What happens to my debts?

6 min read

If you enter bankruptcy, you will find that most debts are covered. This means that you no longer have to repay them. In some cases, your trustee may sell your assets or use compulsory payments to help pay your debts.

Read on to understand which debts bankruptcy covers and if you still need to pay certain types of debts.

Video: what debts survive a bankruptcy

Which debts does bankruptcy cover?

Unsecured debts

An unsecured debt is not tied to specific property, like a house.

Bankruptcy covers most unsecured debts, such as:

credit and store cards
unsecured personal loans and pay day loans
gas, electricity, phone and internet bills
overdrawn bank accounts and unpaid rent
medical, legal & accounting fees.

Bankruptcy releases most of these debts when it ends.

In some cases, you may need to confirm with the creditor to see if bankruptcy covers the following:

Centrelink debts
Australian Taxation Office debts
victims of crime debts
toll fines.

Bankruptcy doesn't cover all debts, including:

court imposed penalties and fines
child support & maintenance
HECS & HELP debts (government student loans)
Note: If you have a VET-FEE HELP or VET Student Loans debt that you disagree with, please see the information at VET Student Loans Ombudsman
debts you incur after your bankruptcy begins
unliquidated debts (e.g. a debt where you and your creditor are yet to determine the amount).
Note: If you require assistance to liquidate a debt we suggest you seek financial or legal advice.

This means you are still liable for these debts. You need to contact your creditors directly to discuss payment options.

The debt comparison table shows which unsecured debts bankruptcy will cover.

To discuss the types of debts you have and how they're treated in bankruptcy, you can speak with a free financial counsellor by contacting the National Debt Helpline on 1800 007 007. For more information on financial counsellors and other support services see Where to find help.

Secured debts

A secured debt is tied to specific property, like a house. The creditor has the right to take possession of your property if you don’t make the payments. If this occurs you must assist with this recovery action.

Some examples are:

mortgage (house is security)
car loan (car is security)
hire purchase or rent to buy (eg. furniture or electronics as security).

You need to contact your secured creditors to discuss your intentions with the debt. If you’re unable to maintain the payments, you may be able to surrender the goods. Sometimes the creditor may sell the goods, however it still doesn't cover what you owe.

We call this a shortfall. You can list the shortfall in your bankruptcy, then the creditor can no longer pursue you for this debt.

Case study: Ben

Secured car debts in bankruptcy

Ben is a 31-year-old delivery driver. They live in Launceston, Tasmania and earns $55,000 per year. They have credit card debts of about $48,000.

Ben is paying off a 2011 Holden Combo van worth $10,000. To buy it, they borrowed money from Island Bank, who registered a security over the van on the Personal Property Securities Register. Ben currently owes Island Bank $9,000.

Ben finds their debts crippling. They have done some research and thinks bankruptcy would be their best option.

Before filing for bankruptcy, they complete AFSA's bankruptcy consequences tool and then creates an Insolvency Services account so they can apply online.

Ben’s main concern about going bankrupt is that they do not want to lose their van. They need this for their job. They do not want to put details of the van and the loan on their Bankruptcy Form. Ben rings AFSA to get more information. AFSA tells Ben that it’s important to list all their debts and assets on their Bankruptcy Form and there are penalties for not doing so. They also tell Ben that if they forget to include any debts, they must tell their trustee as soon as they becomes aware of them.

AFSA tells Ben that the trustee will decide whether to take their van based on its ‘equity’. The ‘equity’ is how much the van is worth, minus what is owed to the secured creditor (Island Bank). Ben’s van is worth $10,000 and they owe $9,000. The equity in their van is $1,000 which is below the limit*. In this instance, the trustee cannot claim the van. If they stop paying off the loan, however, Island Bank could repossess the van.

If Ben’s situation changes in the future and they can no longer keep up the loan payments, Ben could surrender the van to the bank. If this did happen, any money still owing on the loan would be covered by their bankruptcy, and Island Bank could not pursue Ben for the debt.

*The limit is updated each financial year. You can find the latest limits at Indexed Amounts

*These case studies do not constitute legal or financial advice. You should consider whether the options referred to in the case studies are appropriate for you, and seek advice if necessary, before taking any action.

Joint debts

A joint debt is a debt you share with another person. Normally if one person enters bankruptcy, the other person on the loan documents becomes 100% liable for the debt. If both people are bankrupt, they should include the debt in each bankruptcy.

If you have a guarantor for a loan (e.g. your parent), normally the guarantor becomes 100% liable for the debt.

Sole trader debts

If you are a sole trader you can list your debts in the bankruptcy.

Company debts

For insolvent company debts and enquiries, contact the Australian Securities & Investments Commission.

If you are a personal guarantor for company debts, you can include these in your bankruptcy.

For more information see Personal bankruptcy and the liquidation of a company

Overseas debts

Debts you incur overseas are covered in your Australian bankruptcy. This means your creditors can't pursue for that debt in Australia. However, your overseas creditors can pursue you for the debt if you travel back to that country.

This applies during and after your bankruptcy. You must include any overseas debts in your bankruptcy application.

Direct debits

It's your responsibility to cancel any direct debits you have set up with your bank. It is best to speak to your bank directly if you want to stop a direct debit.

For more information about how your debts are paid in bankruptcy see: How are my debts paid?