarantor of a debt incurred by you. For example, if you were to take out a personal loan and had a parent guarantee the payments of this loan, the lender is able to recover any unpaid debts from this parent. After your guarantor pays these debts, they are then able to file a claim for the amount of this debt in your bankruptcy.
Which of my debts are not covered by bankruptcy?
Debts that are not covered by bankruptcy include the following:
- Fines which result from law infringements
- Debts resulting from fraud
- Outstanding Child Support payments
- HECS/HELP/SFSS debts
- Student Supplement loans
The payment of these debts will be your responsibility. Debts owed to Centrelink may or may not be covered by bankruptcy – you will need to contact Centrelink to determine where you stand.
What happens if I have a shared loan or mortgage and go bankrupt?
If you share your mortgage with another person who is not bankrupt, your trustee will either take your place in the mortgage by registering as a “tenant in common” of the house or apply for a caveat on the property that secures your interest in the property. If the non-bankrupt owner of the house cannot afford to buy out the bankrupt person’s share of equity in the property, the trustee is likely to insist on selling the property. If the non-bankrupt owner does not co-operate with the sale, the trustee is entitled to apply for a Court order stipulating the mandatory sale of the property. Any money profited from the sale of the property after mortgage and other expenses are covered is usually divided equally between the non-bankrupt owner and the trustee.
Should I shift assets out of my name before going bankrupt?
No. Hiding assets from your trustee by registering those assets to another person’s name is a serious offence under the Australian Bankruptcy Act. Trustees have the power to claim back any hidden assets, and can recover assets that were transferred up to five years prior to the beginning of your bankruptcy period. Trustees may also claim back-payments from any creditors that the bankrupt person unfairly benefited over other creditors by repaying them immediately prior to filing for bankruptcy.
Which assets do I keep during bankruptcy and which go into the hands of my trustee?
- House or property: Depending on the size of debts your trustee may need to sell your house or property. As a result, you may be forced to leave your home.
- Vehicle: Your trustee is entitled to sell your vehicle if its equity exceeds $7200. If you owe an outstanding debt to a creditor for your vehicle that creditor may also seize your vehicle.
- Clothing and necessary items: You are usually permitted to retain your basic personal belongings. You are also able to keep equipment necessary for your trade, provided that the combined value of these tools does not exceed $3550.
- Cash and savings: If you have money in an account with a credit union or bank to which you owe money, that company is entitled to claim those funds. The trustee takes possession over all other money belonging to you when you become bankrupt.
- Income: You are required to pay a percentage of your income to your trustee if you earn over an indexed amount, as specified by the ITSA here. If your income does not exceed the indexed amount you are not required to make monetary contributions, but can do so voluntarily.
- Superannuation: Superannuation earned before your bankruptcy period falls into the hands of your trustee. However, you may be permitted to keep superannuation earned after filing for bankruptcy – you will need to consult your trustee for confirmation on this matter.
- Sentimental items: Whether or not you can keep these items depends on your creditors, who can vote to allow or disallow you to retain sentimental possessions. If your creditors do not allow you to keep these possessions they will be sold by your trustee.
Follow this link to the ITSA site for a more extensive table on the status of specific assets after bankruptcy.
Are there any insurance or compensation payments that are not protected by bankruptcy?
Yes. Any life insurance or endowment assurance payments received by you before becoming bankrupt are not protected by bankruptcy, and as such may be seized by your trustee. Any compensation payments received before or after bankruptcy that are not linked to personal injury or wrong are also unprotected by bankruptcy.
