Working in the insolvency industry we are acutely aware of the pressures faced by individuals in financial distress and the (sometimes) overwhelming number of choices that are available to you to deal with your debt. In this article we explore and summarise the three formal personal insolvency options available to you when you cannot pay your debts:
Bankruptcy is a formal way to release you from your debts. Almost all debts are released apart from a select few, such as court ordered fines and penalties, HECS debts and some unliquidated damages claims (i.e. a claim where no Judgment has been obtained). You can either voluntarily file by way of a debtor’s petition or be made bankrupt by one of your creditors.
Bankruptcy automatically lasts for three years from the date you lodge your Statement of Affairs, however this can be extended to five or eight years if you do not comply with your duties as a bankrupt. There is currently a bill before Parliament which if enacted would make bankruptcies last for one year. Income assessments would still apply for three years, but the other restrictions of bankruptcy would only last one year. The bill will apply retrospectively so that someone going bankrupt before the bill becomes law (if it does) will be discharged from bankruptcy as soon as they reach one year or whenever the bill is passed, whichever is later. Of course there is no guarantee this bill will be enacted.
See here for further information on bankruptcy.
As the name states, this option involves a formal agreement with your creditors to pay a portion of the debts you owe and your creditors vote on whether to accept it or not. A majority need to vote in favour for it to be accepted. If accepted you will pay instalments over time which will be distributed to creditors by your deed administrator. Debt agreements can last for up to 5 years. While this option avoids bankruptcy, it is still a formal insolvency appointment and will be recorded on the National Personal Insolvency Index and your credit report. Despite the exponential rise in the popularity of debt agreements there are serious concerns as to their suitability for many people. Our recent articles explore whether a debt agreement is right for you and compare the benefits of bankruptcy vs debt agreements.
Personal Insolvency Agreement
A PIA involves appointing a Controlling Trustee and putting forward a proposal to your creditors to avoid bankruptcy. Ordinarily you will offer to pay more to your creditors in the PIA then creditors would get if you went bankrupt. There are relatively few personal insolvency agreements in Australia due to their high cost and unsuitability for many people. Just like debt agreements they are a formal insolvency appointment and will be recorded on the National Personal Insolvency Index and your credit report.
See here for further information on personal insolvency agreements.
The following table provides a useful summary of the major differences and similarities between the three formal options:
|Bankruptcy||Debt Agreement||Personal Insolvency Agreement|
|Thresholds to eligibility for Appointment?||No||Yes, see AFSA’s indexed amounts||No|
|Recorded on NPII and Credit Score?||Yes||Yes||Yes|
|Can you be a director of a company?||No||Yes||No, can be during period of Controlling Trustee Appointment but not during PIA if accepted.|
|Income Contributions Required?||Yes, if income exceeds threshold amounts.||Yes, if terms of agreement requires it.||No, only if PIA provides for it.|
|Can I trade a business under my own name?||Yes, need to trade under your own name though. Criminal offence to not do so.||Yes, unless terms of agreement says otherwise.||Yes.|
|Can I keep my assets?||No, unless they’re exempt under the Bankruptcy Act (household furniture, vehicles up to $7800 etc.)||Yes||Yes, unless agreement provides otherwise.|
|Can assets sold/payments made prior to bankruptcy be recovered?||Yes||No||No, unless agreement provides otherwise.|
|Released from debts?||Upon discharge from bankruptcy but some debts not released.||Upon completing terms of agreement, but some debts not released.||Upon complying with terms of PIA, but some debts not released.|
|Ability to travel overseas?||Yes, but need prior consent of trustee.||Yes||Yes|
|Costs/Fees to be paid by individual?||No, although if filing voluntarily a trustee may seek an up-front payment, usually less than $10,000 to cover some of their time costs.||Yes, there are fees that need to be paid to AFSA and your debt agreement administrator. This usually includes a $200 application fee with AFSA and around 20% of your ongoing payments to your administrator (so if you’re paying $1000/month your administrator will take $200/month).||No, although a trustee may seek an up-front payment to cover some of their time costs. This can range from $20,000 to $40,000.|
|Percentage of total debts to be paid?||Nil||Ordinarily around 85c/$. Sometimes actually more than 100c/$ because of Administrator fees and costs.||Ordinarily between 5 and 50.|
|If I get an inheritance can I keep it?||No||Yes||Yes|
If you are struggling with personal debt and want to better understand the insolvency options available to you get in touch on 1300 4 CACTUS or chat to us via the live chat window on our site.