Our Services - Personal Insolvency and Bankruptcy

What is a “Personal Insolvency Agreement” PIA?
Part X of the Bankruptcy Act (“the Act”) offers an alternative to bankruptcy by providing a Debtor with the mechanism to reach an agreement with creditors for finalising debts.

The Debtor is able to negotiate a settlement with creditors which may involve payment of less than 100 cents in the dollar. Payments could be by lump sum or by instalments over a certain period of time. The agreement could involve the sale of certain property together with the contribution of regular payments. The negotiations could also extend to the continuation of business operations in order to repay debts.

The settlement contract between the Debtor and creditors is called a “Personal Insolvency Agreement” (PIA”). The terms of the PIA are defined by the Debtor and are individually set to suit the Debtor’s unique financial circumstances.

How is a PIA initiated?
The Debtor must appoint a Controlling Trustee and at the same time provide the Controlling Trustee with a proposal for a PIA and a Statement of Affairs outlining all known assets and liabilities. Forms can be downloaded here

What is the immediate effect of appointing a Controlling Trustee?
The immediate effect of appointing a Controlling Trustee is that creditors are unable to commence or continue any further action for recovery of their debts until the outcome of a subsequent meeting of creditors is known (meeting must be held within 25 working days of appointment or within 30 days if the appointment is made in December).

The Controlling Trustee will take control of the Debtor’s property and call a meeting of creditors to consider the Debtor’s proposal for a PIA. The Controlling Trustee will undertake certain investigations and will report to creditors regarding the findings of such investigations and make a recommendation as to whether the PIA proposal is in the best interests of creditors.

What happens at the meeting of creditors?
The creditors will consider the merits of the Debtor’s proposal for a PIA and will have the opportunity to ask questions. The creditors will then be asked to vote on the matter. The Act provides that a majority in number and 75% in value of creditors deemed present and voting must be achieved before the PIA is accepted.

What happens if the creditors vote against?
If the proposal for PIA is not accepted by creditors then the most common outcome is for creditors to resolve that the Debtor file for bankruptcy.

What happens if the creditors vote in favour?
If creditors accept the proposal then the Debtor will be required to execute a PIA and simply comply with the terms of the agreement. Creditors are bound by the terms of the PIA and cannot take any action to recover their debts outside the PIA. At the meeting of creditors a Trustee will be appointed to administer the PIA. The Trustee will invite the lodgement of formal claims from creditors and will act as stakeholder for all funds deposited or realised under the terms of the PIA. The Trustee will in due course arrange payment of dividends to creditors.

Timeliness of PIA can be an attractive feature for the Debtor.
Subject to the terms of the Debtor’s PIA, it is possible to resolve the Debtor’s financial problems within 25 working days. For example, if the Debtor simply proposed to lodge a certain sum in full and final payment of debts and assuming such funds were held in trust by the Controlling Trustee, then immediately the creditors resolved to accept the PIA proposal the Debtor would be released from all provable debts and would be released from Part X of the Act.

Controlling Trustee/Trustee fees.
The Controlling Trustee and the Trustee are entitled to be remunerated for their services and it is usual for the creditors to approve payment of fees at the meeting of creditors. Payment of such fees is afforded a priority under the Act before any distribution to creditors.

What records are maintained of the Part X proceeding?
Once a Debtor appoints a Controlling Trustee, it is kept on permanent record by the Commonwealth Government. Furthermore, the Debtor’s name will also be recorded on commercial credit reference records for 7 years.

Bankruptcy

What is bankruptcy?
Bankruptcy is the process where people who cannot pay their debts and are unable to reach an agreement with their creditors are afforded the protection of the Bankruptcy Act.

How is a person made bankrupt?
A person can declare themself bankrupt by lodging three (3) documents with the office of Insolvency and Trustee Service Australia (“ITSA”) in their own State or Territory.

The three documents are:

Debtor’s Petition;
Statement of Affairs; and
Acknowledgement that the Prescribed Information booklet produced by ITSA has been received and read.

Forms can be downloaded here

Creditors can also make a person bankrupt by lodging a creditor’s petition with the Court for non payment of a debt resulting in the making of a Sequestration Order.

A Trustee is appointed to administer the bankruptcy on behalf of the bankrupt and the creditors.

What is the effect of bankruptcy?
The immediate effect of bankruptcy is that creditors are unable to commence or continue any further action for recovery of their debts. Their rights are converted to a right of lodgement of a Proof of Debt in the bankruptcy and a distribution in the form of dividends declared by the Trustee. (There are some exceptions: ie: fines and penalties; and payments due under a Maintenance Order or Agreement).

All assets of every description owned by the bankrupt automatically vest in the Trustee however certain assets are exempt from realisation.

The role of the Trustee is to investigate the financial affairs of the bankrupt, to realise all available assets and to distribute realised funds to creditors without undue delay.

What assets are exempt from realisation?
Certain assets of a bankrupt are exempt from realisation and they include:

A motor vehicle with a value not exceeding $6,000 (indexed);
Most ordinary household furniture including personal items, kitchen appliances, TV, video recorder, washing machine, stereo and items used by children or students;
Tools of trade with a value not exceeding $3,050 (indexed);
Superannuation, life policies;
Compensation for personal injuries;
Property protected under the Defence Service Homes Act 1918;
Assets held in trust for another person.

How long does the bankruptcy last?
If at any time all debts are paid in full then the bankruptcy can be annulled (terminated).

The usual period of bankruptcy is 3 years however a bankruptcy can be extended by an Objection lodged by the Trustee if the conduct of the bankrupt is unsatisfactory. The maximum period of bankruptcy is 8 years. In the absence of an Objection, the bankrupt will receive a Statutory Discharge after 3 years.

At any time during the bankruptcy, the bankrupt is able to make an offer to settle the claims made by creditors in the form of a Composition proposal. To succeed, the offer must be accepted by a majority of creditors and 75% of the value of creditors. If the Composition proposal is accepted by creditors then the bankruptcy can be annulled.

Income contributions.
Depending upon the level of income derived by a bankrupt and the number of dependants, a bankrupt can be required to make income contributions to the Trustee for ultimate distribution to creditors by way of dividend.

Trustee fees.
The Trustee is entitled to be remunerated for his/her services and it is usual for the creditors to approve payment of fees at the meeting of creditors. Payment of such fees is afforded a priority under the Act before any distribution to creditors.

What records are maintained of the bankruptcy?
The bankruptcy is kept on permanent record by the Commonwealth Government. Furthermore, the Debtor’s name will also be recorded on commercial credit reference records for 7 years.