Bankruptcy and Other Arrangements
The effects of the mining downturn have been felt by many across our region. While some may have been fortunate to have avoided severe financial stress, others are still struggling to cope due to the reduced employment opportunities and falling house prices. To provide some context, it has been reported a home in Moranbah which sold for $589,000 during the boom in 2011 was sold by mortgagee auction late last year for only $118,000 leaving the former owners with no home and hundreds of thousands of dollars in debt.
A person becomes insolvent when they cannot pay their debts when those debts fall due. While some may see bankruptcy as the only option, there are other arrangements which can be made with creditors to assist you to manage repaying your debts without becoming bankrupt.
Although bankruptcy is often considered the last resort, there are reasons why it still can be the best option.
Informal Agreements with Creditors
Outstanding debts should not be ignored as they are usually not going away anytime soon and creditors will usually take enforcement action to recover what they are owed. We suggest that your first point of call be to the creditors themselves. While some creditors may be more sympathetic to your circumstances than others, there is no harm in trying to establish an informal agreement with them for the repayment of the money that you owe.
Debt and Personal Insolvency Agreements
A Debt Agreement and a Personal Insolvency Agreement are two types of formal agreements which a person can make with their creditors under the Bankruptcy Act 1966.
A Debt Agreement can be a flexible way for a person to settle their debts without becoming bankrupt. A Debt Agreement, also known as a Part 9, is a legally binding agreement between you and your creditors. This is the type of agreement you now regularly see organisations advertising on TV to assist you with to enter into (usually for a fee which can be a concern as the risk is some organisations may prefer their own interests over your bests interests in these circumstances).
Your debts are combined and you negotiate to pay back a percentage of your combined debt over a set period of time. The amount payable is based on what you can afford and the repayments are made to an administrator. Once the agreement is completed, your creditors cannot recover the rest of the money that you may owe. However, there are debt, asset and income limits that apply for this type of relief and it may not cover all debts.
Another option is a Personal Insolvency Agreement. A Personal Insolvency Agreement, also known as a Part 10 is another type of agreement available under the Bankruptcy Act.
A Personal Insolvency Agreement involves the appointment of a trustee, similar to bankruptcy to take control of your property and make offers to your creditors. The offer may include paying part of or all of your debts either in instalments or by way of a lump sum. Unlike Debt Agreements there are no debt, asset and income limits that apply. However, again, this type of agreement may not cover all your debts.
A person who becomes bankrupt loses their assets to the trustee in bankruptcy, in exchange for protection from legal action being taken against them by any persons or entities owed.
There are a number of adverse impacts of bankruptcy which are not detailed in this article.
Choice of Option
We have seen it stated by liquidators who specialise in insolvency including personal bankruptcy, that bankruptcy is still often the best alternative. This is because with bankruptcy:-
- It finalises all your debts;
- It shifts the burden of dealing with creditors from you, to the trustee in bankruptcy;
- Bankruptcy last for only three years. While in can be extended, this is only in limited circumstances; and
- Once the bankruptcy ends, you can start accruing assets again. You will not be impacted by the previous debts which were dealt with by the bankruptcy.
If you would like to discuss any of these options to deal with debt in more detail, especially before taking a step towards a Debt or Personal Insolvency Agreement or Bankruptcy, please do not hesitate to contact our office and speak with one of our experienced solicitors.