Types of Personal Insolvency Appointments

Bankruptcy is just one formal option available under the Bankruptcy Act to manage your debt. Other formal options include temporary debt protection for 21 days reprieve from creditors enforcing a judgement against you, a debt agreement or a personal insolvency agreement. Talk to Corporate Lifeline about your best options.

Voluntary Bankruptcy

A debtor may voluntarily lodge a Bankruptcy Form to become bankrupt. The bankruptcy will commence upon the acceptance of the Bankruptcy Form by the Official Receiver.

A debtor can request for a Registered Trustee to administer their bankrupt estate or alternatively, the Official Trustee will be appointed to administer the debtor’s bankrupt estate.

Involuntary Bankruptcy – a creditor makes an individual bankrupt

A creditor whom is owed $5,000 or more may apply to Court and follow the relevant process to have an individual declared bankrupt.

The effects of bankruptcy and the bankruptcy process itself are virtually the same, irrespective of the method by which the bankruptcy has commenced.

Personal Insolvency Agreements (“PIA”) – Part X

A PIA is a legally binding agreement between the debtor and their creditors. It is a flexible way for a debtor to come to an agreement with their creditors to settle the debts without becoming bankrupt.

A PIA may involve a lump sum payment to creditors, transfer of assets to creditors and/or a payment arrangement with creditors.

There are two (2) stages to a PIA:

A debtor initiates the appointment of a Controlling Trustee by written authority. The debtor puts forward their proposal for dealing with their financial affairs.

The Controlling Trustee makes enquiries and investigations into the debtor’s affairs and prepares a report to creditors and convenes a meeting of creditors at which the creditors vote on the debtor’s proposal.

If the proposal is accepted by creditors (a special resolution – 75% of the dollar value of voting creditors and a majority of creditors voting yes), the Controlling Trustee’s appointment is terminated and a Trustee will be appointed to administer the PIA.

If the proposal is rejected, creditors will either vote in favour of the debtor becoming bankrupt or leave it up to the debtor to decide how to resolve their financial difficulties.

Debt Agreements – Part IX

A Debt Agreement is similar to a PIA in terms of a binding agreement between a debtor and their creditors, however, the following are differences:

• The Agreements are lodged with the Official Receiver.
• They are intended for lower asset/liability cases.
• The estates are administered by a Debt Agreement Administrator.
• Edibility for a Debt Agreement is based on certain limits which are currently (as at 1 July 2020 and updated twice a year):
• The unsecured debts must be less than $118,063.40;
• The divisible assets are less than $236,126.80; and
• After-tax annual income is less than $88,547.55.

Bankruptcy – Divisible Property

Divisible property vests in the Trustee in Bankruptcy and the debtor can no longer deal with the property. It includes all property that belonged to, or was vested in, the debtor at the commencement of the bankruptcy and all property acquired by the debtor after the date of bankruptcy but prior to discharge of bankruptcy. The following are examples of divisible property:

• Land and buildings;
• Motor vehicles with an equity interest above a specific amount (updated each financial year and the threshold set as at 1 July 2020 is $8,000);
• Shareholdings and investments;
• Cash at bank less a reasonable amount, as determined by a Trustee in Bankruptcy, for day to day living expenses;
• Tax refunds for income earned prior to bankruptcy;
• Assets of excess value;
• Receipts as a result of action commenced by the Trustee in Bankruptcy, for example, antecedent transactions; and
• Statutory income contributions, if the debtor’s net annual income is above the following certain amounts, as at 1 July 2020 (updated twice annually), they are required to pay to the Bankrupt Estate 50% of the net income earned above the set amount.

The following are examples of assets which vested in the Bankrupt Estate during the period of bankruptcy:

• Lotto winnings;
• Inheritances; and
• Assets acquired from ‘surplus’ income.

Bankruptcy – Excluded Property

A debtor is entitled to keep the following assets:

• Most ordinary household items;
• Regulated superannuation funds (certain exemptions, if for example a debtor transfers assets into a superannuation fund with the intention to defeat creditors);
• Claims for damages or compensation for personal injury or wrongdoing and any assets bought wholly or substantially with such compensation;
• Personal property of the debtor, for example, items of sentimental value, if creditors agree;
• The debtor’s property which is used to earn an income, for example, tools of trade up to a indexed amount of currently $3,800 (updated each financial year);
• Motor vehicles used mainly for transport below the indexed amount of $8,000 (updated each financial year);
• Life insurance policies for the debtor and their spouse; and
• Property held in trust by the debtor for another person (for example, a child’s bank account).

Finalisation of Bankruptcy

Automatic Discharge

Unless a Trustee in Bankruptcy lodges an Objection to Discharge (can be lodged on a number of grounds, including but not limited to, the debtor’s failure to provide information and assist the Trustee in Bankruptcy, disclose all income and assets and explain how monies were spent. An objection may extend the duration of bankruptcy to five or eight years) a debtor is discharged at the end of the period of three years and one day from the date the debtor lodged the Bankruptcy Form, and it was accepted by the Official Receiver.

The administration of the debtor’s bankruptcy may continue after bankruptcy, however, the debtor’s status on NPII will indicate a discharged bankrupt and a debtor will be released from all provable debts.

Annulment

Annulment by payment of all debts in full, including interest, realisations charge (currently 7% of all assets realised by the Trustee in Bankruptcy) and the Trustee in Bankruptcy’s expenses and fees.

Annulment by composition or arrangement (Section 73 of the Bankruptcy Act 1966) in which creditors accept an offer for something less than payment in full. This amount will usually be greater than creditors would receive if the bankruptcy continued. This is similar to a PIA, however, during bankruptcy.

Annulment by Court Order

The effect of annulment results in assets not required by the Trustee in Bankruptcy to pay creditors and fees and expenses will be returned to the debtor. The debtor’s status on NPII will indicate annulled.