What Happens When You Declare Bankruptcy?
Many people filing for bankruptcy believe their debts will be wiped out. Unfortunately, this is not true. While you would be relieved of most of your debts, certain types of debts are not covered in bankruptcy. So the answer to “Does bankruptcy clear all debts?” is no.
When preparing your bankruptcy papers, you must organise them into three categories: priority, unsecured, and secured debts. Secured debts are the ones that are not covered under bankruptcy.
What are secured, unsecured, and priority debts?
Secured Debt
The secured debt is the debt you owe to a creditor secured against specific personal or real property, like a car, land, or house. If you can’t make the monthly payments for a particular duration, the creditor can get hold of your property instead.
Real Estate Property, Bankruptcy and Secured Debt
A mortgage loan is a debt that your house serves as collateral for. When you purchase a home, you borrow money in the form of a house mortgage. Additionally, you promise to repay that loan over a certain period. When you sign off on the mortgage papers, you agree that your bank will seize your house if you cannot make the payments. Once repossessed, the bank will most likely sell the security property.
Personal Property and Secured Car Debts in Bankruptcy
Car loans are also secured debts. Like a mortgage, purchasing a car means giving the bank a security interest in your vehicle. Due to this security interest, your car can be repossessed if you cannot make the monthly payments.
Unlike unsecured creditors, secured creditors don’t need a court order to seize your property because you agreed to property repossession when you took out the loan.
Examples of Secured Debt
- Auto loans
- Home equity lines of credit
- Home mortgages
Unsecured Debt
Unsecured debt is the money you owe to creditors who don’t have any security interest in the collateral. Therefore, the creditor has no right to take away your property if you cannot make the payments. The most common unsecured debts include:
- credit and store cards
- unsecured personal loans and payday loans
- gas, electricity, phone, and internet bills
- overdrawn bank accounts and unpaid rent
- medical, legal, and accounting fees.
These debts don’t have any specific assets backing them, but they still allow you to purchase a good or service. Therefore, a creditor can’t take anything away without legal action if you fall behind on your payments.
However, remember that the creditors can use other means to get the payment that can negatively impact you, like reporting the missed payments or using debt collectors. Therefore, it is essential to avoid ignoring these creditors merely because these are unsecured debts.
Bankruptcy Debts that Cannot be Discharged
An important fact to remember when considering bankruptcy is that it doesn’t cover all debts; the AFSA gives an updated and detailed list of what can and cannot be hidden by a default, which includes the following:
If selling the goods still doesn’t cover your doubt, the remaining amount is known as a shortfall, which can be listed in your bankruptcy. Once this shortfall is added to your default, the creditor won’t be able to pursue you for the remainder of the debt.
Once you enter bankruptcy, a trustee will be appointed to maintain the bankrupt estate. That trustee would deal with unsecured assets and equally apply the sale proceeds to pay a dividend to the unsecured creditors.
Determining Bankruptcy, Secured Debt and Unsecured Debt
When preparing your papers with your bankruptcy professional, you must identify the types of debts you have. Identifying unsecured and secured debts would be a significant step to help you better understand your situation. People often believe they can file for bankruptcy when they are not eligible.
You have to meet two main requirements to apply for bankruptcy in Australia, which are as follows:
- You can’t repay your debts on time, and
- You are an Australian citizen or have a business or residential connection to the country
No fee is involved in applying for bankruptcy, and you don’t need any maximum or minimum debt or income amount to be eligible. Moreover, it is also crucial to work with a bankruptcy expert to ensure that there aren’t any other better options available to escape your financial problems.
Once your bankruptcy professional is sure that bankruptcy is the best option for you, they will help you identify secured and unsecured debts and help you understand which debts you would still have to pay.
Need more information about bankruptcy?
“Bankruptcy and secured debt are complicated and challenging processes that should be done with expert guidance. It can already be stressful for you, and trying to do it alone can lead to mistakes that could cause issues later on. Working with our experienced bankruptcy experts will help you with the complex paperwork of filing for bankruptcy and help you manage the situation with creditors.”
Andrew Bell Bankruptcy Advisor
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With over 30 years of experience in debt solutions and bankruptcy in Australia Andrew can find a solution for you.
“Nothing is more satisfying to me than knowing that I’ve helped someone get back on their feet by guiding them through the Bankruptcy Process. Rest assured, you’re in good hands with me as we solve your financial problems together.”
- Court-imposed penalties and fines.
- Child support and maintenance
- HECS and HELP debts (government student loans)
- Debts incurred after bankruptcy.
- Unliquidated debts, e.g., a debt where you and your creditor have yet to determine the amount, are known as provable debts in bankruptcy.
What Happens with Secured Debt in Bankruptcy?
When you file for bankruptcy, you must contact the secured creditors to discuss your debt and determine if a solution is available. The default won’t change the rights of the secured creditor. If you cannot keep up your payments, the secured creditor can repossess the secure asset and sell it to recover the loan payment.
If selling the goods still doesn’t cover your doubt, the remaining amount is known as a shortfall, which can be listed in your bankruptcy. Once this shortfall is added to your default, the creditor won’t be able to pursue you for the remainder of the debt.
Once you enter bankruptcy, a trustee will be appointed to maintain the bankrupt estate. That trustee would deal with unsecured assets and equally apply the sale proceeds to pay a dividend to the unsecured creditors.
Determining Bankruptcy, Secured Debt and Unsecured Debt
When preparing your papers with your bankruptcy professional, you must identify the types of debts you have. Identifying unsecured and secured debts would be a significant step to help you better understand your situation. People often believe they can file for bankruptcy when they are not eligible.
You have to meet two main requirements to apply for bankruptcy in Australia, which are as follows:
- You can’t repay your debts on time, and
- You are an Australian citizen or have a business or residential connection to the country
No fee is involved in applying for bankruptcy, and you don’t need any maximum or minimum debt or income amount to be eligible. Moreover, it is also crucial to work with a bankruptcy expert to ensure that there aren’t any other better options available to escape your financial problems.
Once your bankruptcy professional is sure that bankruptcy is the best option for you, they will help you identify secured and unsecured debts and help you understand which debts you would still have to pay.
Need more information about bankruptcy?
“Bankruptcy and secured debt are complicated and challenging processes that should be done with expert guidance. It can already be stressful for you, and trying to do it alone can lead to mistakes that could cause issues later on. Working with our experienced bankruptcy experts will help you with the complex paperwork of filing for bankruptcy and help you manage the situation with creditors.”
