Does bankruptcy clear all debt?

If your personal finance is spiralling out of control and you’re facing high debt repayments that you can’t pay back, you might be considering filing for bankruptcy. If this is you, don’t panic. While it might feel scary, declaring bankruptcy provides significant debt relief, allowing you to have a fresh start. 

In this article, we’ll cover everything you need to know about using bankruptcy to clear your debts. 

Let’s get to the following commonly asked questions: 

• What is bankruptcy?
• Does bankruptcy clear all debt?
• What debts are not covered by bankruptcy?
• Does bankruptcy get rid of everything?
• Which bankruptcy eliminates most debts?
• Does bankruptcy wipe your credit?
• Does bankruptcy clear ATO debt?

Q1. What is bankruptcy?

Bankruptcy occurs when an individual or business cannot pay the accumulated debt and is a legal proceeding recognised by Australian courts. Filing for bankruptcy can sometimes be the only way to get out of financial hardship, allowing for a fresh start for those that owe money but are unable to pay it off. 

Bankruptcy affects thousands of Australians annually and is filled by either the debtor or the creditor. 

Note: When applying for bankruptcy, the borrower’s assets are evaluated and some may be taken to repay a percentage of the outstanding debts. It is one of the most effective ways to receive debt relief. 

Q2. Does bankruptcy clear all debt?

Bankruptcy only clears certain types of debt and will not absolve you from paying back secured debt, including real estate mortgages and auto loans. However, all unsecured debt incurred is cleared. This can be beneficial depending on your financial situation, especially if you have multiple unsecured debts such as credit card debt or personal loans. 

Types of unsecured loan debt include: 

• A personal loan
• A credit card
• Overdrafts 
• Tax debts
• Student loan debt
• Payday loans

Q3. What debts are not covered by bankruptcy?

Applying for bankruptcy won’t absolve you from any secured debts. But what does this mean? 

Secured debts are assigned to your assets, such as your property or car. When you fail to make repayments, creditors will attempt to take the money you owe by repossessing your asset. For example, if you fall behind on your home loan repayments, your provider could take your home. 

Types of secured debts include: 

• Home equity loans 
• Second mortgage loans 
• Some debt consolidation loans 
• Car loans 

Q4. Does bankruptcy get rid of everything?

No, bankruptcy does not get rid of all debts, but it will stop you from having to deal with a debt collection agency temporarily. While all your unsecured debts will be cleared, your secured debts, such as a home loan, could be repossessed if you don’t revise your repayment plans with your credit. 

Q5. Which bankruptcy eliminates most debts?

There are two types of bankruptcy in Australia: voluntary and involuntary. Both types of bankruptcy clear the same amount of unsecured debts, and neither will clear your secured debt, whether that’s a mortgage or a debt consolidation loan. If you can’t pay your debts that are secured, it’s essential to contact your creditor and start a payment arrangement.

Note:  A payment plan will make your debt more manageable and will help you avoid repossession.  

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Q6. Does bankruptcy wipe your credit?

Becoming bankrupt will not wipe your credit score. Instead, it will remain on your credit file for five years and will give you “bad” credit during this period. You will struggle to secure other loans during this bankruptcy period, as creditors will be able to see this in your credit reports. 

If you’ve declared bankruptcy, after five years, your credit score will return to normal and you’ll be able to practice credit repair. However, you’ll still remain on the National Personal Insolvency Index indefinitely. 

Q7. Does bankruptcy clear ATO debt?

Yes, the Australian Financial Security Authority will clear your Australian Taxation Office (ATO) debt if you file bankruptcy forms. However. The ATO is still classed as a creditor, meaning any money that becomes available to pay off creditors will be shared with them. 

Important: Tax debt in Australia is not the end of the world. If you owed the ATO a tax payment but can’t make it on time, contact them as soon as possible regarding your outstanding tax payment. They will be able to devise a debt solution through an ATO payment plan to stop your debts from spiralling. If you fail to do this, stronger action will be required, such as contacting a collection agency. 

Summing up

Declaring bankruptcy will not clear all your debts; however, it can be a big help if you’re struggling with unsecured loans such as credit cards, overdrafts, tax debts, or payday loans. If you have secured debts and you’re still struggling with debt management, consider taking out a debt consolidation loan or personal loan. If you have significant equity in your property, you can also release funds using home equity loans. 

For more financial advice, stay up to date with our blog. Alternatively, for more information on paying off debts, read our article on ‘how to manage credit card debt’.

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.