31 Jan 2016

Personal Insolvency Options


3 min

Is bankruptcy really the last resort?

Under the Bankruptcy Act 1966 two broad options are available for those in financial difficulty. One is to make a proposal to creditors to avoid bankruptcy (Part IX debt agreement or Part X personal insolvency agreement). The other option is bankruptcy itself, which is either, initiated by the debtor themselves with a debtors' petition, or a creditor with a creditors' petition.

Regularly, when a debtor and their advisors are considering which option best meets their circumstances bankruptcy is considered the last resort. In our experience this should not always be the case. All options should be given equal consideration as to which best suits the debtor's particular circumstances. Often proposing a debt agreement or personal insolvency agreement to try to avoid a bankruptcy is not in the debtor's or creditors' best interests.

The most common form of proposal using a debt agreement or personal insolvency agreement is for the debtor to make monthly payments over a period to provide some distribution to creditors. Such proposals often last up to five years or more, and can require the debtor to pay tens of thousands of dollars, usually from income. In reality, all that has happened is the debtor has replaced the creditors’ obligations and stress (before the proposal was accepted) with an obligation and stress of payments (under a proposal) with the foreboding possibility of the whole proposal being set aside—if not complied with. While such proposals may intend to provide a better return to creditors, as compared to that of being made bankrupt, frequently the reverse happens due to multiple defaults, additional costs, and diminished funds available for distribution to creditors.

In many instances these proposals are not in the debtor's best interests when considering the minimal impact of a bankruptcy. Particularly when, a debtor has no real property, a motor vehicle under the statutory limit, and most likely no or minimal income contributions to pay to the trustee over a three-year period.

Certainly, proposals to avoid bankruptcy have their place, but prior to committing to any such proposal debtors and their advisors should seek advice from a registered trustee on the actual bankruptcy implications on the debtor so whichever decision is made; it is with all the facts.

Often the implications of bankruptcy are much less than the debtor expected, and actually provides the debtor with the clean start they really need.

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