7.13.1.1 — A debtor may become bankrupt by:
7.13.1.2 — On becoming bankrupt, all responsibility for the bankrupt's assets and debts passes to the Official Receiver in Bankruptcy or to a private bankruptcy trustee.
7.13.1.3 — Subject to section 149 in the Bankruptcy Act 1966, a bankrupt will be discharged three (3) years after the date of being declared bankrupt. The exceptions are where:
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) [4] 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 [4] 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 [4] VEA at a point in time after a debtor has become bankrupt. Under no circumstances should a notice under section 205A [4] 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) [4] VEA. Payment notices issued under section 205A [4] 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:
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'.
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.
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.
7.13.3.1 — When an overpayment occurs after a person has been declared bankrupt, the new debt does not form a part of any bankruptcy action currently in force. However, recovery of such debts can only be pursued through deductions from a person's pension in relation to amounts which qualify as 'overpayments' for the purposes of paragraph 205(2) (a) [4] VEA. Recovery of such debts should not be pursued via payment notice under section 205A [4] VEA until such time as the debtor has been discharged from bankruptcy. Staff seeking to recover from assets (such as FI accounts) should, check with the Insolvency Trustee Service of Australia (ITSA) first to ensure that the asset is not part of the bankrupt estate.
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7.13.3.2 — In cases where limitations are in place or a payment notice has been issued in order to recover a debt, any debt that occurs after bankruptcy should be recovered after the first debt has been finalised.
7.13.3.3 — Where the date of bankruptcy falls during an overpayment period, the total overpayment must be divided into two parts, i.e. two overpaid periods exist. Two overpayments must be raised, one prior to, and one after, the date of bankruptcy.
Insolvency Trustee Service of Australia (ITSA) website
[7]http://www.itsa.gov.au [8]
7.13.4.1 — After the bankrupt has been discharged from bankruptcy, the important consideration is how the debt arose. If the debt is generally attributable to fraud (paragraph 205(1) (a) [4] VEA refers) as described in paragraph 153(2) (b) of the Bankruptcy Act 1966, the Department can continue to seek recovery after discharge via payment notices issued under section 205A [4] VEA.
7.13.4.2 — Paragraph 153(2) (b) of the Bankruptcy Act 1966 states that the discharge of a bankrupt from a bankruptcy does not release the bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust to which he or she was a party or a debt of which he or she has obtained forbearance by fraud. In these cases, a review of the debt should be conducted and appropriate recovery action taken. If it is considered that the debt in question arose due to fraud on the part of the debtor, the case should be referred to the Legal Services Group, National Office for advice on whether the debt may still be pursued.
Note:For further information in determining whether fraud has occurred refer to this manual's Section 5.9 Fraud Investigations.
7.13.4.3 — It is also important to remember that debts arising due to fraud may be pursued during the bankruptcy period via deductions from pension, as long as the amount owing is an overpayment for the purposes of paragraph 205(2) (a) [4] VEA.
7.13.4.4 — Where a debt is attributable to fraud and a partial dividend has been paid from the estate, recovery action on the balance outstanding can continue after discharge.
7.13.4.5 — Where a debt is not attributable to fraud and the dividend is insufficient to cover the whole debt, any balance remaining is irrecoverable at law and should be written off after the bankrupt is discharged.
7.13.4.6 — If having read this section, you are uncertain about the Department's powers to recover money in any particular bankruptcy situation, you should, after consultation with your manager, seek legal advice from the Legal Services Group, National Office.
Links
[1] https://clik.dva.gov.au/user/login?destination=comment/reply/24098%23comment-form
[2] https://clik.dva.gov.au/user/login?destination=comment/reply/24301%23comment-form
[3] https://clik.dva.gov.au/user/login?destination=comment/reply/24319%23comment-form
[4] https://clik.dva.gov.au/service-eligibility-assistant-updates/all-determinations-order-date-signed-oldest-most-recent/determinations-under-vea
[5] https://clik.dva.gov.au/user/login?destination=comment/reply/24378%23comment-form
[6] https://clik.dva.gov.au/book/export/html/24098#tgt-csref_manual_ftn25
[7] http://www.itsa.gov.au/
[8] http://www.itsa.gov.au
[9] https://clik.dva.gov.au/book/export/html/24098#ref-csref_manual_ftn25
[10] https://clik.dva.gov.au/user/login?destination=comment/reply/24150%23comment-form