Part X (Part 10) of the Bankruptcy Act allows a debtor to enter into an arrangement with their creditors to satisfy their debts without being made bankrupt. This arrangement is called a Personal Insolvency Agreement.
A debtor will usually use a Personal Insolvency Agreement to:
- get relief from their debts
- ensure a fair distribution of their assets to creditors
- provide a higher dividend than would be payable in bankruptcy
- maintain their source of income and
- avoid the restrictions of bankruptcy
A Personal Insolvency Agreement is a formal agreement between the debtor and their creditors and records how the debtor will satisfy their debts, once creditors have agreed to the proposal.
The proposal will usually provide for the payment of money over time and the sale of some assets. It will also usually contain a suspension of creditor's claims throughout the term of the Agreement and payment of less than the full amount in full satisfaction of claims.
An individual can propose a personal insolvency agreement when certain conditions are met:
- The debtor must be insolvent
- The debtor must be present in Australia or otherwise have an Australian connection
- Unless the debtor has permission from the Court, they cannot have proposed another PIA in the previous six months
A debtor must choose a Controlling Trustee, either a solicitor or a Registered Trustee in bankruptcy and provide them with three documents:
- an authority under Section 188 giving the controlling Trustee control over their assets and requiring them to call a meeting of creditors to consider the proposal
- a statement of affairs detailing all assets, liabilities and other personal information
- a draft personal insolvency agreement detailing the terms of the proposal to be made to creditors.
The Controlling Trustee will sign a Consent to Act and will forward the material to AFSA (Australian Financial Security Authority) for registration on the official record. AFSA will then give the estate an Estate Number.
Accepting the Proposal
The majority of creditors and more than 75% in value of creditors attending and voting at the meeting must vote in favour of the proposal for this special resolution to be accepted. If the proposal is not accepted by the required majority, the creditors may resolve that the debtor bankrupt themselves.
Section 188 authority
In the course of the Part X process a debtor will commit a number of acts of bankruptcy, including signing the section 188 authority, the holding of a meeting of their creditors and obtaining a special resolution by creditors. Any creditor may use these Acts to apply to the court to have the debtor made bankrupt if the proposal is not accepted.
Debtor's property and income
There are no income, asset or debt limits involved in Personal Insolvency Agreements.
Only property that is included in the Personal Insolvency Agreement is affected. Property that is not included in the agreement is not available to creditors. The debtor is only required to contribute some of their income if the agreement includes terms requiring them to do so. When applicable, the debtor will make the same type of contribution out of income that they would if they were bankrupt.
The Agreement ends when the debtor fully satisfies the requirements of the deed and the funds distributed by way of dividend.
Who administers a Personal Insolvency Agreement?
The proposal for an agreement must include the appointment of a registered Trustee or the Official Receiver to administer the agreement. The Official receiver will be the Trustee if a Registered Trustee is not nominated. The powers and obligations of the Trustee will be set out in the agreement and the Bankruptcy Act. They essentially will be to enforce the terms of the agreement, sell any assets, collect any monies and make a distribution to creditors.
Effect on Credit rating
The fact that the debtor has signed a section 188 Authority will be noted by credit agencies. This may be more favourable than outstanding writs, defaults and a bankruptcy on the debtor's file.
A debtor cannot act as a director whilst subject to the terms of a Personal Insolvency Agreement. This restriction is lifted when the agreement has ended.