Alternatives to Bankruptcy

You may be having difficulty managing your financial affairs and have debts that you cannot pay. You may even be considering declaring yourself bankrupt. Before you do, you should consider some alternatives to bankruptcy. Informal agreement An informal agreement is an arrangement made between a debtor and their creditors to settle their debts. Informal agreements are typically the first option considered by a debtor because they are less expensive to administer than formal debt agreements and allow a debtor to retain control of their financial affairs. Informal agreements are most likely to proceed when there are a small number of creditors and the agreement is proposed as soon as the debtor is unable to meet their financial commitments. Declaration of Intention to Present a Debtor’s Petition In certain circumstances, a person may present a Declaration of Intention to Present a Debtor’s Petition (Declaration) to the Official Receiver (the Australian Financial Security Authority). Filing a Declaration is a way of announcing that the person is considering declaring themselves bankrupt. If a person makes a Declaration, they do not have to pay their debts (and any enforcement proceedings by creditors to recover judgment debts are stayed) for a period of 21 days. If a debtor is able to reach an agreement with their creditors within the 21 day period, the debtor does not need to proceed with filing for bankruptcy. Debt agreement A debt agreement (also known as a Part 9 debt agreement after Part IX of the Bankruptcy Act 1966) is an agreement between a debtor and their creditor to release the debtor from their debts. Debt agreements are creatures of statute and there are rules that govern when and how they can be made. To be eligible to lodge a debt agreement proposal to the Official Receiver, a debtor must:

• Be unable to pay their debts when they become due;
• Have not been bankrupt, had a debt agreement or a personal insolvency agreement in the last 10 years;
• Have unsecured debts and assets under a certain amount; and
• Have an estimated after-tax income under a certain amount.

The advantage of a debt agreement is that a debtor can negotiate with all of their creditors to pay a percentage of their combined debt and once that is paid, the debtor’s creditors cannot recover the balance of the money owed (although the debtor might still be liable for certain other debts, such as Court fines or HECS/HELP/SFSS debts). It is important to note that by making a proposal to creditors under a debt agreement a debtor commits an act of bankruptcy and if the debtor’s proposal is not accepted, a creditor can apply to the Court to bankrupt the debtor. The fact that a debtor has entered into a debt agreement will also appear on a public register and may affect their ability to obtain credit. Personal insolvency agreement A personal insolvency agreement (also known as a Part 10 agreement or PIA) is similar to a debt agreement, except there are no limits on a debtor’s income, assets or the total debt owed. There are more significant costs involved in proposing a PIA and the arrangement is better suited to debtors with higher incomes and a number of assets. A PIA is managed by a controlling trustee who undertakes an investigation into the debtor’s financial position and then calls a creditors’ meeting to vote on a proposal. The advantages of a PIA are that it allows a debtor to continue to carry on business (which may be difficult if a person becomes bankrupt), and there is no requirement for a debtor to contribute assets or income acquired after the PIA to pay their creditors. Again, a debtor commits an act of bankruptcy by signing the formal authority required to make a proposal to creditors, and if the debtor’s proposal is not accepted, a creditor can apply to the Court to bankrupt the debtor. Conclusion Formal steps to manage bankruptcy should not be taken lightly as they can have long term adverse effects on a debtor, their employment options, and their ability to obtain credit in the future. Before you do anything, it is crucial to get the right advice about your options. If you or someone you know wants more information or needs help or advice, please contact us.