With many companies taking up the small business restructuring regime to compromise and restructure debts, it is worth remembering that individuals also have formal ways to compromise personal debts.
As the ATO continues to ramp up recovery action and personal exposure from Director Penalty Notices and creditors relying on personal guarantees to collect unpaid bills, many people are looking for structured ways to settle debts and move forward.
This article outlines two key pathways available under the Bankruptcy Act:
Part X Personal Insolvency Agreements (PIAs) – a pre-bankruptcy alternative that allows debtors to reach a binding settlement with creditors without becoming bankrupt.
Section 73 Compositions – available to individuals who are already bankrupt and wish to compromise their debts by obtaining creditor approval.
The right path depends on the debtor’s financial position, available resources, and stage of the insolvency process.
Part X – Personal Insolvency Agreements (PIAs)
PIAs are gaining renewed attention as a practical and commercial alternative to bankruptcy. They provide a formal mechanism for individuals to settle debts with creditors while avoiding most restrictions imposed by Bankruptcy, reputational damage, and the three-year administration period associated with bankruptcy.
Who PIAs suit
PIAs tend to appeal to company directors, business owners, and professionals who have residual personal liabilities after a corporate failure. These often include DPN debts to the ATO, unpaid superannuation, lease or loan guarantees, or supplier accounts. Many of these individuals remain solvent in a practical sense, they may have a steady income, supportive family members, or equity in assets—but need a structured way to settle debts and draw a line under past obligations.
A proposal is put forward to creditors and is considered accepted when it receives approval from at least 75% of the total value and a majority in number of creditors.
Why PIAs appeal
For debtors, a PIA offers flexibility, confidentiality, and control. The terms can be tailored to suit individual circumstances, whether through lump-sum payments, instalments, or asset realisations and once completed, the debtor is released from provable debts. If creditors reject the proposal, the debtor simply returns to their pre-appointment position. There is no automatic bankruptcy.
For creditors, PIAs often mean faster, higher recoveries with lower administrative costs and greater cooperation from the debtor. The process avoids court involvement and can generally be implemented more efficiently than post-bankruptcy arrangements.
Cost and timing advantages of PIAs
Compared to Section 73 compositions or annulments, a PIA is typically cheaper and quicker to implement, making it an attractive early option for directors and professionals seeking a commercial resolution without the added cost and complexity of court-supervised arrangements. It’s a small-business-style restructure for individuals: practical, flexible, and commercially focused.
S 73 Composition
Should a person be declared bankrupt, they still have an opportunity to annul their bankruptcy under Section 73 of the Bankruptcy Act. This is managed by the Trustee in Bankruptcy, who, after receiving details of the proposal to creditors, calls a meeting of creditors to vote on the proposal. Like a PIA, approval requires 75% in value and a majority in the number of creditors.
If accepted, the arrangement binds all unsecured creditors and leads to the immediate annulment of the bankruptcy under Section 153C. The terms of the arrangement dictate how assets are handled and how debts are repaid. Although the bankruptcy will remain permanently recorded on the National Personal Insolvency Index as ‘annulled,’ this process provides a structured pathway to exit bankruptcy.
What is in it for creditors
For creditors, a Section 73 proposal or annulment can deliver tangible commercial benefits. By accepting a debtor’s proposal, creditors often receive higher or earlier dividends than would be available through a continued bankruptcy, particularly where the offer is supported by external funds from family, business partners, or refinancing.
The process provides certainty and finality, with an enforceable settlement that concludes creditor claims once the agreed terms are met. It also reduces administrative and legal costs, preserving more funds for distribution. Importantly, creditors retain influence through their voting rights and can negotiate repayment terms, ensuring a fair, equitable, and binding outcome across all unsecured creditors.
Drawbacks to consider
Despite its advantages, a Section 73 proposal carries several drawbacks that must be carefully considered. Approval depends entirely on creditor support, requiring a 75% majority in value and a majority in number. If the proposal is rejected, the bankruptcy continues on its ordinary course.
The process can also be costly and complex, involving trustee fees, proposal preparation, and legal advice. There is no automatic guarantee of annulment; it only takes effect once creditors approve the composition. Furthermore, both the bankruptcy and the annulment remain recorded on the NPII and credit file, which may affect future borrowing. Depending on the agreed terms, some asset realisations may still occur, limiting the debtor’s control over property during the process.
Conclusion
Personal insolvency does not have to mean financial failure.
With the right advice, individuals can use formal mechanisms such as Part X or Section 73 to settle debts and rebuild with confidence.
Both options offer structured, commercial solutions that give debtors control while delivering fair outcomes for creditors, a genuine fresh start built on cooperation, not collapse.
