6.7.3.05 Bankruptcy

Summary

The Bankruptcy Act 1966 applies to bankruptcy matters.

When a person becomes bankrupt, their property, except for some personal items, is vested in the bankruptcy trustee with individual creditors unable to take action to pursue their debts. A creditor can lodge proof of a debt with the trustee. Provided that this is accepted by the trustee, the creditor may be paid a dividend when the debtor's assets are liquidated.

Unless it is discharged earlier by the trustee or extended due to objections from creditors, a bankruptcy is automatically discharged 3 years after the date the bankrupt person filed their Statement of Affairs.

When a person is discharged from bankruptcy, they are released from all 'provable' debts, even if these debts were not acknowledged or 'proved' in the bankruptcy process. The exception to this is where a debt was incurred because of fraud.

Arrangements under Part IX or Part X of the Bankruptcy Act

When a debt agreement under Part IX or a personal insolvency agreement under Part X of the Bankruptcy Act is in place, repayment of the debt can only take place where a creditor is a party to the arrangement.

Social security debts & bankruptcy

Social security debts are treated in the same way as other debts in bankruptcy.

A debt is taken to be irrecoverable at law if the debtor is discharged from bankruptcy, and the debt was incurred before the debtor became bankrupt and was not incurred by fraud. This also applies where a debtor entered into an arrangement under Part IX or Part X of the Bankruptcy Act.

Explanation: Debt means a debt as defined in SSAct section 1235.

Act reference: SSAct section 1236(1B)(c) … the debtor is discharged from bankruptcy and the debt was incurred …

Fraud

A finding of fraud in relation to bankruptcy is a serious matter which should only be made in the clearest of cases.

Example: A person failed to provide correct information about their income, or provided incorrect information about their income. In order to find that there was fraud, it is also necessary to establish that they deliberately acted dishonestly or were reckless as to whether the information they provided was true or false.

Person who has a social security debt is declared bankrupt

When a person who has a social security debt is declared bankrupt, all recovery action must stop. If a proof of debt is lodged with the trustee in bankruptcy and accepted by the trustee, a dividend may be paid when the debtor's assets are liquidated. On discharge from bankruptcy, the debt should be written off under SSAct section 1236(1B)(c).

Repayments by way of deductions from a social security payment, garnishee, legal proceedings or instalments, cannot be pursued once a debtor has been declared bankrupt. Any monies paid towards the debt after the declaration of bankruptcy should be repaid, unless the debt repayment is made by the trustee.

Judgement & reparation orders

Where reparation is ordered before bankruptcy, recovery is only available by 'proving' the debt for the bankruptcy. If the person has been discharged from bankruptcy, debts for which a judgement or reparation order was made before bankruptcy cannot be recovered.

Effect of bankruptcy on recovery by deductions

The debt is not eliminated by the debtor entering into bankruptcy. However, the debt is neither due nor payable so long as the debtor is bankrupt. Because the SSAct requires that any debt must be 'due' to the Commonwealth to be recoverable, any debt for a period arising before bankruptcy began cannot be recovered.

A debt to the Commonwealth incurred during the bankruptcy period is considered non-provable, and the bankrupt person is liable for that debt, which is subject to the normal collection methods specified in the SSAct.

Where parts of the debt were incurred both before and during the bankruptcy period, the part of the debt which occurred during bankruptcy can be treated as any other debt, and collected.

After discharge from bankruptcy, the debtor is released from most debts that occurred before bankruptcy, so long as they were not incurred by fraud. Where a bankruptcy notice is in place, and the debtor has property or access to funds with which to satisfy the debt, the department is open to take bankruptcy proceedings against the debtor by filing a Creditor's Petition in the Federal Court.

Act reference: SSAct section 1236 Secretary may write off debt

Repayment of money recovered from a bankrupt debtor

Where deductions have been made from the social security payment of a bankrupt person, money recovered during the bankruptcy period for a debt that occurred before bankruptcy should be refunded directly to the person.

Where the money was recovered by means of deductions by consent under SSAct section 1234A from the payment of a person who is not the debtor, the money should be repaid to the person from whose payments it was deducted.

Act reference: SSAct section 1234A Deductions by consent from social security payment of person who is not a debtor, section 1236 Secretary may write off debt

Effect of bankruptcy on recovery by garnishee

The Commonwealth cannot issue a garnishee notice against a bankrupt debtor, because the debt is no longer considered to be 'due to the Commonwealth'.

The Commonwealth can rely on a garnishee notice issued before bankruptcy, but only where the debt was due before the bankruptcy began. Specific advice should be sought where a garnishee notice was issued before bankruptcy, but not complied with before the funds vested in the trustee.

Instead of entering into bankruptcy, a debtor may enter into an agreement with his or her creditors, or a composition, a deed of arrangement or a deed of assignment. In these cases, a garnishee notice may be issued against the debtor.

Money recovered by a garnishee notice

Money recovered during the period of the bankruptcy by a garnishee notice issued against a bankrupt person should be refunded to that person.

Money recovered by a garnishee notice issued in respect of the debtor's income should be repaid directly to the person who was issued the garnishee notice, not the debtor.

Money recovered by a garnishee notice issued in respect of the debtor's property (subject to the provision of the Bankruptcy Act), or recovered by instalments, should be repaid to the trustee.

Money recovered by a garnishee notice issued in respect of the debtor's property (not subject to the provisions of the Bankruptcy Act) should be repaid to the debtor.

Act reference: SSAct section 1233 Garnishee notice

Effect of bankruptcy on recovery by legal proceedings

A complex situation arises where money has been recovered from a bankrupt person by way of legal proceedings. This situation is rare, as any legal proceedings should be discontinued once a debtor enters into bankruptcy. Cases involving recovery in these circumstances should be referred to the relevant help desk for specific advice.

Act reference: SSAct section 1232 Legal proceedings

Policy reference: SS Guide 6.7.2.40 Debt Recovery by Legal Proceedings

Effect of bankruptcy on recovery from multiple assurers for AoS debts

Where there is more than 1 assurer, the amount of payment provided to the assuree must still first be deducted from the bond. If any debt remains after the bond (if any) is enforced, recovery must be pursued from each of the assurers.

If recovery from a particular assurer is not possible, then recovery action should be referred or stopped.

Example: An assurer is bankrupt or cannot be located.

Policy reference: SS Guide 6.7.1.30 Assurance of Support Debts

Last reviewed: 20 September 2019