What is Personal Bankruptcy?
In Australia, people sometimes use the term Personal Bankruptcy, as if there’s a separate type of bankruptcy for companies.
SPOILER ALERT: There isn’t.
Instead, we have two separate pieces of legislation for insolvency in Australia. The Corporations Act 2001 covers insolvency for companies and the Bankruptcy Act 1966 covers insolvency for people.
Contrary to popular belief, it’s impossible for an Australian company to become bankrupt.
Instead, the term personal bankruptcy is a pleonasm, much like tuna fish, frozen tundra or black darkness.
Why are some Aussies confused about personal bankruptcy?
When people talk about Bankruptcy, it’s not uncommon to hear or see comments like this:
The first thing to understand is that Bankruptcy legislation isn’t universal. While a company is capable of becoming bankrupt in the U.S.A, that’s not the case in every country, least of all in Australia
What’s the story for companies?
In Australia, the Corporations Act is the relevant legislation for all companies. The Australian Securities and Investments Commission (ASIC) is Australia’s integrated corporate, markets, financial services and consumer credit regulator. One of the many laws that ASIC administer is the Corporations Act 2001.
The insolvency provisions within the Corporations Act 2001 are:
Voluntary Administration
A major secured creditor or director of a struggling company can appoint an external voluntary administrator. Their role is to investigate the company and then report to creditors on whether the entity should;
- Go into liquidation
- Continue operating under the control of the directors or;
- Enter into a Deed Of Company Arrangement (see DOCA below)
Liquidation/Wind up
Liquidating or winding up a company refers to the formal process of selling any available company assets. The proceeds are then made available to pay outstanding company debts. A licensed liquidator is usually appointed to manage this process. Any surplus funds left at the end of the liquidation, are usually paid to company shareholders. If there are no funds available after the liquidation, outstanding company debts remain unpaid and the company is wound up.
For directors who gave personal guarantees for company debts, the liquidation will not stop creditors from pursuing guaranteed debts. This is when personal insolvency options like bankruptcy can sometimes be relevant.
Receivership
Receivership is usually initiated by a secured creditor. A receiver is appointed to sell some or all the company’s secured assets to pay any debt owing to the secured creditor. As with liquidation, creditors can still pursue directors for any shortfalls on debts with a guarantee.
Deed of Company Arrangement (DOCA)
A DOCA is a formal and binding agreement between the company directors and the creditors. The agreement outlines how the company’s affairs will be managed to maximise returns to creditors. The arrangement usually covers what will happen if the company continues to operate or is wound up.
What’s the story for individuals?
The Bankruptcy Act is the relevant legislation for individuals who are unable to pay their debts. It can extend to directors who have large debts from personal guarantees, as these won’t be cleared by corporate insolvency.
The Australia Financial Security Authority (AFSA) acts as the Inspector-General in Bankruptcy, the Official Receiver, Official Trustee in Bankruptcy and the Registrar of Personal Property Securities (PPSR). AFSA is also responsible for regulation and enforcement within the personal insolvency industry and the administration of any proceeds of crime.
The insolvency provisions for individuals within the Bankruptcy Act 1966 are:
Declaration of intention to present a debtor’s petition (DOI)
If you need time to consider your options, a DOI provides a 21 day period (temporarily extended to 6 months due to COVID-19) where unsecured creditors are unable to take legal action to recover a debt. This includes activity from writs or garnishee orders. It doesn’t stop secured creditors like a mortgagee from repossessing their security if you’re behind in repayments.
While you won’t automatically become bankrupt after the specified time is up, you will have committed an Act of Bankruptcy. A creditor can rely on this to petition the Federal Circuit Court to make you bankrupt.
Debt Agreement
A debt agreement from Part IX or 9 of the Bankruptcy Act 1966 is a binding agreement between you and your creditors where creditors agree to accept a sum of money which you can afford and is based on your capacity to pay.
While a debt agreement proposal can be administered by anyone, they are typically managed by licensed insolvency practitioners such as a Registered Debt Agreement Administrators, Registered Bankruptcy Trustees or qualified solicitors.
As long as the majority of your creditors in dollar value, i.e., 50.01% who decide to vote, and are entitled to vote, accept the Proposal, it becomes legally binding on all creditors. It’s the creditors who decide whether to accept or reject the proposal.
To be eligible to propose a debt agreement you must:
- Be insolvent
- Have not been an undischarged bankrupt, or party to an undischarged Debt Agreement proposal or given an authority under Part X of the Bankruptcy Act in the last 10 years
- Have unsecured debts, assets and after-tax income for the next 12 months all less than set limits
As with all personal insolvency options aside from the DOI, your credit rating will be impaired for 5 years and there’ll be a listing on the National Personal Insolvency Index (NPII). The NPII listing will be removed after 5 years, provided you’ve met your obligations with the debt agreement.
Click here to learn more about debt agreements
Personal Insolvency Agreement
A personal insolvency agreement (PIA) from Part X or 10 of the Bankruptcy Act 1966 is another type of agreement between you and your creditors.
Unlike Debt Agreements, there are no income, asset or debt limits. But, you must be insolvent to propose a PIA. Additionally, this type of agreement can only be administered by a controlling trustee. A controlling trustee is a Registered Bankruptcy Trustee, the Official Trustee or a solicitor who is a full member of ARITA or who has otherwise completed an Inspector-General approved insolvency course.
The terms of the proposal may vary and can include:
- A lump sum payment to creditors via the trustee either from your own money or money from third parties (e.g. family or friends); and/or
- An assignment of assets to the trustee which will be sold and the proceeds distributed to creditors or the payment of the sale proceeds of assets to the trustee for distribution to the creditors; and/or
- Instalment payments to the trustee to be distributed to creditors.
Acceptance of the proposal requires a ‘yes’ vote from a majority of creditors who represent at least 75% of the dollar value of the voting creditor’s debts (referred to as a ‘special resolution’).
As with all personal insolvency options aside from the DOI, your credit rating would be impaired for 5 years and there will be a listing on the National Personal Insolvency Index (NPII).
Click here to learn more about personal insolvency agreements
Bankruptcy
When you become bankrupt, your provable unsecured debt is no longer payable. Unsecured debt includes credit cards, personal loans, shortfalls and even tax debt.
Bankruptcy normally lasts for 3 years and 1 day before you’re discharged. Whether your creditors receive any money from your bankruptcy will depend on a range of factors, including how much you earn. It’ll also come down to the type of assets you own as some assets are protected while others are not.
Only a Registered Bankruptcy Trustee or the Official Trustee can manage bankruptcies in Australia.
As with all personal insolvency options aside from the DOI, your credit rating would be impaired for 5 years and there will be a listing on the National Personal Insolvency Index (NPII).
In reality, it’s pretty hard to cover the ins and outs of bankruptcy within one paragraph. While the act is the same for everyone, individual circumstances vary and so do the outcomes in bankruptcy.
To read more about how Bankruptcy works click here.
So what’s the moral of the story? Personal Bankruptcy is just Bankruptcy.
Got Questions?
Getting some advice on your situation and the options available is a great place to start.
Call 1300 369 168, start a chat or make an online enquiry to speak with an experienced insolvency professional today.