Is it true that you don’t need to pay any debt once you become bankrupt

It’s a common misconception that you don’t need to pay any debt once you become bankrupt. While bankruptcy can discharge many of your debts, meaning you are no longer legally required to pay them, there are important nuances and exceptions to understand.

What Happens to Your Debts in Bankruptcy?

1. Dischargeable Debts: Most unsecured debts, such as credit card debt, personal loans, and medical bills, can be discharged in bankruptcy. Once these debts are discharged, you are no longer legally obligated to repay them.
2. Non-Dischargeable Debts: Certain debts are not discharged through bankruptcy. These typically include:
   • Child Support and Alimony: You are still required to pay any child support or alimony obligations.
   • Student Loans: In many cases, student loans are not dischargeable unless you can prove undue hardship, which is difficult to establish.
   • Tax Debts: Some tax obligations may not be discharged.
   • Fines and Penalties: Government fines and penalties, including court-ordered payments, generally remain payable.
   • Secured Debts: If you have secured debts, such as a mortgage or car loan, you may need to continue making payments if you want to keep the collateral (e.g., your house or car). If you stop making payments, the lender can repossess the collateral.

Income Contributions

If you earn above a certain threshold, you may be required to make income contributions to your bankruptcy estate. This means that part of your income will go towards paying off your debts for a specified period, typically three years in Australia.

Asset Liquidation

In bankruptcy, your non-exempt assets may be sold (liquidated) by the trustee to repay your creditors. Exempt assets, which vary by jurisdiction, are items you are allowed to keep, such as essential household items and, in some cases, a modest car.

Life After Bankruptcy

While bankruptcy can provide a fresh start by discharging many debts, it comes with significant consequences:

• Credit Impact: Bankruptcy stays on your credit report for several years (five years in Australia), making it difficult to obtain new credit, loans, or even rental agreements.
• Financial Restrictions: You may face restrictions on managing your finances and accessing credit during and after bankruptcy.
• Public Record: Bankruptcy becomes a matter of public record, which can affect your reputation and opportunities.

Bankruptcy can provide relief from overwhelming debt, but it doesn’t absolve all financial responsibilities. Understanding which debts are discharged and the obligations that remain is crucial for anyone considering bankruptcy. It’s essential to seek professional advice to navigate the complexities of the process and make informed decisions about your financial future.