Picture credit: Nikki Mannix
On the verge of going bankrupt?
Be aware that bankruptcy isn’t your only option. a Personal Insolvency Agreement (PIA) and a Debt Agreement (DA) are also worth consideration.
Here’s what each may mean for you.
A Quick Comparison
This table by Fresh Start Solutions gives a clear and concise overview of the advantages and disadvantages of going bankrupt, debt agreements and personal insolvency agreements.
Debt Agreement (DA)
A debt agreement occurs between a debtor and their creditors when each agree on an acceptable payment rate that the debtor can afford in place of the full amount owing.
While an act of bankruptcy, a debt agreement is not equivalent to going bankrupt. Nonetheless, your credit rating will still be affected and the agreement will be listed on credit reporting records for a period of 7 years.
When an amount is agreed upon between debtors and creditors, debtors are released from the majority of their debts once all obligations and payments under the agreement are complete. All creditors are paid the same rate under a debt agreement according to the amount owing and the total contributed by the debtor.
Importantly, debt agreements do not cover all types of debts: secured creditors maintain the right to repossess assets offered as security if the debtor defaults on payments.
Am I eligible for a debt agreement?
Not everyone can apply for a debt agreement to avoid gonig bankrupt. To be eligible to lodge a debt agreement, debtors must:
- Be insolvent
- Have assets, unsecured debts and income (after-tax) for the subsequent year all less than the indexed amounts
- Have no history of bankruptcy, other debt agreements or granted any authority under Part X of the Australian Bankruptcy Act in the last decade
- Pay the $200 debt agreement lodgement fee
How does a debt agreement work?
Like bankruptcy, a debt agreement is registered through the Australian Financial Security Authority (AFSA). A debtor can prepare and lodge a proposal with the help of a debt agreement administrator. Once approved, this proposed agreement is then passed on to the appropriate creditors to vote upon the debt agreement conditions.
If the majority of voting parties accept the terms, the proposal becomes an agreement.
See the Debt Agreement Process page by the AFSA for more information
What are the consequences of proposing a debt agreement?
When you propose a debt agreement:
- Your name will appear in the National Personal Insolvency Index (NPII) permanently.
- Creditors are required to suspend deductions and are not permitted to take further action toward recovering debt while the voting period on a debt agreement is still open.
- If your proposal is rejected, a creditor may use it to appeal to the court to make you bankrupt.
- Like going bankrupt, your ability to acquire further credit will be affected. If your proposal is accepted, details of your proposal will be added to credit reporting agency’s records for five-seven years.
What are the additional consequences of entering into a debt agreement?
Once you enter into a debt agreement with your creditors:
- The debtor’s unsecured creditors are not permitted to take action to collect debts.
- Most unsecured creditors will be paid in proportion to the amount owed under the debt agreement.
- Upon completion of all obligations and payments, the debtor is released from their unsecured debts.
- Other parties owing joint debts with the debtor are not released from their share of debt.
- When trading under a business name, the debtor must disclose the debt agreement to all parties dealing with that business.
Can a debt agreement be altered or terminated?
A debt agreement may be altered or terminated should your circumstances change through an application to the AFSA. Should you default on the specified terms, your debt agreement may be terminated automatically.
Personal Insolvency Agreement (PIA)
A personal insolvency agreement is an arrangement that takes place between a debtor and their creditors where the debtor commits to repaying their debt, either in part or in full, through a lump sum or instalments. A proposal must be created by a debtor with the help of a trustee to be submitted to the creditors, who can agree to or reject the special resolution.
Like a debt agreement, a PIA does not cover secured debts: any assets offered as security may still be repossessed be a secured creditor if the debtor defaults.
A PIA generally allows you to limit the income contributions you need to make under your proposal, and can be a quick process when a single payment amount and lump sum is agreed upon. From a creditor’s perspective, a PIA usually means that they will receive more money in a shorter amount of time than they would under if you were to start going bankrupt.
Nonetheless, there are still eligibility requirements and consequences to consider before lodging a PIA.
Am I eligible for a personal insolvency agreement?
Unlike bankruptcy or a debt agreement, you do not have to meet certain income, asset or debt requirements to apply for a personal insolvency agreement.
To be eligible to propose a personal insolvency agreement, you must:
- Be insolvent
- Not have proposed another personal insolvency agreement in the previous 6 months.
- Be presently residing in Australia or maintain a strong connection to Australia, for example in the form of a business.
How does a personal insolvency agreement work?
To lodge a PIA, you must first nominate a trustee to control your property and manage a proposal for creditors. This trustee will analyse your proposal, investigate your finances and liaise with creditors. The trustee’s final report will outline how much creditors can expect to receive from the proposal by comparison to that they would receive if you became bankrupt. From this, the trustee will make a recommendation as to whether a PIA is in the creditors’ best interest.
A vote on the proposal will be taken at a meeting with the trustee, the debtor and their creditors that occurs within 25 working days of the trustee’s initial appointment.
To be accepted, the majority of debtors must vote “yes” on the proposal. The majority of debtors is defined as those making up 75% or more of the total amount owing to all creditors.
What are the consequences of proposing a PIA?
The proposal of a debt agreement is in itself an act of going bankrupt – regardless of whether or not that proposal is accepted.
- Should your proposal be rejected, a creditor can use your attempt at attaining a PIA to apply to the court to make you bankrupt.
- All existing petitions for your bankruptcy are suspended until the meeting of creditors is held and the proposal resolved.
- Your application automatically disqualifies you from managing a corporation until the PIA terms have been completed.
What are the additional consequences of entering into a PIA?
Once you enter into a PIA with your creditors:
- Your name will appear on credit reporting records for seven years and your credit rating will be affected.
- You are not permitted to deal with your property without prior agreement from your trustee
- Your name will be recorded on the National Personal Insolvency Index permanently.
What are the fees associated with a PIA?
A fee of $240 must be paid so AFSA upon lodgement of your PIA.
In addition, your trustee will charge a fee for both administering your PIA and for realising funds as part of the agreement execution, most of which is immediately passed on to the government.
For more information on how to avoid going bankrupt
Despite all of the information on this page, we have only scraped the surface when it comes to the specifics of debt and personal insolvency agreements. Research extensively before deciding whether these options are better than going bankrupt for you.
For more information, refer to this insolvency information booklet published by the AFSA.