Does bankruptcy clear tax debt in Australia?

by | Feb 27, 2024

Bankruptcy is a legal process in which the court makes solutions for individuals or businesses to get rid of debt. It can have several consequences and benefits. Bankruptcy is a complex process so always analyse the situation calmly, before taking any action.

Bankruptcy is a final decision that has many effects. Understanding the whole process and looking for the possible consequences is advised. You may seek the help of a professional.

Facing mountains of tax debt and considering bankruptcy as a way out? While it can offer relief for some debts, understanding how it impacts your tax obligations is crucial. In Australia, bankruptcy can clear most, but not all, tax debts.

Here’s the key takeaway: Bankruptcy generally discharges unsecured debts like credit cards and personal loans. This may include older tax debts (over 3 years old) and certain penalties. However, recent tax debts (within the last year), fines, and student loans typically remain even after bankruptcy.

Effects of Bankruptcy

    1. When the individual or business files for bankruptcy, part of their unsecured loans including student loans, personal loans, and credit cards are discharged to pay the creditors.
    2. It will negatively affect your credit score for several years. So, you can’t apply for loans or credit cards.
    3. Asset liquidation is the process in which your non-exempt assets are discharged to pay creditors.
    4. This can highly affect your professional life as many companies have strict rules for bankruptcy, affecting your future employment.

Federal Bankruptcy Law

Federal bankruptcy law is a legal process to get rid of overwhelming debts. Both individuals and businesses can seek protection through this law from extreme debts. It is a complex procedure and will help remove maximum debt providing you with financial stability. But always remember, it also has many consequences that you must be ready to face before filing for bankruptcy.

Bankruptcy And Tax Debt

Bankruptcy can eradicate some of your tax debts but it is not always the solution. The Australian Taxation Office (ATO) remains a creditor and can pursue the tax debt regardless of the discharge orders of debt.

There are some conditions and circumstances for text debt that are not helped by bankruptcy. Those bankruptcies that have occurred in the last 12 months of filing for bankruptcy are not removed by it. Similarly, most of the fines and penalties are also not discharged through bankruptcy.

Even after bankruptcy, if some of your tax debt remains, you must put your effort into removing it. Cooperate with the bankrupt trustee completely throughout the whole process. Make your point and prove with pieces of evidence that repaying the debt can badly affect your well-being. You can also negotiate with the ATO so that you can get maximum debt discharge.

Bankruptcy Due to Unpaid Tax: ATO Notice

Unpaid tax can be a serious situation for you, especially when ATO sends you a notice. An ATO notice can be stressful for some people. It can be due to several causes but unpaid taxes are one of them.

ATO notice means that they are going to take legal action against you to recover the unpaid tax debts. This legal action involves filing a petition which leads to bankruptcy. But if you receive notice that does not mean you are declared bankrupt. You have to pay the debt or create a payment plan within 21 days of the notice.

You must pay the debt within the given time after ATO notice. If you are not able to discharge the tax debt within time, ATO will file a petition against you for bankruptcy.

Creditor’s Petition by ATO

The creditor’s petition is a legal action taken by ATO to declare an individual bankrupt. The court gives the sequestration order and declares you bankrupt if you have not responded to the ATO notice. This happens when you are not able to pay your tax debts on time. Once you are bankrupt, the court will hire a trustee who will look upon your assets.
Now, your assets are sold to pay the creditors and ATO.

Basic Chapters of Federal Bankruptcy Law

Chapter 7

      • Chapter 7 of bankruptcy law is also called “ Liquidation”. It is the procedure in which the non-exempt assets are sold to repay the remaining debt of the creditors.
      • If there are insufficient or no assets to meet the creditor’s demand for tax debt payment, then these debts are removed and creditors will receive nothing.
      • If the tax debts are older than three years, they can be easily removed on their own by Chapter 7.

Chapter 13

      • It is the most common form of individual bankruptcy which is also known as reorganisation bankruptcy.
      • Chapter 13 involves the formation of a repayment plan for a period of 3 to 5 years which will help to discharge debt.
      • Once the Chapter 13 filing is successful, the tax debts that are paid according to the reorganisation plan are discharged.
      • Those tax debts that are more than three years older, at the time of filing, will also be discharged.
      • It will help remove interests and penalties according to the conditions.
      • Penalties having a life of more than three years are also removed.

Chapter 11

      • Chapter 11 debt strategies are made only for the business community and larger debts.
      • The company will reorganise its debts by Chapter 11 and continue operations.

Chapter 12

      • Chapter 12 focuses on family farmers to stay in business and reorganise their debts.

Conclusion

Some of your tax debts can be cleared but it is a challenging task to file for bankruptcy. There are some circumstances in which you cannot discharge tax debts even through bankruptcy.

One must look into the benefits and consequences before filing for bankruptcy. Every situation is different and needs a unique solution. It is advised to ask for help or consult some professional who can analyse your debts and then provide you with the best solution possible.
Feel free to contact us, our experts would love to hear from you. We will make sure to provide you with the best strategies to deal with bankruptcy.

B M Peachey

B M Peachey, has over 15 years of experience investing in property and the stock market, in both New Zealand and Australia. She has a post-graduate degree, with qualifications in Finance and Mortgage Broking and in Accounting and Bookkeeping. She is passionate about ensuring people have access to credible, reliable, and easy to understand information to help them get in control of the life they REALLY want to live.

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    Disclaimer: The information in this article is general in nature as it has been prepared without taking account of your specific objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.