When a debtor is a bankrupt

7.13.2.1 — When a debtor becomes bankrupt, any debt incurred before the date of bankruptcy is subject to restrictions on its recovery under the Bankruptcy Act 1966. This will affect the Department's methods of recovery as follows:

7.13.2.2Limitations
Where the amount which a debtor owes to the Commonwealth is an 'overpayment' as described in paragraph 205(2) VEA, that amount can continue to be recovered via deductions from the debtor's pension, even after the debtor becomes bankrupt.

7.13.2.3Cash recovery
Negotiations should not be conducted to recover a debt from a bankrupt debtor by lump sum repayment or cash instalment. This would place the Department in a preferred position, and it is likely that the Official Receiver or trustee would require that the money be returned.

7.13.2.4Payment notices issued prior to bankruptcy
Where a notice has been issued under section 205A VEA prior to the date when a debtor became bankrupt, in respect of a debt which was due prior to the date of bankruptcy, the Department is still entitled to rely on that notice as a means of recovering that debt. However, where any doubt exists regarding the Department's power to rely on a section 205A notice in such circumstances, it is recommended that advice be sought from the Department's Legal Services Group.

7.13.2.5Payment notices after bankruptcy
The Department has no power to issue a notice under section 205A VEA at a point in time after a debtor has become bankrupt. Under no circumstances should a notice under section 205A VEA be issued during the period of the debtor's bankruptcy.

7.13.2.6Civil action
Any civil action being taken against a bankrupt debtor should be discontinued as soon as the Department is aware of the bankruptcy.

7.13.2.7Recovery on behalf of other departments
Recovery on behalf of Centrelink or DEST can continue after a debtor has become bankrupt, as long as recovery is undertaken via deductions from pension in relation to an amount which qualifies as an 'overpayment' for the purposes of paragraph 205(2) (a) VEA. Payment notices issued under section 205A VEA on behalf of Centrelink and DEST, can also be used to recover a debt after a debtor has become bankrupt, as long as the notices were issued prior to the date of bankruptcy in relation to a debt which was due prior to that date.

7.13.2.8Proof of debt
The Department may be requested to lodge a 'Proof of Debt' with the Official Receiver or private trustee. This form lists the debt as a liability owed by the estate and, once proved, the Department becomes eligible to share in a distribution from the estate. A 'Proof of Debt' should be lodged where:

• the debt will become irrecoverable on the discharge of bankruptcy, i.e. the debt did not arise under paragraph 205(1) (a) VEA. (Refer to paragraph 7.13.4 Affect on debts after discharge in this chapter);
• it would assist recovery, i.e. the dividend from the estate is likely to be greater than the amount that could be recovered by limitations to pension or payment notice recovery from salary/wages for the period of the bankruptcy.

7.13.2.9 — Approval under Finance Regulation 34 from the Department of Finance and Administration (DOFA) no longer needs to be obtained before lodging a 'Proof of Debt'.

Bankruptcy action by the Department

7.13.2.10 — Bankrupting a debtor by the Department should only be considered where there is a strong possibility that a tangible amount can be recovered. As substantial costs are involved, the cost effectiveness of such action should be considered. If bankruptcy action is considered appropriate, the case should be referred to the AGS.

7.13.2.11 — The AGS will, on formal instructions from DVA, issue a bankruptcy notice to the debtor. This notice will warn that, unless arrangements to repay the debt are made within 14 days, an application will be made to the Federal Court of Australia to have him/her declared bankrupt. Failure by the debtor to comply, constitutes an 'Act of Bankruptcy'.

7.13.2.12 — The Official Receiver or private trustee may ask the Department to lodge a 'Proof of Debt'. This form lists the debt as a liability owed by the estate and, once proved, the Department becomes eligible to share in a distribution from the estate.

Priority of debts

7.13.2.13 — The Official Receiver or trustee will inform the Department of the amount that is likely to be paid on distribution of the estate. In determining this amount, DVA is given no priority over other creditors. Child support deductions (under section 50 in the Child Support (Registration & Collection) Act 1988) are given first preference over all other creditors.

7.13.2.14 — The order in which creditors are to paid is governed by section 109 in the Bankruptcy Act 1966. It should be noted that as of 1 July 1993, the Commonwealth no longer exercises the right under Income Tax Assessment Act 1936 to claim first priority for employee PAYE deductions and company dividend withholding taxes which have not been passed to the Commissioner of Taxation. Subsections 221YHZD(3), (4) and (5) and section 221YU in the Income Tax Assessment Act 1936 refer.