Overview
A Personal Insolvency Agreement (PIA) (also known as Part X) is a legally binding arrangement under the Bankruptcy Act 1966 (Cth) in Australia.
It allows individuals who are unable to pay their debts to come to a formal agreement with their creditors to settle those debts without becoming bankrupt. A PIA is suitable for individuals facing serious financial hardship, but who wish to avoid the long-term consequences of bankruptcy.
A personal insolvency agreement involves:
- The appointment of a trustee (or a solicitor) to take control of your property and make an offer/propsal to creditors.
- The offer may be to pay part or all of the debts by instalments or a lump sum, transfer of assets, or a combination of both.
The agreement is tailored to the individual’s financial situation and must be accepted by a special resolution of creditors voting at a meeting in person, by proxy or power of attorney (75% in value and at least 50% in number) to be legally binding on all creditors.
Eligibility Criteria
To propose a PIA, an individual must:
- Be insolvent, meaning they cannot pay their debts as and when they fall due.
- Be present in Australia or have a residential or business connection in the country.
- Not have proposed another PIA in the previous six months.
The individual must appoint a Registered Trustee or Controlling Trustee to manage the process and assess their financial affairs.
Process of Setting Up a PIA
- Appointment of a Controlling Trustee: The debtor signs a 188 Authority under the Bankruptcy Act, giving control of their property to a Controlling Trustee.
- Statement of Affairs: The debtor provides a detailed account of their financial position.
- Proposal Development: A formal proposal is drafted, outlining how debts will be repaid or settled.
- Creditor Meeting: Creditors are notified and a meeting is held, usually within 25 working days.
- Voting: For the PIA to be accepted, a special resolution must pass — at least 75% in value and 50% in number of creditors who vote.
- Implementation: Once accepted, the PIA becomes legally binding and is administered by a trustee, generally this is the same person as the Controlling Trustee.
Advantages of a PIA
- Avoids bankruptcy: Unlike bankruptcy, a PIA allows you to manage your debts without the severe restrictions and stigma.
- Flexible terms: Agreements can be negotiated to suit the individual’s financial capacity.
- Creditor cooperation: Once in place, unsecured creditors are bound by its terms and cannot take further enforcement action.
- Asset protection: In some cases, a PIA can help protect personal assets that might otherwise be lost in bankruptcy.
- Business continuity: It can allow individuals, especially sole traders or directors, to continue business operations.
Disadvantages of a PIA
- Public record: Like bankruptcy, PIAs are recorded on the National Personal Insolvency Index (NPII).
- Impact on credit: A PIA remains on your credit file for up to 5 years, affecting your ability to obtain credit.
- Costs: The process can be expensive due to trustee fees and administrative, government charges.
- Loss of control: You hand over control of your financial affairs and some assets to a trustee.
- Does not discharge all debts: Not all debts can be included — for example, court fines and some government debts may still be enforceable.
Debts That Can Be Included:
- Credit card debts
- Personal loans
- Utility bills
- Unsecured business debts
- Medical, legal and accounting fees
Debts That Cannot Be Included:
- HECS/HELP debts
- Child support and maintenance
- Court-imposed fines and penalties
- Secured debts, unless the secured asset is surrendered
Who Should Consider a PIA?
A PIA is more suitable for individuals with:
- Significant assets (e.g., property or investments) they want to protect
- Complex debt structures that require flexible negotiations
- Higher incomes that exceed thresholds for debt agreements
- Professional or business obligations that may be affected by bankruptcy
Whilst less common than bankruptcy or debt agreements due to its complexity and higher costs, it can offer a tailored solution in appropriate circumstances.
A Personal Insolvency Agreement can be a powerful tool for Australians seeking to avoid bankruptcy while managing significant unmanageable debt. It allows for flexibility, creditor negotiation, and the possibility of asset protection.
Before entering a PIA, it’s essential to seek advice from a Registered Trustee or insolvency professional. Every individual’s financial situation is unique, and the best path forward will depend on a full assessment of assets, debts, income, and personal goals. Contact our team for more information and further discussion.
Article written by Biljana Vuckovic (Manager) – Melbourne