Financial hardship can affect anyone. Unexpected life events such as job loss, illness, relationship breakdown, or business failure can lead to mounting debts that become difficult to manage. When debts grow beyond what someone can reasonably repay, bankruptcy may become an option to regain control of their financial situation.
In Australia, bankruptcy is a legal process designed to provide individuals with relief from overwhelming debt while ensuring creditors are treated fairly. However, many people are unsure about which debts can actually be included in bankruptcy and which obligations still remain.
Understanding the difference is essential before making any decisions. It’s also important to consider how related legal matters—such as property settlements or child support—may intersect with financial distress. In some circumstances, professional advice on matters involving bankruptcy and family law can help clarify how financial obligations are handled during separation or divorce.
This guide explains the types of debts that can typically be included in bankruptcy in Australia, along with those that cannot.
How Bankruptcy Works in Australia
In Australia, personal bankruptcy is governed by the Bankruptcy Act 1966 and administered by the Australian Financial Security Authority (AFSA).
When a person becomes bankrupt, a trustee is appointed to manage their financial affairs. The trustee assesses assets, investigates financial records, and distributes available funds to creditors where possible.
Most unsecured debts are released once the bankruptcy period ends, which typically lasts three years and one day from the date the bankruptcy begins.
However, not all debts are treated equally under bankruptcy law.
Debts That Can Be Included in Bankruptcy
A wide range of personal debts can be included in bankruptcy proceedings. These debts are usually unsecured, meaning they are not backed by a specific asset.
Credit Card Debt
Credit card balances are among the most common debts included in bankruptcy. If someone has accumulated significant credit card debt across multiple cards and cannot meet repayments, these debts are generally covered.
Once bankruptcy begins, creditors must stop pursuing payment through legal action or collection activities.
Personal Loans
Unsecured personal loans from banks, lenders, or financial institutions are typically included in bankruptcy. These may include:
- Unsecured bank loans
- Payday loans
- Personal lines of credit
- Peer-to-peer lending debts
These debts are generally discharged once the bankruptcy period ends.
Utility Bills
Outstanding household bills such as electricity, gas, water, and telecommunications charges can also be included in bankruptcy if they remain unpaid.
Utility providers must cease collection activity once bankruptcy begins.
Medical Bills
Medical debts that have accumulated due to hospital treatment, specialist services, or other healthcare costs can also be included.
These debts often arise unexpectedly and can become significant, making bankruptcy a possible path toward financial relief.
Tax Debts
Certain tax debts owed to the Australian Taxation Office (ATO) can be included in bankruptcy.
This may include:
- Income tax debt
- GST debt for sole traders
- Business-related tax liabilities
However, penalties involving fraud or serious tax offences may be treated differently.
Business Debts
If a person operates as a sole trader, business debts are considered personal debts. This means that many business-related liabilities may be included in bankruptcy, such as:
- Supplier invoices
- Business loans
- Lease obligations
- Unpaid trade accounts
Because sole traders are personally responsible for their business finances, these debts can fall within the scope of bankruptcy.
Debts That Cannot Be Included in Bankruptcy
While bankruptcy provides relief from many financial obligations, certain debts cannot be wiped out through the process.
These debts remain payable even during and after bankruptcy.
Court-Imposed Fines and Penalties
Fines issued by courts or government authorities cannot be discharged through bankruptcy.
Examples include:
- Traffic fines
- Court penalties
- Criminal fines
- Local council penalties
These debts must still be paid regardless of bankruptcy status.
Child Support Payments
Child support obligations cannot be eliminated through bankruptcy. These payments are considered a legal responsibility to support a child and remain enforceable.
The Child Support Agency can continue to collect payments even while someone is bankrupt.
HECS-HELP and Student Loans
Government-funded student loans, including HECS-HELP or other HELP debts, are not released through bankruptcy.
These debts remain with the borrower and must be repaid through the Australian tax system once income reaches the relevant threshold.
Compensation Orders
If a court orders someone to pay compensation for injury or damages, that debt typically cannot be included in bankruptcy.
This may apply to compensation resulting from:
- Personal injury claims
- Criminal conduct
- Workplace incidents
The obligation to pay compensation remains enforceable.
Certain Family Law Debts
Some debts arising from family law matters—such as maintenance obligations or court-ordered financial settlements—may not be fully discharged in bankruptcy.
Because family law and bankruptcy laws sometimes intersect in complex ways, legal advice is often necessary to understand how specific obligations are treated.
What Happens to Secured Debts?
Secured debts are loans tied to an asset, such as a home or car.
Examples include:
- Home mortgages
- Car loans
- Secured personal loans
Bankruptcy does not automatically remove these debts. Instead, the lender may repossess the secured asset if repayments are not maintained.
For instance, if someone stops paying their car loan, the lender may repossess and sell the vehicle to recover the outstanding balance.
If the sale does not fully cover the loan, the remaining shortfall may become an unsecured debt included in the bankruptcy.
How Bankruptcy Affects Your Financial Future
Although bankruptcy can provide relief from overwhelming debt, it also has long-term consequences.
Some potential impacts include:
- Bankruptcy remains on your credit report for several years
- Difficulty obtaining loans or credit
- Restrictions on overseas travel during the bankruptcy period
- Limitations on managing or directing a company
For many individuals, however, bankruptcy can also provide an opportunity to reset financially and rebuild over time.
Alternatives to Bankruptcy
Before declaring bankruptcy, it may be worth exploring other options that could help resolve financial difficulties.
Possible alternatives include:
- Debt agreements
- Personal insolvency agreements
- Negotiating payment arrangements with creditors
- Financial counselling services
These alternatives may allow individuals to repay part of their debts while avoiding the broader consequences of bankruptcy.
Seeking Legal and Financial Advice
Because bankruptcy affects many areas of a person’s financial life, seeking professional advice is highly recommended before proceeding.
Legal professionals, financial counsellors, and insolvency experts can help assess whether bankruptcy is the best option based on an individual’s specific circumstances.
Understanding which debts can be included—and which remain enforceable—can help people make informed decisions and take meaningful steps toward long-term financial stability.