The Law Handbook 2024

Chapter 5.3: Understanding bankruptcy 375 Therefore, a creditor who has a mortgage etc. cannot take action against a debtor simply because the debtor bankrupts. The trustee’s right to sell the security property The trustee can sell a security property whether or not the bankrupt has defaulted in payments. The trustee can sell a property if there is sufficient equity to make it commercially practicable. If sold, the proceeds of sale pay the secured creditor and the balance goes to the bankrupt estate. Security over furniture and other household goods Some fringe lenders have taken mortgages over people’s essential household goods to secure payment of debts. The threat to repossess goods is then used to force payment of the debt even after bankruptcy. These types of mortgages are void under the National Credit Code (s 50) and are known as ‘blackmail securities’. This type of mortgage could breach laws relating to unfair contract terms or unconscionable conduct (see Chapter 7.2: Consumer protection laws). Seek advice from an organisation such as ASIC, the Consumer Action Law Centre or Consumer Affairs Victoria (see ‘Contacts’ at the end of this chapter) if this is happening to you or your clients. Mortgages over houses and land The trustee has no power to prevent the sale of a house by the mortgagee if the bankrupt is in default under the mortgage. If the bankrupt is not in default, the mortgagee will not be able to take action against the debtor. In this case, the bankrupt might be able to stay in the house and continue making payments, but the property will vest with the trustee and could be sold years later if the bankrupt’s equity increases sufficiently that it would be viable for the trustee to sell the house and land (see ‘Houses and land’, above). Guaranteed debts The bankrupt as guarantor A debtor who has guaranteed someone else’s debt is released from any liability under the guarantee after bankruptcy. Such a debt should be included on the bankrupt’s statement of affairs as a debt. The bankrupt’s friend or relative as guarantor A bankrupt will be released from debts that have been guaranteed by someone else but the guarantor will not be released from the debt. The guarantor, or the person guaranteeing the bankrupt’s debt, is usually a friend or relative. Once the bankrupt stops paying the debt, the creditor usually takes action against the friend or relative under the guarantee. Therefore, many bankrupts want to continue paying such debts. The Bankruptcy Act does not prevent the bankrupt from doing this. Debts to friends or relatives Debts owed to friends and relatives usually result from a verbal not written contract. These debts should be shown on the statement of affairs as unsecured debts regardless of whether or not the contract is in writing. A bankrupt can, if they wish, continue to pay such debts after the date of bankruptcy. Unliquidated damages Unliquidated damages debts are not wiped by bankruptcy (ss 82, 153 Bankruptcy Act). This is a technical area of law that affects many consumer debtors, especially those who have car accident debts. Damages are ‘unliquidated’ if a court has not assessed them or if the parties involved have not agreed on the amount of damages. Under section 82(2), ‘demands in the nature of unliquidated damages’ are not provable in bankruptcy unless they arise out of a breach of contract, promise or breach of trust. A discharged bankrupt is only released from debts that are provable in the bankruptcy (s 153 Bankruptcy Act) and therefore will not be released from debts arising from unliquidated damages. If a debtor has a property damage debt and legal action for the debt appears unlikely in the short term, the debtor should consider whether: 1 it is worth bankrupting on this debt – if this is the only debt it may not be worth bankrupting; 2 they are able to wait until the other party gets a court judgment against them; or