You may remember that last month I did an article on the insolvency options available to companies. This article is an overview of the personal insolvency options. If it’s a trust who is in trouble, then you need to establish who the trustee is and go from there. i.e., if the trustee is a person, refer to this article. If the trustee is a company, then refer to my earlier article.
Prefer a quick overview? Watch the short video below or continue reading for a more detailed explanation of each option.
You have three main personal insolvency options. I've called them:
Repayment Arrangements
Formal Arrangements
Bankruptcy
1. Repayment Arrangements
Informal arrangements are agreements exclusively between the individual and their creditors that don’t need to be supervised by a licensed trustee, e.g., repayment arrangement with a debt collector. They can be documented, but do not need to be. The individual can negotiate the arrangement themselves, or get some assistance to do the deal with their creditor/s.
Most informal arrangements are simple repayment arrangements with one creditor where you agree to pay the total debt a little later than when it is due, or over an extended period of time. They are negotiated over the phone or in person, and no written agreement is prepared. Informal arrangements can be used to negotiate deals with multiple creditors at the same time, where you don’t pay the total owing. It would be wise in these circumstances to have a lawyer draw up an agreement that you and the creditors sign, to avoid any confusion on the terms of the arrangement.
Informal arrangements are, however, best used when you have a minimal number of creditors (e.g., 3 to 5). If you have a larger number of creditors to contend with, it can become unwieldy to negotiating multiple deals at once.
2. Formal Arrangements (Part IX Debt Agreements & Part X Personal Insolvency Agreements)
A Part IX (part 9) Debt Agreement is a formal arrangement under the Bankruptcy Act 1966 between you and your creditors to repay some or all of your debts, and to avoid bankruptcy. There are no restrictions on the terms of the agreement with creditors, but most arrangements are repayment of your total debts over a period of time, usually between three and five years.
In order to be eligible for a debt agreement, you must:
Not have been bankrupt, entered into a debt agreement, or given an authority under Part X of the Bankruptcy Act 1966 in the last 10 years.
Have unsecured assets and unsecured liabilities of less than the prescribed amount. The current prescribed amount can be found at Indexed amounts | Australian Financial Security Authority.
Have an after-tax annual income of less than the prescribed amount.
Part X - Personal Insolvency Agreements
Like a debt agreement, a Part X (Part 10) Personal Insolvency Agreement (“PIA”) is an arrangement with your unsecured creditors to repay some or all of your debts, and to avoid bankruptcy. Secured creditors (i.e., those who can foreclose on an asset if you don’t pay) generally sit outside the arrangement. There are however no restrictions on the level of your assets and liabilities, or your income to qualify for a PIA.
The proposal can contain almost any lawful term and condition. Usually, it will provide for the payment of a lump sum that is less than the full amount owing, but can include payments over time, the sale of assets, the assignment of legal proceedings, etc.
The process is generally about one month long (but can be extended in special circumstances), culminating in a meeting of creditors where the creditors vote on whether to accept the arrangement. It is therefore important that, whatever the terms of the arrangement are, to maximise the chances of success, you offer creditors at least the same return as what would be available if you were declared bankrupt.
Unlike repayment arrangements, where you need the consent of each individual creditor to the repayment, under the Part IX and Part X processes, acceptance or rejection of the deal is based upon creditor votes. So, you can have some creditors out voting other creditors to get the arrangement accepted (or rejected).
You can read more about Part X Personal Insolvency Agreements on our fact sheet Part 10 Personal Insolvency Agreements & Registered Trustees | Worrells
3. Bankruptcy
Bankruptcy is a process where a trustee is appointed to administer a person’s financial affairs, investigate if there are any transactions the bankrupt has entered into that can be overturned so as to realise more money for the creditors, and ultimately provide a fair distribution of that person’s assets to their creditors.
A bankruptcy can be commenced by the court on an application of a creditor (creditor’s petition), or voluntarily by a person lodging what is called a debtor’s petition. Bankruptcies can only be administered by licensed registered trustees or by the government official trustee. If the bankruptcy is initiated by the court, then the creditor usually selects the bankruptcy trustee. If you file for bankruptcy voluntarily, then you get to choose either a private trustee or a government trustee.
The main effects on a bankrupt are:
Subject to some exclusions, you are no longer legally obliged to pay your debts up to the date of bankruptcy (Exclusions include, but are not limited to, court-imposed fines, child support, and HECS debts).
The term of bankruptcy is three years but can be extended by your trustee to five or eight years if you breach a condition set out in a list in the Bankruptcy Act 1966.
Your assets, subject to some exclusions, are available to be sold by the trustee (this includes assets that you come to own whilst you are a bankrupt, e.g., lottery winnings, benefits under a will).
You cannot be the director of a company.
You can be a sole trader with an ABN, but you cannot trade under a name other than your own without advising people that you are bankrupt.
Can borrow money, but if you borrow in excess of the threshold amount, you must disclose that you are bankrupt.
You can travel throughout Australia without permission, but you need the consent of your bankruptcy trustee to travel overseas (this is generally a pretty straightforward process of you completing a questionnaire that gives the trustee details of where you are going and when you will return).
You pay half of your income above a prescribed amount to the bankruptcy trustee for each year that you are bankrupt (the prescribed amounts vary based on the number of dependants).
Section 73 Arrangements
A section 73 arrangement is an agreement you do with your creditors from inside of bankruptcy that, if accepted, results in you getting out of bankruptcy immediately, and your bankruptcy is annulled (i.e., at law you never were bankrupt).
Like a debt agreement and PIA, the terms of a section 73 arrangement can be anything that you can afford and that your creditors accept. Commonly, they are lump sum payments from family members, but the terms of the agreement are not restricted to that. To have any chance of acceptance, though, your section 73 proposal should offer creditors a greater return than what they would receive under your continued bankruptcy.
The process is worked through with your bankruptcy trustee and is ultimately decided upon by your creditors at a meeting. You can put forward a proposal at any time during your bankruptcy, although we generally suggest you wait at least three months after being declared bankrupt, just to allow enough time for your creditors to process the effect of your bankruptcy on them.
You can read more about Section 73 Arrangements on our fact sheet Section 73 Proposals: What They Are & How They Work | Worrells
I hope that helps explain how the insolvency options work together, but of course, reach out to your local Worrells principal (we are everywhere) if you need some more help.
