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If you find yourself in a position where you cannot pay your personal debts, and you have creditors chasing you, your legal options may be limited.

The Bankruptcy Act 1966 (Cth) is the law which governs this type of situation. It provides three main pathways for insolvent individuals to address their debts. They are: 

  • entering into a Part IX debt agreement;
  • entering into a Part X personal insolvency agreement; or
  • voluntarily declaring, or being forced into, bankruptcy.

These processes are all regulated and in some instances, directly administered by the Australian Financial Security Authority (AFSA). This article will discuss the role that AFSA plays in managing personal insolvency processes in Australia.

Alternatives to Bankruptcy

In some instances, you may be able to avoid bankruptcy by entering into special types of agreement with your creditors. These are a:

  • Part IX debt agreement; or
  • Part X personal insolvency agreement with your creditor(s).

Both of these are legally binding agreements which specific rules and processes govern.

Part IX Debt Agreement

A Part IX Debt Agreement is a legally binding agreement to repay your creditors a reduced amount, via an administrator, over a set period of time. After you complete the payments and the agreement ends, your creditors cannot recover the rest of the money you owe.

If your debts, assets and income are all below a set amount, you will be eligible to lodge a Part IX Debt Agreement proposal to AFSA. The steps will be to:

  • meet with an insolvency professional determine whether you are eligible;
  • make a proposal to your creditors to pay a reduced percentage of your combined debt that you can afford over a period of time;
  • if your creditors accept the proposal, you can then lodge the debt agreement with AFSA; and
  • if AFSA accepts the debt agreement, you will then make repayments to a debt agreement administrator, rather than individual payments to your creditors.

The benefit to creditors is that they may receive more money than if you were to file for bankruptcy.

A debt agreement can assist you in relation to unsecured debts. However, it may not prevent secured credits from seizing and selling any assets over which they have security. 

Entering into a Part IX Debt Agreement can impact on your future credit rating. For a period of time, your name will appear on the National Personal Insolvency Index. However, it may still be a preferable option to bankruptcy. 

Part X Personal Insolvency Agreements

A Part X Personal Insolvency Agreement is a legally binding agreement between you and your creditors that sets out a process on how to discharge your debts. Like bankruptcy, it involves appointing a trustee to take control of your property. A Personal Involvement Agreement is a flexible option that can assist you in discharging debts without becoming bankrupt. This is because it involves putting forward a specific proposal to your creditors to pay part or all of your debts by instalments or a lump sum.

A Personal Insolvency Agreement can suit debtors with a high income but few limited assets, or a substantial asset but with only a limited income. The steps include:

  1. putting forward a formal payment proposal to creditors;
  2. authorising a trustee and calling a meeting of creditors; and
  3. if the creditors accept your proposal through a special resolution at the meeting of creditors, then the appointed trustee takes control of your property and financial affairs and carries out the terms and objectives of the agreement.

Creditors may prefer this pathway because it means they can avoid paying the court fees associated with bankruptcy proceedings.

It is important to understand that there are consequences of entering into a Personal Insolvency Agreement, including that:

  • if you fail to meet the requirements of the Personal Insolvency Agreement, the creditor can apply to the court to make you bankrupt;
  • your credit rating will be impacted for a period of time;
  • you will not be able to deal with your property without the consent of the trustee; and
  • you cannot manage a corporation until the you have finalised the terms of the agreement.

Bankruptcy

Bankruptcy is the last resort option if you cannot pay your personal debts. It is a legal process where a ‘trustee in bankruptcy’ sells your assets and property. It is a lengthy and sometimes complex process, which ultimately releases you from your debts and enables you to have a fresh start with your finances.

If you are insolvent and cannot negotiate a compromise with your creditors, you can opt to declare bankruptcy yourself. Alternatively, you can be forced into bankruptcy by a creditor which has a court judgment for a sum of money that you are unable to pay.

When you go bankrupt, a trustee will be appointed to you. This trustee will:

  • take control over most of your assets and property (including, in some cases, your house);
  • take control of your financial affairs, including potentially taking a cut of your income;
  • arrange for the sale of your assets and property; and
  • issue dividends to all identified creditors in an attempt to pay down their debts as much as possible. Here, the dividend that creditors get will typically be lower than the debt amount itself.

The trustee will also tax your assets to cover their own professional fees. 

Consequences of Bankruptcy

The bankruptcy process usually lasts a minimum of three years. During this time, you cannot be a company director, and your ability to travel internationally may be restricted at your trustee’s discretion. While you are bankrupt, your ability to sue and be sued for existing debts is also limited. It is important to understand the consequences for you before filing for bankruptcy.

At the end of this process, your debts will be formally discharged (with some exceptions, such as student loans). From a financial point of view, you have the opportunity to start over. However, the long term consequences of bankruptcy include:

  • permanently being listed in a publicly accessible insolvency register; and
  • negatively impacting your credit.

AFSAs Role 

Bankruptcy and other insolvency arrangements all have the potential to be complex and time-consuming processes. Trustees and administrators are in positions of power, and their decisions have a significant impact on people’s lives. A specialist government agency, AFSA, therefore regulates their conduct. 

AFSA manages both the appointment and regulation of trustees and the administration of the broader personal insolvency system. If you have issues or complaints with a trustees conduct, you can seek assistance from AFSA.

Appointment and Regulation of Trustees and Administrators

AFSA has an office called the ‘Official Trustee in Bankruptcy’ which contains staff and resources to administer:

  • bankruptcy arrangements;
  • debt agreements; and 
  • personal insolvency agreements.

AFSA also regulates any private trustees which it does not employ. All trustees and administrators are only entitled to practice in the first place if they meet AFSA’s qualification requirements.

When they are practising, trustees and administrators are required by law to maintain a standard of:

  • professionalism;
  • independence;
  • honesty; and
  • ethical conduct.

In the event that you have complaints about your trustees or administrators conduct (whether Official Trustee or private) you have the option to complain to AFSA and AFSA will investigate the matter. You can also complain to AFSA you are dissatisfied with your trustees claim for remuneration from your pool of assets and finances.

Official Receiver

AFSA also functions as the ‘Official Receiver’, which is the official public registry of all bankrupt individuals. This register means that anyone can find out if you are bankrupt or party to a Part IX or Part X agreement, including potential employers or financial lenders. 

Key Takeaways

AFSA plays a significant role in ensuring that personal insolvency processes are administered consistently and fairly. If you are in a position where you risk entering bankruptcy, it is important to understand that you may have a range of options available to you. If you have any questions about the bankruptcy process in Australia, contact LegalVision’s bankruptcy lawyers on 1300 544 755 or fill out the form on this page.

Note: LegalVision is not AFSA; we are a private law firm with expertise in disputes, litigations and insolvency processes. Please reach out if you have any questions about recovering debt in the context of personal insolvency.

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