When a person who owes you money becomes bankrupt, it may become a lot more difficult for you to recover your debt. A trustee (being a person or entity) steps in to manage the bankrupt’s affairs. The trustee works with the bankrupt individual and the bankrupt’s creditors to achieve a fair outcome for all. While the trustee will endeavour to ensure all creditors receive due payment for the amounts owing to them, creditors may have to commercially accept ‘cents in the dollar’ to ensure they receive some payment for their debt.
Debts such as credit cards, personal loans, utility bills and professional fees are covered by bankruptcy. That means if you are a creditor, you cannot demand payment of the debt and must instead go through the trustee to recoup the debt. Usually, these debts are released after bankruptcy ends. Whether you receive all, or some, of the amount owed to you depends on where you rank in the order of priority.
Debts that are not covered by bankruptcy include fines, penalties, child support, and government student loans. More relevantly for individual creditors, bankruptcy does not cover unliquidated debts (where the debt amount has not been determined) and debts incurred after bankruptcy commences. The debtor is still liable for those debts and you may contact them directly to seek repayment, both during and after bankruptcy.
If you are a secured creditor (where your debt is tied to a particular asset), bankruptcy does not change your rights. You can still pursue the debtor for payment and repossess and sell the secured goods if the debtor defaults. Importantly, any shortfall in the amount received from the sale of the secured goods can become an unsecured debt covered in bankruptcy, thereby providing further recourse for you to recoup your debt.
If a debtor alleges their inability to repay a debt is due to bankruptcy, then ask them for the AFSA administration number and the trustee’s details. This will enable you to perform a Bankruptcy Register Search to determine whether the debtor is truly bankrupt. If the debtor is bankrupt, you can contact the appointed trustee for details of the bankruptcy and add your debt to the bankruptcy. This ensures the trustee is aware of your debt to avoid missing out on a dividend payment. If dividends are available, you will be required to lodge a proof of debt form with supporting evidence to prove the debt is genuine.
Being a creditor in bankruptcy gives you rights and responsibilities. It is important to understand these and the requirements you must meet to increase the likelihood of you recovering your debt in the bankruptcy.
If you have a debtor who has become bankrupt, or you anticipate they may become bankrupt in the future, then we recommend that you get in contact with our Corporate Advisory, Restructuring & Litigation team at Frank Law. We will be able to advise you as to your options to ensure you obtain repayment for your debt, whether or not the debtor ends up bankrupt.
If you have further questions, please contact Matthew Sibley at msibley@franklaw.com.au.
This is not legal advice.
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