Personal Insolvency – Is It The Best Option For You?

March 10, 2017 Esolvency

Rising unemployment and bankruptcies, as well as increasing debt to disposable income ratios are all current trends set to continue in to the 2017 financial year, according to information released by the Australian Financial Security Authority and the RBA.

Financial distress on individuals will escalate as these trends increase. Not only can this affect lifestyle, but personal health and wellbeing too.

If this is the case, then what are the options available to individuals in the midst of personal financial hardship? This blog aims to provide a summary of formal personal insolvency options, with their accompanying pros and cons.

Debt Agreements

 Under Part IX of the Bankruptcy Act 1966, a Debt Agreement is a binding financial agreement and can only be proposed if:

• You are insolvent;
• You have not entered into personal insolvency in the last ten years;
• You have unsecured debt below $109,036.20;
• Your divisible property (assets) is less than $109.036.20;
• Your after tax income is less than $81,777.15; and
• The lodgement fee (currently $200) is paid.

Debt Agreements may be suitable for those with limited income, assets and liabilities, though there are consequences, both positive and negative, both are listed below:

Positive:

• Debtor can retain their assets
• Creditor claims are frozen
• Debtor is released from debts (as they would be in a bankruptcy)
• Debtor is not disqualified from managing a corporation

Negative:

• Permanent record on the National Personal Insolvency Index
• Considered an ‘act of bankruptcy’
• Recorded on the Debtor’s credit file
• Debt Agreement term may be longer than a Bankruptcy
• Requirement to disclose the Debtor is subject to a Debt Agreement

Personal Insolvency Agreement

Under Part X of the Bankruptcy Act 1966, a Personal Insolvency Agreement, commonly known as a PIA, is a legally binding Agreement between a Debtor and his/her creditors. A Personal Insolvency Agreement can only be proposed if:

• You are insolvent;
• You are present in Australia (or have a connection to Australia); and
• You have not presented another proposal within the previous six (6) months.

A PIA proposal is more appropriate for those with higher incomes and complex affairs, for the purpose of assessing whether or not an alternative to Bankruptcy is available.

Differing from a Debt Agreement, there are no restrictions on income, assets or debts to be eligible.

The positive and negative consequences of entering into a PIA, include:

Positive-

• Debtor’s assets don not automatically vest in the Controlling Trustee
• After acquired property will not be available to creditors
• Antecedent Transaction Provisions may not apply
• Debtor is released upon completion of his or her obligations under the agreement

Negative-

• Considered an ‘Act of Bankruptcy’
• Permanent record on the National Personal Insolvency Index
• Recorded on the Debtor’s credit file
• May have an effect on the Debtor’s professional licence (e.g. real estate agent or aged care nurse”
• Disqualified from managing a Corporation while subject to the obligations of the Agreement

Bankruptcy

 This is the most common type of personal insolvency and consists of two forms:

1. Debtor’s Petition – Voluntarily entering into Bankruptcy

A person who wishes to declare themselves bankrupt, may only do so if:

• They are insolvent; and
• They are personally present or reside in Australia; or
• They have a dwelling or place of business in Australia; or
• They are carrying a business in Australia.

2. Creditor’s Petition – A creditor applies to the Court for a Sequestration Order forcing the Bankruptcy, if the debt owed is greater than $5,000.

While Bankruptcy may be a viable option, the consequences of entering Bankruptcy that need to be considered include:

Positive-

• Debtor may retain a motor vehicle up to the threshold of $7,700
• Debtor may retain tools of trade to earn an income up to an amount of $3,750\
• Superannuation is not available under a bankruptcy (in most circumstances)
• Debtor is released from the majority of their debts

Negative-

• Can effect some employment licenses (if they’re for age care nurses/real estate agents)
• Passport is required to be submitted and permission sought to travel;
• Cannot manage a Corporation or be a Director of a Corporation during the term of the bankruptcy;
• There may be restrictions on obtaining credit and/or loans
• The Bankruptcy remains permanently on the National Personal Insolvency Index
• Remains on the credit file for five years

How can Bankruptcy help?

There was a time when ‘bankruptcy’ meant (almost literally) the end of the world. Times have changed. The stigma surrounding bankruptcy has evolved from financial ruin and desolation to helping individuals get back on their feet.

Bankruptcy is more commonly known these days as a “degree in financial prudence”. No more paying credit card repayments, loan repayments, huge tax bills…the income contribution regime now allows more funds to feed back into the family!

Common bankruptcy myths debunked:

“I will lose all of my assets”

A summary of the divisible and non-divisible property that would be available under a Bankruptcy scenario includes:

Divisible-

• Bank accounts
• Real estate
• Motor vehicles (over the threshold)
• Shareholdings
• Debts owed to the Bankrupt
• Interest in a company/business

Non-Divisible-

• Household property (i.e. lounges, fridges, microwaves)
• Tools of trade (below the threshold)
• Policies of life insurance
• Superannuation
• Compensation for personal or wrong doing

Those declared bankrupt can:

• Retain cash at the bank if their account has a combined balance of less than $2,000…

• Maintain their property, by purchasing the equity from the Trustee by way of instalments…

• Maintain their motor vehicle, provided finance payments continue and they purchase any equity from the Trustee…

“I will be released from all of my debts upon entering bankruptcy”

Another common misconception is that by entering Bankruptcy, the individual will be released from all their debts upon discharge. This is incorrect, as there are a number of debts that are considered “not provable” which are not released upon the discharge from Bankruptcy. The below table summarises the debts that are included and those that are excluded from a Bankruptcy:

Provable (Released)-

• Credit card debts
• Personal loans
• Tax debts
• Phone bills
• Electricity bills
• Judgement debts

Not Provable (Not Released)-

• Penalties (offences against the law)
• Council rates
• HECS
• Proceeds of crime
• Debts incurred after Bankruptcy

“The Trustee will take all my income”

When a Bankrupt earns over the applicable income threshold, they are required to contribute 50% of the excess towards their estate. The current threshold for no dependents is $54,518.10 net of tax.

Esolvency have a specialist team with over 70 years of combined experience in personal insolvency. Our services include low-cost liquidation, bankruptcy and insolvency. We can help to create a tailored plan to overcome your financial obstacles. If you are experiencing financial stress, contact us today on 1800 ESOLVE or 1800 376 583 to find out how we can help you.