Provable Debts

One of the general intentions of the Bankruptcy Act 1966 is to free an insolvent person from his or her financial obligations arising from debts incurred prior to bankruptcy that they are unable to meet.

A provable debt is a claim which entitles a creditor to share in any dividends and to vote at meetings in the bankruptcy. Generally a creditor with a provable debt is prevented from continuing any recovery proceeding against a debtor upon their bankruptcy. There are very limited exceptions.

There are some claims by creditors that are ‘provable’ but from which the debtor is then not released from at the end of the bankruptcy.

The relevant section of the Bankruptcy Act are: s.82 s.153 s.58(3) s.58(5) s.58(5A) .	. Debts Provable in Bankruptcy Effect of Discharge Enforcement of Remedies by Creditors Rights of secured creditors Maintenance Agreement; Pecuniary Penalty Order
Which debts are and aren’t ‘provable’ debts?
Secured Debt	Unsecured Debts
A secured debt is where a creditor has a hold over an asset until the debt is paid for. Should the debtor default on payments, the creditor has the right to sell the asset to reduce the debt. Generally, nothing in the Bankruptcy Act prevents a secured creditor to realise or otherwise deal with their security. Generally, any deficiency from the sale of the asset is considered to be a provable debt.	Most unsecured debts are provable in bankruptcy.

Common examples of provable debts are:-

Credit card debts and personal loans incurred before bankruptcy;
Trade creditors incurred before bankruptcy;

There are some debts which are not provable and therefore are not ‘covered’ by bankruptcy eg. Court imposed fines, some portions of student loans.

There are also debts which are provable but where the bankrupt is not released from the liability upon discharge from bankruptcy eg. debts incurred by fraud, maintenance, child support .

There are debts which are provable (and the creditor can vote at meetings and share in any dividends) where the creditor can also continue or commence recovery action against the debtor’s non-divisible property and/or income after the date of bankruptcy eg. maintenance, child support.

There are debts which are provable but which if not paid will cause a service to be terminated for non-payment eg. supply of electricity, gas, telephone etc or the cancellation of a drivers licence and/or motor vehicle registration eg. parking and driving infringement notices.

Some debts have not sufficiently ‘crystalised’ for them to be covered by bankruptcy. - Eg. A claim for unliquidated damages against a debtor will not be covered unless the dispute as to whether they are liable and how much they are liable for has been settled prior to bankruptcy (ie a settlement has been agreed between the parties or judgement has been entered). A common example of an unliquidated claim for damages is an action for personal injury or property damage for negligence.

Therefore the question of what debts a bankrupt will be released from upon the making of a sequestration order or the acceptance of a debtor’s petition, will depend upon the nature of the debt.

Only ‘provable’ debts entitle a creditor to share in any dividend from the administration and to vote at any meeting. A debt is not covered by bankruptcy unless it is provable.

Subsection 82(1) of the Bankruptcy Act states:

“subject to this Division . . . all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of bankruptcy, are provable in his or her bankruptcy.”

Subsections 82(2)-(4) list a number of exceptions.

Examples of Provable Debts

Examples of Non-Provable Debts

Common examples of provable debts include personal loans, credit cards and the provision of goods and services obtained on credit.

Some unusual examples of debts that are provable in bankruptcy:

Workers compensation payments due.
Debts arising by breach of trust are provable in bankruptcy and include such things as debts that arise from misappropriation of funds held by the debtor on trust or as administrator of a trust.
A guarantor in relation to a liability of a bankrupt is entitled to prove in the bankruptcy on two conditions, (i) that the guarantee under which the liability arose was given prior to bankruptcy, and (ii) the guarantor has paid the entire liability due under the guarantee.
Unliquidated debts arising from breach of contract are provable.

Note: Interest accruing on provable debts from the date of bankruptcy to the date of dividend payment is only paid after all creditors are paid in full and there is a surplus in the bankrupt estate.

Note: A debtor (or a bankrupt) is required to disclose all their liabilities in their statement of affairs irrespective of whether the debts are provable or not.

Further specific information is available on:

Higher Education Loan Debts
Income Tax
Restitution Orders
Claims by secured creditors
Debts incurred after bankruptcy

Unliquidated damages [subsection 82(2)] except those arising from breach of contract, promise or breach of trust are not provable in bankruptcy.

The most common situation is where a debtor has been involved in a motor vehicle accident and judgment has not been entered prior to bankruptcy, or there has been no legal acknowledgment of the liability.

Normally, the trustee will accept that there is a provable debt if the debtor has given a written admission/acknowledgment of liability to the other party or its solicitor/insurer and has documentary evidence that such admission has been received by the other party or its representatives.

Penalties and fines imposed by a Court are not provable in bankruptcy
[subsection 82(3)]. However, penalties imposed by the Australian Taxation Office for late payment or late lodgement of returns are provable in bankruptcy.

Council rates are not provable in bankruptcy as they attach to the property for which the rates are due. Ie. they are secured debts.

Creditors’ legal costs are not provable in bankruptcy unless:

they are allowed by a judgment obtained prior to bankruptcy;
were allowed as part of the contractual obligation incurred prior to bankruptcy;

Costs of abortive writs are not provable nor are collection agents’ expenses unless the debtor is liable under the terms of the contract or the there are specific provision in statute allowing such.

If a debt is not enforceable at law owing to a prohibition contained in a statute, the debt cannot be proved, eg a debt due to a minor, an unlicensed bookmaker or a debt related to illegal purchases.

A Student Loan made pursuant to the Student and Youth Assistance Act 1973 and as from 1st July 1998, the Youth Allowance and Austudy Payment Schemes covered by the Social Security Act 1991, is a debt not provable in bankruptcy, pursuant to Section 12ZW of the Act.

Note: A debtor (or a bankrupt) is required to disclose all their liabilities in their statement of affairs irrespective of whether the debts are provable or not.

Higher Education Loan Debts

Non-Provable HECS-HELP debts
HECS-HELP, FEE-HELP or OS-HELP debts which arise after 1 January 2005, are not provable in bankruptcy.
Consequential Act changes to existing accumulated HECS debts means they can be converted into new accumulated HELP debts. New accumulated HELP debts will not be provable from 1 June 2006.

In 2003, the Government introduced legislation to implement the Higher Education Loan Programme (HELP) which comprises a suite of income contingent loans to support a student's higher education.
HELP came into effect on 1 January 2005 and incorporates the Higher Education Contribution Scheme (HECS), with some changes (known as HECS-HELP); and replaces the Postgraduate Education Loan Scheme (PELS), Bridging for Overseas Trained Professionals Loan Scheme (BOTPLS) and Open Learning Deferred Payment Scheme (OLDPS) with two new loan schemes called: FEE-HELP and OS-HELP.

HECS-HELP provides a loan for eligible students enrolled in Commonwealth supported places and covers all or part of their student contribution. FEE-HELP provides a loan for eligible fee paying students up to the full amount of their tuition fees. OS-HELP provides students who wish to study overseas with a loan to cover expenses such as accommodation and travel.

HELP debts consist of HECS-HELP, FEE-HELP and OS-HELP and are incurred under Part 4-1 of the Higher Education Support Act 2003. The Higher Education Support (Transitional Provisions and Consequential Amendments) Act 2003 (the Consequentials Act) inserted subsection 82(3AB) of the Bankruptcy Act. That provision commenced on 1 January 2004 and as from that date, a debt incurred under Part 4-1 of the Higher Education Support Act is not provable in bankruptcy. This effectively means that a HECS-HELP, FEE-HELP or OS-HELP debt which only arises after 1 January 2005, is not provable from that date.

Existing HECS debts
The Consequentials Act also provides for the conversion of existing accumulated HECS debts to new accumulated HELP debts. This effectively means that the new accumulated HELP debt will not be provable from 1 June 2006.

However, an existing semester debt incurred prior to 1 January 2005 or an accumulated HECS debt incurred prior to 1 June 2006 is subject to the current treatment of HECS debts in bankruptcy. That is, the Australian Taxation Office can prove in the bankrupt estate for all HECS debts owing prior to the date of bankruptcy. However, if the dividend from the bankruptcy distribution is insufficient to repay the HECS debts, the bankrupt will still be required to repay the outstanding balance and they are not discharged from the HECS liability (see s 106YA of the Higher Education Funding Act 1988).

HECS or HELP debts subject to ATO Notice of assessment
There is no change to the status of HECS debts assessed as payable and which have been notified by a notice of assessment issued by the ATO; these remain provable. Similarly, all HELP debts which have been assessed as payable on a notice of assessment will be provable.

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Income Tax

The bankrupt can lodge a return for the period from the commencement of the financial year to the date of bankruptcy and income tax assessed as payable on the income earned up to the date of bankruptcy would be a provable debt in the bankrupt estate.

The bankrupt would also be required to lodge a return for the remainder of the year and the tax assessed payable on that return would not be provable.

Penalties imposed by the Australian Taxation Office for late payment or late lodgement of returns are provable in bankruptcy.

Note: The Australian Taxation Office is entitled by statute to retain any refunds due to the bankrupt during the period of bankruptcy and apply such refunds to the bankrupt’s liability for unpaid income tax.

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Restitution Orders

Restitution Orders are normally associated with criminal proceedings eg a person has been convicted of larceny, embezzlement, fraud. As part of the sentence imposed, an order is made that the convicted person pays specific sum (usually the amount stolen, embezzled, fraudulently appropriated etc) to the particular affected party by way of restitution.

In the case where the convicted person has been sentenced to a term of imprisonment or periodic detention, and has been ordered to pay a specific sum to a specified party, the restitution order usually contains a ‘default clause’ ie if the money is not paid the defendant is to be imprisoned for a specified period.

In many cases the term of imprisonment is suspended if the defendant enters into a recognisance to be of good behaviour for a specified period (usually the same period as the term of imprisonment) and to repay the subject monies to the victim. In these cases if the defendant does not repay the money as required, the recognisance is breached and the prison sentence applies to the defendant.

In either scenario the amount the defendant is ordered to pay by way of restitution is a provable debt if the defendant becomes bankrupt. However if the bankrupt does not pay he breaches the order and is liable to be imprisoned.

The bankrupt can avoid imprisonment by obtaining an order of the Federal Court of Australia under Section 60(1) of the Bankruptcy Act 1966.

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Claims by secured creditors

A secured creditor in bankruptcy is a creditor who holds either a mortgage, a lien or a Bill of Sale over the bankrupt’s property ie if the creditor holds a mortgage over a property owned by a relative or friend of the bankrupt, as security for the loan made to the bankrupt, for bankruptcy purposes, the creditor is unsecured.

A secured creditor has the following three options in relation to its debt:

Surrender its security and prove in the estate for the entire debt;
Realise its security and prove for the deficiency after the proceeds of sale have been applied to the principal of the debt;
Estimate the value of the security and prove in the estate for the estimated deficiency.

Note: A deficiency arising from the sale of an asset (eg house, motor vehicle) by a secured creditor in respect of a contract (eg mortgage, hire purchase, lease) entered into before the date of bankruptcy, is a provable debt, irrespective of when the asset is sold before, during or after bankruptcy.

A creditor with a primary debt owing by a bankrupt with security over another persons property , say a relative, can prove in the bankruptcy for the full amount.

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Debts incurred after bankruptcy

Debts incurred by the bankrupt after he/she becomes bankrupt are not provable in bankruptcy and the bankrupt remains liable for the debts.

Creditors with post bankruptcy debts may exercise their usual civil remedies for the collection of outstanding debts. For example, a writ of execution may be enforced against property that does not vest in the trustee.

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