The Law Handbook 2024

376 Section 5: Managing your money 3 they can replace the claim for unliquidated damages with a claim under a contract or a deed by settling the claim. Replacing a claim for unliquidated damages with a claim under a deed or contract A settlement of a damages claim in a deed, or via an exchange of letters, can liquidate a damages claim. If the exchange of letters forms a contract the creditor will then have a claim in contract. If the settlement is in a deed, the creditor will have a claim under the deed. As a claim under a contract or a deed is provable in bankruptcy, the bankrupt should then be released from the claim by the bankruptcy. WARNING Debtors should be aware that a creditor could always challenge this type of settlement and, if such a challenge were successful, the debt would then become unprovable and so not extinguished by the bankruptcy. The debtor must prove that the liquidation occurred at least the day before the hearing of the creditor’s petition or a few days before the presentation of a debtor’s petition. The debt will not be included in the bankruptcy if the liquidation occurs after the date of the bankruptcy. Maintenance and child support A bankrupt is not released from maintenance or child support debts on discharge unless the court orders otherwise (s 153(2)(c) Bankruptcy Act). Taxation Tax debts that arise before the date of the bankruptcy Tax debts from before the date of bankruptcy are provable and extinguished after bankruptcy whether or not they have been assessed by the Australian Taxation Office ( ATO ). If tax has not been assessed at the time of bankruptcy If the ATO has not issued and served a notice of assessment at the time of the bankruptcy, a tax liability is a contingent liability and is provable under s 82 Bankruptcy Act. If a debtor becomes bankrupt before the end of a financial year, the ATO can issue a tax assessment for the year to date. Once the bankrupt gets this separate assessment, they should only be liable for any tax amounts that arise after the bankruptcy. If the ATO refuses to issue a separate assessment for the year to the date of the bankruptcy, the bankrupt can consider appealing this decision. Tax debts that arise after the date of the bankruptcy Debts arising from tax periods after the date of bankruptcy are not provable. Tax refunds The ATO’s rights to take refunds The ATO can take refunds during the period of the bankruptcy if the bankrupt has a tax debt frombefore the bankruptcy. If a bankrupt is entitled to a refund, the ATO can offset the refund due during the period of the bankruptcy against tax debts, including those provable tax debts incurred prior to bankruptcy. In general, under the Bankruptcy Act, a creditor is not entitled to take any action in respect of a provable debt once a bankruptcy has commenced (s 58(3)). The stay of proceedings in s 58(3) does not apply to obligations incurred after bankruptcy has commenced. The trustee’s right to take refunds The trustee can take a refund if it relates to a year prior to the bankruptcy. If the refund relates to a year after the date of the bankruptcy, it is treated as income and the trustee takes the amount into account when calculating income contribution. Centrelink debts Except in limited circumstances, Centrelink debts are wiped by bankruptcy. Debtors should seek advice from Social Security Rights Victoria (see ‘Contacts’ at the end of this chapter), from a solicitor experienced in social security law and bankruptcy, or from a financial counsellor (see Chapter 5.4: Financial coun- selling services). Generally, the following applies: • As soon as Centrelink receives notification of a client’s bankruptcy from AFSA, it should stop