What happens to your HECS – HELP (Higher Education Loan Program) debt entering Bankruptcy
For many, the idea that a HECS - HELP debt can be extinguished or compromised via bankruptcy is a common misconception. Understanding how HECS - HELP is treated under bankruptcy and in accordance with the Bankruptcy Act (1966) (Act) is critical for anyone considering bankruptcy.
What is HECS – HELP?
HECS is a government scheme designed to help students finance their higher education. The loan is repaid through the tax system, with repayments triggered when a person’s income reaches a certain threshold. Unlike typical loans, HECS debts are indexed annually, meaning they increase over time based on inflation (usually tied to the Consumer Price Index (CPI)).
Are HECS - HELP Debts Discharged in Bankruptcy?
When a person declares bankruptcy, the typical unsecured debts (credit card balances, personal loans, etc) are either compromised or extinguished.
However, under the Act, certain debts are classified as "excluded" from discharge during bankruptcy. HECS - HELP debts fall under the category of "excluded debts" under section 82(1)(a) of the Act. This means that, unlike typical unsecured debts, HECS - HELP debts are not extinguished by bankruptcy. Other excluded debts include fines imposed by the Court (such as speeding fines) and other government-related debts.
The key reason for this is that HECS - HELP debts are a form of government assistance designed to support education and are consistent with the policy intention that people repay these loans when they are financially able to do so. The exclusion also seeks to protect the integrity of the education loan system (after all, the government doesn’t want students incurring HECS - HELP debts, just to voluntarily enter into bankruptcy to avoid paying it back!).
How Bankruptcy Affects Repayment of HECS - HELP Debts
While HECS - HELP debts are not discharged in bankruptcy, there are several important things to consider:
Income Thresholds: Repayments on HECS - HELP debts are income-driven, meaning they are only required once your annual income exceeds a specific threshold. During bankruptcy, if your income is below the repayment threshold, you may not be required to make repayments to HECS - HELP.
Post-Bankruptcy Repayments: Once you emerge from bankruptcy and your income surpasses the repayment threshold, you may be required to begin repaying your HECS - HELP debt again. These repayments will be automatically deducted from your employer or payable to the Australian Taxation Office (ATO) once you have submitted your personal income tax return.
Impact on Bankruptcy Duration: A key advantage of bankruptcy is that it offers relief from other forms of debt, which may make it easier for individuals to focus on repaying their HECS – HELP debt once they are financially stable. While HECS - HELP debts can’t be written off, eliminating other debts may give individuals the breathing room they need.
Conclusion
While bankruptcy offers a fresh start for many debts, it doesn’t provide a get-out-of-jail-free card for HECS – HELP loans. The key takeaway is that while you won’t have to make repayments during bankruptcy if your income is below the required threshold, HECS – HELP debts continue to exist. The debt will need to be repaid once you are earning above the repayment threshold, and it will remain protected under the system until that point.
HECS - HELP debts are excluded from bankruptcy discharge, meaning they remain a financial obligation that must be repaid after the bankruptcy period ends.
Before considering bankruptcy, it's essential to consider all the options and understand the long-term impacts on your financial situation.
If you are facing financial distress and unsure about how bankruptcy will affect your HECS - HELP debt, getting professional advice is crucial. At Worrells, we are here to help guide you through this complex process, ensuring you understand all the implications of your decisions.
