Alternatives to Bankruptcy

Contents

Personal insolvency agreements
Debt agreements
Acceptance of personal insolvency and debt agreements


Personal insolvency agreements

Part X of the Bankruptcy Act 1966 (the 'Act') provides a statutory framework to sanction an agreement between an insolvent debtor and creditors known as a personal insolvency agreement ('PIA'). The procedure requires an insolvent debtor to make a proposal to creditors in the form of a deed that, if accepted by creditors, will avoid a pending bankruptcy. A registered trustee will administer the agreement, and all creditors' claims that are provable in a bankruptcy will be bound by the terms of the agreement.

A PIA is a binding agreement between a person and their creditors that provides new terms for the repayment of existing debts. The new terms may include the following:

  • Full release from current debts;
  • An undertaking to repay a new, mutually agreed, smaller debt to creditors. For example: Insolvent debtor offers creditors between 20 - 80 cents in the dollar in full and final repayment of existing debt;
  • A moratorium of payments. For example: Creditors agree to a six month period without repayments;
  • Repayment of new mutually agreed smaller debt by periodic payments to a trustee. For example: Insolvent debtor makes monthly repayments into a fund held by a trustee who pays creditors when the new agreed reduced debt is paid;
  • Creditors offered assets not available in bankruptcy; and
  • A combination of the above.

A trustee will administer the PIA. Subject to limited exceptions, all creditors will be bound by the terms of PIA when implemented. There are no income, asset or debt limits for the PIA.

The PIA is a single type of agreement.

Entering into a PIA

To initiate a PIA an insolvent debtor will normally engage a registered trustee to act in the capacity of a controlling trustee and attend to the following:

  • Take control of the insolvent debtor's affairs and assets;
  • Undertake independent investigation into the debtor's affairs;
  • Assess the merits of the debtor's proposal having regard to the likely return to creditors in bankruptcy; and
  • Convene the meeting of creditors to determine if creditors wish to accept the debtor's proposal.

Costs

Assistance in making a proposal, investigation, report, convene and attend meeting of creditors and statutory duties as controlling trustee costs approximately $15,000 - $25,000. Coordinating the PIA costs approximately $10,000 - $15,000.

Warning: By signing the formal authority required to make a proposal to creditors under Part X, a debtor commits an act of bankruptcy which shows the debtor is insolvent. If the debtor's proposal is not accepted, a creditor may apply to court to bankrupt the debtor.

To avoid bankruptcy the debtor must prove their solvency.


Debt agreements

Part IX of the Act provides a statutory framework to sanction an agreement between an insolvent debtor and creditors known as a Debt Agreement. To be eligible to enter into a Debt Agreement a person must have:

  • Assets and creditors of less than the amount prescribed by the Act as detailed at www.afsa.gov.au;
  • After tax income of less than the amount prescribed by the Act as detailed at www.afsa.gov.au; and
  • Not entered into bankruptcy (or formal alternatives) during the past 10 years.

Debt agreements are binding agreements between a person and their creditors that provide new terms for the repayment of existing debts. The new terms may include the following:

  • Full release from current debts;
  • An undertaking to repay a new, mutually agreed, smaller debt to creditors. For example: Insolvent debtor offers creditors between 20 - 80 cents in the dollar in full and final repayment of existing debt;
  • A moratorium of payments. For example: Creditors agree to six month period without repayments;
  • Repayment of new mutually agreed smaller debt by periodic payments to a trustee. For example: Insolvent debtor makes monthly repayments into a fund held by a trustee who repays creditors when the new agreed reduced debt is paid;
  • Creditors offered assets not available in bankruptcy; and
  • A combination of the above.

Debt agreements are governed by the Act. They are a streamlined version of PIAs. They are legally binding once creditors agree the terms.

A debt agreement is initiated by making a proposal to a debtor's creditors. The proposal must identify a debtor's assets, how they shall be dealt with and who shall coordinate a debtor's proposal.

A debt agreement ends when all of the obligations that are created under the proposal have been discharged.

Warning: By making a proposal to creditors under a debt agreement a debtor commits an act of bankruptcy which shows the debtor is insolvent. If the debtor's proposal is not accepted, a creditor may apply to court to bankrupt the debtor. To avoid bankruptcy the debtor must prove their solvency.


Acceptance of personal insolvency and debt agreements

The decision to accept or reject a debtor's proposal will be made solely by a debtor's creditors. Creditors may vote on a debtor's proposal at a meeting of a debtor's creditors; or by a postal vote. A proposal will be accepted where:

  • More than 50% in number of the creditors who vote in favour; and
  • More than 75% in value of the creditors who vote in favour.

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