People often assume that bankruptcy provides a clean slate for all personal debts.
But when it comes to Commonwealth debts, particularly HECS‑HELP and tax liabilities, the rules operate very differently.
The interaction between the Bankruptcy Act, the ATO’s administrative powers, and income‑contingent repayment systems means some debts survive bankruptcy while others do not. This article unpacks how HECS‑HELP, tax debts, and tax refunds are treated once someone enters bankruptcy.
HECS‑HELP: Why bankruptcy doesn’t make it go away
The distinction between provable and non‑provable debts is fundamental to how bankruptcy operates.
Provable debts are included in the bankruptcy and are released when the bankrupt is discharged.
Non‑provable debts survive bankruptcy and remain payable afterwards.
Under s 82 of the Bankruptcy Act, certain liabilities cannot be claimed in the bankruptcy and therefore are not released upon discharge.
HECS‑HELP is an income‑contingent loan program. Unlike conventional unsecured debts, it is not provable in bankruptcy and therefore is not extinguished at discharge. The balance remains owing regardless of bankruptcy and continues to be indexed each year.
During bankruptcy:
If the bankrupt’s income is below the compulsory repayment threshold, no repayments are made.
If income later rises above the threshold (either during or after bankruptcy), the repayment system automatically recommences through the tax system.
Bankruptcy has no mechanism to compromise, reduce, or release a HECS‑HELP balance.
The loan simply pauses if the bankrupt’s income is below the threshold and resumes when it is not.
Tax debts: What survives and what doesn’t
Tax debts operate differently because the ATO acts as both creditor and administrator of the taxation system. The treatment of tax liabilities depends on when the debt arose.
Tax debts incurred before bankruptcy
Pre‑bankruptcy tax debts are generally provable debts. This means:
The ATO lodges a proof of debt like any other unsecured creditor.
The debt is included in the estate.
Upon discharge, the bankrupt is released from any unpaid balance.
Importantly, although the ATO cannot enforce collection during bankruptcy, it may still apply administrative offsets (e.g., applying available refunds to reduce the outstanding tax liability) as part of its existing statutory powers.
Tax debts incurred after bankruptcy
Tax liabilities that arise after the date of bankruptcy are not provable. They remain fully payable by the bankrupt and can be pursued during and after the bankruptcy period.
This often catches people by surprise. Bankruptcy only relieves debts up to the date the person becomes bankrupt. Any new tax obligations, for example, from business activity after bankruptcy, are treated as fresh liabilities.
How tax refunds are treated during bankruptcy
Tax refunds operate differently from tax debts because they represent an asset or entitlement owed to the taxpayer. Their treatment depends on the period to which the refund relates, not the date the refund is received.
Refunds relating to pre‑bankruptcy income
If a refund relates to an income period before bankruptcy:
The refund is considered an asset of the bankrupt estate.
The bankruptcy trustee is entitled to the refund, even if the assessment is issued after the date of bankruptcy.
The ATO may also apply the refund against outstanding pre‑bankruptcy tax debts under its own statutory powers.
Refunds relating to post‑bankruptcy income
If the refund relates to a period after the date of bankruptcy:
The refund belongs to the bankrupt personally.
They will usually receive the refund unless there is a post‑bankruptcy tax debt that the ATO is entitled to offset.
Mixed‑year assessments
If a person becomes bankrupt part‑way through a financial year:
The refund must be apportioned.
Only the portion relating to the pre‑bankruptcy period vests in the trustee.
The remainder is the bankrupt’s personal entitlement.
Key takeaways
HECS‑HELP survives bankruptcy entirely. Compulsory repayments are required whenever income exceeds the threshold, regardless of whether you are/have been bankrupt or not.
Pre‑bankruptcy tax debts are provable and generally wiped at discharge.
Post‑bankruptcy tax debts remain payable and can be enforced.
Tax refunds for pre‑bankruptcy periods form part of the bankrupt estate and may be applied against pre‑bankruptcy tax debts.
Tax refunds for post‑bankruptcy periods belong to the individual, subject to ATO offset rules and possible income‑contribution implications.
Worrells can help
If you’re unsure how bankruptcy may affect your HECS-HELP debt, tax debt, or whether bankruptcy is the right pathway for your situation, our team at Worrells is here to help. Contact your local Worrells Principal to explore your situation and discover the options available to help you move forward with confidence.
