11.3.2.6 Anomalous situations

Anomalous situations

Bankruptcy

When a person becomes bankrupt management of their assets and debts passes to the Official Receiver in Bankruptcy or Trustee. The person’s assets may be used to repay debts. The bankruptcy of a client affects DVA’s methods of recovery. Any debt incurred before the date of the bankruptcy is subject to restrictions on its recovery under the Bankruptcy Act 1966.

If a client becomes bankrupt, DVA should not continue to recover an overpayment via deductions from the client’s payment, because a bankrupt client would not have the capacity to make debt repayments. Deductions should only continue if approved by the Trustee. In addition, there are payments such as compensation payments which cannot be garnished from a bankrupt.

In the event that DVA has commenced a debt recovery action, the recovery action and any contact with the client should cease as soon as DVA becomes aware of the bankruptcy. Any civil action being taken against a bankrupt client should also be reviewed in this circumstance.

Under subsection 153(1) of the Bankruptcy Act, the effect of a discharged bankruptcy proceeding is that the person is released from all debts provable in relation to any proceedings under the Act. This means that the debt cannot be pursued after the discharge by any of the creditors. This is particularly the case when the overpayment occurred before the person was declared a bankrupt.  Subsection 153(2) provides a list of circumstances in which a bankrupt cannot be discharged from their debt. For example, where the overpayment occurred by fraud, and prosecution proceedings are to be commenced or have commenced.

Consult the General Counsel Division to discuss what to do when a client’s business has gone into administration and the implications of this for the recovery of payments.

A deceased client

When a client has died and there is an outstanding overpayment, a formal claim must be made on the estate. The deceased debtor’s family (including the client’s spouse or partner) are not personally liable for the debt and a family member should only be approached regarding the debt if they are the executor or trustee. Family members who are not the executor/trustee should not be contacted regarding the debt or asked to repay the debt.

If an overpayment has been raised after a client’s death but before the estate has been distributed, action can be taken to recover the debt. Action can also be continued against a deceased client’s estate to recover an existing departmental debt. The statute of limitations or time limits imposed by state and territory legislation are, however, applicable.

Whether action can be taken is contingent on whether there are identifiable traceable assets. An identifiable traceable asset is an asset that was once owned by the deceased but has passed to the beneficiaries by virtue of the deceased’s will or local intestacy rules (for example, shares, bank accounts, and real or personal property). Superannuation, insurance and compensation are not traceable assets.

The executor/trustee of the estate must be contacted in order for DVA to lodge a claim for the repayment of the debt. If the representative is not known, the Public Trustee, the Probate Office or the Official Trustee should be contacted for details of who is handling the estate. Alternatively, you can write to the executor of the estate at the deceased client’s last known address. 

When a client dies during a period in which it would have been open for them to apply for review of a decision relating to the debt, or if a formal claim on the estate serves as the first notification of the debt, the claim must provide details about rights of review.

If the trustee/executor is notified of a client’s debt after the estate has been distributed, the only remaining debt recovery option available to DVA is for a beneficiary of the estate (such as a family member) to make a voluntary repayment.  The debt should normally be written off for 6 months to allow for a possible voluntary payment. If a voluntary repayment is not forthcoming, a waiver should be considered. The lack of capacity to recover is relevant to the exercise of the waiver discretion. It may be the case that a waiver is appropriate in the first instance, having regard to the circumstances of the individual case.

If there is no estate and no surviving family members, such that there is no prospect of receiving a voluntary repayment, this will be relevant to the waiver discretion such that the debt would normally be waived.