The first part in our series on bankruptcy explores some basic concepts: what is bankruptcy and what effect does it have on your debt?
What is bankruptcy?
In the 2014-15 Financial Year over 17,000 Australians became bankrupt and a further 11,000 entered into debt agreements (statistics sourced from Australian Financial Security Authority).
Bankruptcy is a legal status that a person has under the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”). A person may become bankrupt if their financial position is such that they are unable to meet their various debts. The Bankruptcy Act then regulates the relationship between that person (the debtor) and their creditors. A bankruptcy has two main purposes:
- to fairly distribute the debtor’s assets amongst creditors; and
- to give the debtor a fresh start by wiping most of their debts
A person can become bankrupt under the Bankruptcy Act in three ways:
- the debtor files a debtor’s petition (this accounts for approximately 90% of bankruptcies and is known as “voluntary bankruptcy”);
- the creditor(s) files a creditor’s petition in the court, resulting in a “forced bankruptcy”; or
- either the legal personal representative of the deceased or creditor of the deceased can petition for an order that treats the deceased person as a bankrupt.
What happens to my debt when I become bankrupt?
This will depend on whether your debt is a secured debt, unsecured debt or fines from laws that may have been breached.
Secured debts are those where your creditor has a security over an asset. For example it could be the mortgage you have taken against your home or a hire purchase agreement for your car. Such a security would, normally, have been registered either with Land Titles if it relates to Real Estate or on the Personal Property Securities Register if it relates to an item of personal property.
The Bankruptcy Act does not protect you from secured debts. If you fail to make the regular payments the creditor can repossess the asset that they have financed and sell it to recover their dues. They can then chase you for any shortfall. However, if there is a shortfall, the creditor becomes an unsecured creditor.
Unsecured debts include debts such as credit card balances, personal loans, store cars, unpaid utility bills. This means all debts that are not registered as being secured by an asset.
By entering into bankruptcy, you are released from paying most unsecured debts. The debts are effectively cancelled and you can stop making further payments.
Breach of law
There are some exceptions to the above rule, however, as bankruptcy cannot cancel all unsecured debts. Certain specified unsecured creditors are required to be repaid during and after bankruptcy. These include fines for any law that you may have breached, debts arising from fraud, maintenance payments and child-support payments, contingent debts such as HECS and student loans and Centrelink debts.
Sometimes lenders may insist that you include a guarantor in your loan application. If your loan was guaranteed by a parent, friend or relative or jointly signed, then the guarantor/joint signatory can become liable for your debt, even if you have gone bankrupt.
Bankruptcy offers some protection from further action by creditors however this does not release you from all debts. If you are considering bankruptcy you should consult a specialist to see how your debts will be affected by declaring bankruptcy.
If you need assistance with a bankruptcy, contact our dispute resolution lawyers.