Section 82 of the Bankruptcy Act deals with those debts which are provable in bankruptcy. As would be expected, the debts which are claimable include those that might be thought of normal debts incurred by an individual in ordinary living or in the usual conduct of his or her business.

But not all debts are provable in bankruptcy; in previous editions of Worrells e Updates we have dealt with a number of the non provable debts including fines, HECS and certain child support debts. The subject of this article is debts relating to personal injury claims involving an individual.

The relevant sub section of the Bankruptcy Act is Section 82(2) which provides:-

Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.

If a claim is made against an individual for personal injuries, at least until any judgment is awarded, it is an unliquidated damages claim. The claim itself is, by its nature, related neither to a contract, promise or breach of trust. As a result a personal injuries claim against an individual in such circumstances is not a provable debt under the Bankruptcy Act. Of course, if the debt is not provable, it is not released on the discharge of the bankrupt.

In the past we have seen many instances where a debtor’s petition is lodged in the mistaken belief that this course of action will allow the debtor to avoid ongoing liability. Clearly this is not the case and professional advisors should be aware of this.

For a personal injuries claim to be caught by the bankruptcy the claim has to be liquidated, which effectively means the claiming party needs to have obtained judgment prior to the start of the bankruptcy. Once judgment is obtained the debt is quantified and becomes a provable debt in the bankrupt estate.

As an aside, we are not aware why the policy of the Bankruptcy Act should prohibit unliquidated personal injury claims from sharing in a distribution. In other words, what is it about unliquidated personal injury claims that require this differential treatment? Input from others is invited.

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