Personal Insolvency FAQ

Bankruptcy is a legal process that provides protection to people who are unable to repay their debts or reach a suitable arrangement with their creditors.

Bankruptcy provides protection for both debtors (bankrupts) and creditors. The bankrupt is protected from being pursued by most creditors (secured creditors are entitled to continue taking action) and they are released from most debts.

Bankruptcy protects the interests of creditors by having an independent person (a Registered Trustee) appointed to investigate the bankrupt’s financial affairs. If sufficient funds are recovered a dividend will be paid to creditors of the estate.

If someone is unable to pay their debts or come to a suitable arrangement with their creditors, they can choose to make themselves bankrupt. Generally, they must have debts of at least $5,000 and a connection with Australia. The most common causes of bankruptcy occur when:
• An individual is unable to pay all debts
• Personal guarantees provided for company debts are called up
• An individual receives letters of demand, writs and/or bankruptcy notices from creditors, debt collectors or solicitors

Creditors can apply to Court to make someone bankrupt if:
• They can satisfy the Court that the person has debts of at least $5,000 and that a bankruptcy notice has expired.
• They haven’t received a payment of debt
• There are dishonoured cheques or payments
• Trading terms extended or not met by the individual (debtor)
• The debtor disposing or transferring property prior to bankruptcy

Before applying for bankruptcy there are 2 eligibility criterions that need to be met. These are that the individual cannot pay their debts when they are due and you are present in Australia with a residential or business address. If a person is making an application for bankruptcy, there is no eligibility criteria on income or debt amounts.

It is recommended that if you are considering applying for bankruptcy that you speak to a qualified professional. As there are serious consequences of bankruptcy, this may be the last resort.

To declare bankruptcy, the individual needs to complete an application form (Bankruptcy Form). You can do this with the Australian Financial Security Authority (AFSA) using their portal or if you have arranged for a Trustee (such as SV Partners) to assist you we will help you through the process and you will need to complete a Consent to Act Declaration with your Bankruptcy Form. By engaging with a Trustee (such as SV Partners) we will do this for you on your behalf. These forms will be lodged with AFSA.

AFSA then reviews each application and advises if your bankruptcy application has been approved or not.

Normally bankruptcy lasts for 3 years and 1 day. As bankruptcy can have serious consequences, it is important to know your options and seek professional advice first before declaring bankruptcy.

Throughout the bankruptcy term, there are obligations and responsibilities that a bankrupt needs to abide by.

There are instances whereby your bankruptcy can be extended from the normal 3 years and 1 day to a term of up to 8 years. In these instances, your Trustee will have lodged an ‘objection to discharge’ on the basis that you have not complied with your obligations during your bankruptcy. These may be failures to:

• Provide information to the Trustee and disclosed all your income
• Made your compulsory payments to the Trustee if applicable
• Explain your expenditures
• Be forthcoming and disclosed all assets and debts

It is important to remember your obligations as a bankrupt as failure to do so may incur a prolonged bankruptcy term.

Once an individual enters bankruptcy, their name and other personal details are listed permanently on a public register known as the National Personal Insolvency Index (or NPII). This record is permanent and can be accessed by anyone upon a search of the index at just a small financial cost.

Personal information is recorded along with the bankrupt’s name on the listing. This includes:

• Date of birth and residential address
• Occupation
• Any other names that you may have been previously been known by
• The details of the bankruptcy administration and Trustee contact information
• The current status of the bankruptcy (discharged or current)

Along with a permanent record of the bankruptcy on the NPII, a bankrupt’s credit file with the appropriate credit bureau has the details of the bankruptcy on record. This remains on file for 5 years from when the person become bankrupt or 2 years from when the bankruptcy ends (whichever is later).

If specific circumstances where a bankrupt has a genuine safety concern of their residential address being listed on the NPII, they may make an application to remove this detail. Their name and date of birth will always remain however on the NPII. Residential addresses may be removed upon application in situations whereby the bankrupt is on witness protection or victim of domestic violence.

Although bankruptcy is a formal and legal process to relieve someone of their unmanageable debts, it is vital to understand that there are consequences for filing for bankruptcy. Once bankruptcy is filed and a Trustee is appointed, they become the sole controller and manager of the Bankrupt’s finances. This is so that creditors and debts are fairly managed and paid in order to achieve the best possible result under the circumstances.

Consequences relating to bankruptcy include:

• Selling off assets to pay off debts
• A bankrupt must be willing and is obligated to provide all information to the Trustee relating to changes of circumstances, such as employment, income, business statements
• May need to make compulsory income contributions if the bankrupt exceeds income limits
• All debts may not be ‘cleared’ under your bankruptcy
• Impacts to your credit file that may impact future financial decisions such as loan applications
• Permanent listing on the National Personal Insolvency Index (NPII)

The Trustee may need to sell off assets in order to recover funds to pay off creditors. With the Trustee being appointed, the Bankrupt has legal obligations that include the disclosure of any change in circumstances that relate or may impact the situation or bankruptcy. This includes providing information such as bank statements, files and other records that the Trustee may request of you.

In addition, entering bankruptcy may also have an effect on your income, employment and business. Earning over a certain amount of income may mean that you will need to make compulsory payments to your Trustee. If you lose or job, have a change of employment or there is a change of income, these circumstances must be communicated back to the Trustee.

Unfortunately, entering bankruptcy does not necessarily mean that all debts are cleared or you are exempt from all debts. There are exclusions to the debt relief that someone may seek under bankruptcy, this includes; court penalties or fines, child support, Government student loans, debts that are incurred after the bankruptcy begins and debts that are undecided between the bankrupt and the creditor (also known as unliquidated debts).

There are also secured debts (or debts that are tied to assets) that need to be managed. This includes instances such as a mortgage over a house, the secured creditor (commonly a bank that has issued the mortgage loan) has the security over the house. If a bankrupt is not making the repayments, the secured creditor has the right to take possession of that property they have the security over. As a consequence, being a bankrupt, you do need to comply and be of assistance to the secured creditor during this asset recovery.

There are also different types of debt including joint debts, company debts and overseas debts, all of which are treated individually. It is important and your obligation to disclose all debts and all creditors as part of your bankruptcy to your Trustee.

For more information on the consequences of bankruptcy in Australia, contact one of our professionals.

If a bankrupt earns over a certain threshold, they are required to pay a contribution from their income to their Trustee. The Trustee will conduct an assessment of the bankrupt’s liability to pay contributions and will arrange for this liability to be paid by the bankrupt.

Certain debts are not released by bankruptcy. This can include:
• Court imposed fines or penalties
• Some portions of students loans (HECS / HELP debts)
• Child support debts
• Maintenance debts
• Debts incurred by fraud

An annulment is the cancellation of a bankruptcy.  There are 3 ways a bankruptcy can be annulled:

• The Trustee’s fees and expenses and creditors debts (including interest) are paid in full
• Creditors accept a bankrupt’s proposal to annul their bankruptcy (this is referred to as a Section 73 proposal)
• By an order of the Court

If a bankrupt is interested in annulling their bankruptcy, they should contact their solicitor and their Trustee.

The Trustee will conduct investigations into the bankrupt’s affairs, recover any property into the estate, report any offences that may have been committed by the bankrupt to AFSA and report to creditors on their findings.

The recoveries that a Trustee can make include:
• Realising any divisible property
• Recovering contributions from a bankrupt if their income is over a certain threshold
• Recovering any voidable transactions

If sufficient funds are recovered by a Trustee, they will pay a dividend to creditors.

At the date of bankruptcy, any divisible assets of the bankrupt are controlled by their Trustee.  Divisible assets can include money, vehicles, property, shares, jewellery and other similar assets. There are thresholds and prescribed limits to the value of assets in which a bankrupt is able to realise. AFSA regularly update these thresholds on their indexed amounts section of the website. https://www.afsa.gov.au/insolvency/how-we-can-help/indexed-amounts-0

Some assets are not divisible and are exempt from realisation by the Trustee.  This can include:

• Necessary clothing and household items
• Life insurance or endowment policies
• Certain damages and compensation payments
• Sentimental property
• Funds held in a regulated superannuation fund
• Assets above the prescribed limit and threshold (see AFSA indexed amounts)

Part X is part of the Bankruptcy Act that provides a framework for a debtor to formally deal with their creditors by making a proposal in satisfaction of their debts.

Part X is often considered by debtors who do not meet the eligibility requirements of a Part IX (because their assets and liabilities are considered too great).

Benefits to debtors of creditors accepting the proposal commonly include:

• A debtor can avoid going into bankruptcy
• Debts owed to creditors can be dealt with in an orderly manner
• Creditors are prevented from taking further steps to recover debts owed whilst the proposal is being considered
• Restrictions brought about by bankruptcy (for example, in relation to certain professions and income) can be avoided

The impact on a debtor’s credit rating is less severe than if the debtor was to be made bankrupt.

Benefits to creditors of accepting the proposal commonly include:

• Creditors may receive a greater return compared to the return expected were the debtor to be made bankrupt
• Creditors may receive a dividend sooner than if the debtor were to be made bankrupt
• The costs of administering the controlling Trustee period and Personal Insolvency Agreement may be lower than the costs of administering a bankruptcy

If agreed upon with creditors, the debtor will execute a Personal Insolvency Agreement.

Almost anything can be offered, it just needs to make sense and be believable. Things that are commonly proposed include:

• A lump sum of money
• Funds over time
• Proceeds from the sale of certain assets
• Any combination of the above

In order to formally propose a Personal Insolvency Agreement, a debtor must enter a controlling Trustee period. The effect of this is that a controlling Trustee (often a Registered Trustee) will take control over their property and conduct investigations with a view on reporting to creditors on the debtor’s asset and liability position and commenting on the debtor’s proposal.

Once accepted, unsecured creditors are bound by the agreement, regardless of whether they are in favour of the proposal. Unsecured creditors exchange their right to pursue the debtor for payment for an entitlement to receive a dividend from the funds or property made available under the proposal.

Secured creditors are not bound by a Personal Insolvency Agreement and maintain their rights to recover and sell property that is subject to their security

Some assets are not divisible and are exempt from realisation by the Trustee.  This can include:

• Necessary clothing and household items
• Life insurance or endowment policies
• Certain damages and compensation payments
• Sentimental property
• Funds held in a regulated superannuation fund
• Assets above the prescribed limit and threshold (see AFSA indexed amounts)

Usually, the Personal Insolvency Agreement will come to an end once the debtor’s obligations have been satisfied.

If the debtor does not comply with the terms of the agreement, the Trustee will usually issue a default notice requiring that the non-compliance be rectified.

If the debtor still does not comply, the Trustee and/or creditors may terminate the agreement. This can happen in the following ways:

• Automatic termination under the terms of the agreement
• Creditors resolving that the agreement be terminated by way of a special resolution at a meeting of creditors
• The Trustee terminating the agreement with the agreement of creditors

The agreement may also be terminated by order of the Court under a number of circumstances, but generally where the terms of the agreement are unreasonable or are not calculated to benefit creditors generally.

Whilst executing a Personal Insolvency Agreement may bring significant benefit to a debtor in allowing them to deal with their creditors in an orderly manner, there are a number of pitfalls that you should be aware of:

• Executing a Section 188 Authority is an ‘act of bankruptcy’. If a proposal for a Personal Insolvency Agreement is not accepted by creditors, a creditor may rely on this act to bankrupt the debtor.
• Whilst the controlling Trustee period is in place, a debtor cannot act as a director of a corporation, or until the terms of the Personal Insolvency Agreement have been fulfilled (at which time the Trustee will issue a certificate of completion).
• Executing a Section 188 Authority affects a debtor’s credit rating – although the effect of this is much less detrimental than if bankruptcy were to occur.

If a debtor’s proposal for a Personal Insolvency Agreement is not accepted by creditors, a debtor cannot present another proposal under Part X of the Act for a further 6 months, without leave of the Court.

A Part IX Debt Agreement occurs in lieu of bankruptcy, when the individual is unable to pay all debts. The individual receives letters of demand, writs and/or bankruptcy notices from creditors, debt collectors or solicitors.

A Part IX Debt Agreement is when an individual who is insolvent enters into a formal agreement with creditors. The Agreement is administered by an independent person and is a flexible arrangement negotiated between the individual and creditors.

A Part IX Debt Agreement is different from a Part X Arrangement in that eligibility is limited based on debtor’s assets, liabilities, income and prior acts of bankruptcy. This agreement is aimed at lower level debts often associated with consumer liabilities.

A Part IX Debt Agreement occurs in lieu of bankruptcy, when the individual is unable to pay all debts. The individual receives letters of demand, writs and/or bankruptcy notices from creditors, debt collectors or solicitors.

A Part IX Debt Agreement is when an individual who is insolvent enters into a formal agreement with creditors. The Agreement is administered by an independent person and is a flexible arrangement negotiated between the individual and creditors.

A Part IX Debt Agreement is different from a Part X Arrangement in that eligibility is limited based on debtor’s assets, liabilities, income and prior acts of bankruptcy. This agreement is aimed at lower level debts often associated with consumer liabilities.

Almost anything can be offered, it just needs to make sense and be believable. Things that are commonly proposed include:
• A lump sum of money
• Funds over time
• Proceeds from the sale of certain assets
• Any combination of the above

A Debt Agreement is limited to a debtor who has:

• Not been bankrupt, utilised a Debt Agreement or given an Authority under Part X of the Bankruptcy Act in the last 10 years;
• Estimated after tax income, for the 12 months after the proposal is given, of less than the threshold amount.

Possible effects a Part IX Debt Agreement can have on individuals include:

• It is binding upon all parties
• The restrictions of bankruptcy are avoided
• Provide relief from debt problems and extinguish existing debts
• Arrangements are flexible
• Can start life afresh, free of debt
• Less expensive than Part X

Once accepted, unsecured creditors are bound by the agreement, regardless of whether they are in favour of the proposal. Unsecured creditors exchange their right to pursue the debtor for payment for an entitlement to receive a dividend from the funds or property made available under the proposal.

The effects on creditors can include:
• The arrangement is binding upon all parties
• Uncertainty is crystallised
• Arrangements are flexible
• Often provides a higher and quicker dividend than under bankruptcy
• The arrangement is generally finalised sooner and is less costly than Part X

A debtor can make a written proposal through AFSA. The debtor can propose to pay creditors by instalments, make a lump sum payment or even give an asset(s) to creditors. There is a fee payable to AFSA, plus any other fee if you engage external assistance for work carried out in setting up the Debt Agreement.

Debt Agreement proposals are either accepted or rejected by creditors. Voting is normally done by letter, however a physical meeting may be held. A proposal is accepted if a majority in value of creditors who vote / reply before the applicable deadline state that the proposal should be accepted. Take

Note: Giving a proposal to AFSA, or setting up a Debt Agreement and not keeping up the repayments is an ‘Act of Bankruptcy’. A creditor can use this to apply to the Federal Court or Federal Circuit Court for a Sequestration (Bankruptcy) Order.

A Part IX Debt Agreement ends when the debtor has completed all obligations and payments to the creditor. The debtor is then released from all the debts covered in the debt agreement. The National Personal Insolvency Index (NPII) will be updated once your administrator notifies the Official Receiver of the completion of all obligations and payments.

A proposal pursuant to Section 73 of the Bankruptcy Act 1966 is a formal agreement between a bankrupt, creditors and the Trustee that monitors the agreement. If creditors accept the Section 73 proposal, the bankruptcy is annulled and it is as though the bankruptcy never occurred.

Under a Section 73 Proposal, the bankrupt is released from the restrictions of remaining in bankruptcy. They are released from their debts and their property revests in them (unless it is dealt with in the Section 73 Proposal). In return, creditors would expect to be offered a higher return than they would have received in the bankruptcy.

The first step is for the bankrupt to approach their Trustee and advise their intention to put forward a proposal to deal with their debts. The Trustee can evaluate the proposal and provide feedback. The Trustee needs to be in a position to assess whether the proposal would be more beneficial than if the bankruptcy were to continue, so further investigations may be required.

The formal process of a Section 73 Proposal begins when a bankrupt provides the Trustee with a written proposal. A Section 73 proposal cannot be submitted jointly by 2 or more bankrupts.

A Section 73 proposal can be differentiated into two distinct categories:

1. A composition and;
2. A scheme of arrangement.

It is more common for a bankrupt to propose a composition. A composition is an agreement to pay funds into the administration to be available to pay creditors and the costs of the administration. It is possible to pay funds over a period of time; however many Trustees will recommend that payment be made upon acceptance to provide greater certainty for creditors.

A scheme of arrangement can involve almost any other kind of consideration, including payment of funds from the bankrupt or third parties and the sale or transfer of property.

At the meeting, the Trustee will invite creditors to move a motion that the bankrupt’s proposal be accepted or rejected.

For the bankrupt’s proposal to be accepted, a motion must be supported by:
• Creditors who hold 75% of the dollar value of participating debts
• A majority of creditors

If either requirement is not satisfied, the motion will be defeated and the proposal will not be accepted. If this is the case then the bankruptcy will continue as before.

If accepted, the bankruptcy is annulled from the day of the meeting of creditors. Unsecured creditors are bound by the agreement, regardless of whether they are in favour of the proposal.

Unsecured creditors receive a dividend from the funds or property made available under the proposal. Secured creditors maintain their rights to recover and sell security owned by the bankrupt.

A Registered Trustee must administer the agreement. Usually it is the case that the former bankruptcy Trustee will collect the funds and / or property and make a distribution to unsecured creditors.

Once the necessary investigations have been satisfied, the Trustee will prepare and issue a report to creditors setting out the details of the proposal and call a meeting for creditors to convene and consider the proposal, and whether the proposal is to be accepted.

The Trustee can ask for a surety to cover the costs of preparing the report to creditors and calling and holding the meeting. If there is no regard to these costs, or the outstanding costs and remuneration of the Trustee can refuse to issue the report or call a meeting.

The Trustee may also refuse to issue a report if the proposal is not bona fide.

Usually the Section 73 proposal comes to an end when all parties have completed their obligations and responsibilities under the proposal.

However, a Section 73 proposal can also be terminated by the following ways:
• If the terms of the section proposal are not complied with, the Trustee and / or creditors terminate the agreement
• By an order of the court, usually on the basis that the composition cannot be proceeded with without injustice or undue delay to the creditors, the approval of creditors was obtained by a misrepresentation by the former bankrupt, or if it is desirable that the composition be set aside on the basis of non-compliance

The Section 73 proposal will usually contain terms which set out what steps the Trustee can take to enforce compliance in the event of a default.

Termination of a Section 73 proposal due to non-performance is an act of bankruptcy, and could be relied upon by creditors or the Trustee to bankrupt the person again.