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Legally Irrecoverable Loans or Debts

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Assets assessment of legally irrecoverable loan or debt

A loan or debt that is legally irrecoverable is a disregarded asset, because it has no value.

Legally irrecoverable

A loan or debt is legally irrecoverable solely if it has not been repaid in full or in part according to the terms of the loan agreement and within the time frame specified in the statute of limitations of the relevant State. A loan or debt is not legally irrecoverable solely because there is no documentation of the loan or debt agreement.

The fact that a debtor is unable to repay a loan or debt does not automatically mean the loan or debt is irrecoverable.

If a debtor is able to repay a loan or debt but is unwilling or refuses to do so, the loan or debt is still legally recoverable and continues to be assessed as an asset.    

Statute of limitations

The Statutes of Limitations specify the date after which the loan or debt is legally considered irrecoverable. The date at which the limitations apply varies, depending on how the loan or debt was to be repaid:

If the loan or debt is...

then the Statute of Limitations operates from...

repayable on demand

the later of:

- the date of demand, or

- the date of the last repayment.

subject to regular repayments or repayments at will,

the later of:

  • the date of the loan, or
  • the date of the last repayment.

repayable on a specific date

the specific date that repayment is due.

Debtor as an individual

The following table shows whether a loan is an assessable asset for individual debtors.    

If the individual debtor...

then the loan...

and...

is an undischarged bankrupt,

may be irrecoverable or may be partially recoverable,

if the loan is:

  • irrecoverable it is an exempt disregarded asset.
  • partially recoverable it is an assessable asset and the assessable amount is the amount recoverable.
  • is a salary or wage earner with saleable assets, and
  • has little scope for large future increases in either assets or income

is partially recoverable,

  • an assessable asset, and
  • the assessable amount is the amount recoverable.
  • is self employed, and
  • is operating at a profit

is recoverable

an assessable asset.

  • is self employed, and
  • is operating at a loss or winding up the business

may be irrecoverable or partially recoverable

If the loan is:

  • irrecoverable, it is a disregarded asset.
  • partially recoverable, it is an assessable asset. The assessable amount is the amount recoverable.
Debtor as a trust

If the trust

then the loan is...

and...

  • is continuing to trade, and
  • is solvent,

recoverable

an assessable asset.

  • has ceased trading, and
  • is not producing gross income, and
  • has saleable assets

possibly recoverable

may be an assessable asset.

  • is being wound up, and
  • has insufficient assets to repay the loan in full

partially recoverable

an assessable asset.


loan or debt is legally irrecoverable solely if it has not been repaid in full or in part according to the terms of the loan agreement and within the time frame specified in the statute of limitations of the relevant State. A loan or debt is not legally irrecoverable solely because there is no documentation of the loan or debt agreement. The fact that a debtor is unable to repay a loan or debt does not automatically mean the loan or debt is irrecoverable.

 

 

A disregarded asset is one that is not included when calculating the value of a person's assets under the assets test, irrespective of it's value.

 

For a full legislative definition see Section 52 of the VEA.

 

 

loan or debt is legally irrecoverable solely if it has not been repaid in full or in part according to the terms of the loan agreement and within the time frame specified in the statute of limitations of the relevant State. A loan or debt is not legally irrecoverable solely because there is no documentation of the loan or debt agreement. The fact that a debtor is unable to repay a loan or debt does not automatically mean the loan or debt is irrecoverable.