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. You can also see our range of financial advisory services for guidance across personal insolvency and restructuring matters.
Article written by Biljana Vuckovic (Manager) – Melbourne