What Happens to Your Debts in Bankruptcy?

Bankruptcy is a way to get much-needed relief from your debts, but it has some consequences that are important to understand. The more you understand these consequences, the better equipped you’ll be to make a decision about the best debt solution for you.

Bankruptcy refers to the legal process in which you’re declared unable to pay your debts. While this releases you from most debts and provides relief, it lasts several years. Though bankruptcy is a useful, effective way to manage your debts, it’s seen as a final resort. It’s not a decision to be made lightly, and it can have long-term consequences.

With that in mind, what happens to your debts in bankruptcy? This option might have serious impacts on your ability to get credit, travel overseas, and gain types of employment. In this guide, we’ll delve deeper into what happens to your debts in bankruptcy and what it means for your future.

What Is Bankruptcy?

First, it’s important to understand the definition of bankruptcy. There are many different debt solutions to choose from, depending on your situation. Bankruptcy is the most extreme option, though it’s sometimes a good fit.

This is the formal process of being declared unable to pay your debts. This means you won’t have to pay most of the debts you owe, and debt collectors can no longer legally contact you. The process lasts 3 years, and a trustee is appointed to look after your affairs.

While it’s a relief to no longer worry about your debts, there are consequences. When you become bankrupt, the following is true:

  • You will stay bankrupt for 3 years
  • This remains on your credit report for 5 years
  • Your name is listed on the National Personal Insolvency Index forever
  • You must ask for permission to travel overseas
  • You cannot work as a director of a company without court permission
  • You can’t work in certain trades

In addition, not everyone is eligible for bankruptcy. You can only apply for bankruptcy if you meet two specific requirements:

  • You’re unable to pay your debts when they’re due
  • You’re present in Australia or have a residential/business connection to Australia

There are a lot of misconceptions about bankruptcy. Most believe you need to have a certain amount of debt to qualify. In reality, there is no minimum or maximum amount of debt you need to qualify for this option. There is also no cost to apply. However, there are other options for managing your debt that are less challenging long-term, such as a debt agreement.

Do All Your Debts Disappear?

Another common misconception about bankruptcy is that it covers all debts. While it does cover most debts, it’s not that black-and-white. When you enter bankruptcy, you will still need to pay some debts. Bankruptcy covers most unsecured debts. This includes things like credit cards, unsecured personal loans, unpaid rent, and medical fees.

However, bankruptcy doesn’t cover all of your debts. You might have to pay:

  • Court penalties
  • Child support
  • HECS & HELP debts
  • New debts
  • Unliquidated debts

You will still be liable for these debts above after applying for bankruptcy. Luckily, you can still contact your lenders to talk about different payment options. You are not required to pay anything in full right away, and your creditors are typically willing to work with you. Your trustee will help you through this process.

Additionally, any secured debts can be taken by your creditors or trustees if you’re not able to continue making payments. This includes your mortgage (home), car loan (car), or belongings. If you have any joint debts, these will fall solely upon the other person. It’s important to consider all of these possibilities before entering bankruptcy.

Is Bankruptcy Right for You?

With that in mind, is bankruptcy right for you? If you’re struggling to pay your debts on time, you might assume bankruptcy is the natural next step. While filing bankruptcy will stop collection calls, it’s best looked at as a last resort.

Before you choose bankruptcy, consider your options. Some debts, as explained above, will not be wiped out. In addition, you might risk other property, like your home or car. Bankruptcy can greatly affect your personal life if you’re not careful, so it’s not a decision to be entered lightly.

When in doubt, seek professional advice. A debt professional can walk you through the options for your specific situation. From debt negotiation to informal arrangements, there are a lot of alternatives that suit a variety of situations.

Consult with our experts

Bankruptcy undoubtedly helps many feel freedom from their debts. Nobody should have to suffer from long-term debt and the stress it brings. Bankruptcy is a way out for many, ending these debts once and for all. Though most debt is no longer burdening those who declare bankruptcy, there are other sides of the story to consider.

Before choosing bankruptcy, talk with the professionals at Debt Busters on 1300 3683 22. With over 15 years of experience working with Aussies of all backgrounds, we’re here to help. Contact our team today to start your own debt plan.


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Debt Busters is an Australian owned business which was founded in 2005 - since then we have been able to help thousands regain financial control.

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