In part one of our article on avoiding bankruptcy, we demonstrated why creditors are often willing to negotiate an alternative to a debtor becoming insolvent.
If you have reached the stage where you are ready to open negotiations with your creditors, here are the types of settlement most commonly utilised to avoid bankruptcy.
Alternatives to Bankruptcy
Personal Insolvency Agreements
A Personal Insolvency Agreement (PIA) is a formal agreement between an insolvent person and their creditors. In order to put forward a proposal for a PIA, a person must appoint a controlling trustee who will review the person’s circumstances and provide a report to the person’s creditors, which will include (among other matters):
- Brief details of the person’s financial affairs
- A summary of the person’s assets (if any)
- Details of the person’s creditors
- A summary of the estimated returns should the person go bankrupt
- A comparison summary of estimated returns if the proposal for a PIA is accepted
- A recommendation as to whether or not creditors should accept the proposal for a PIA
The controlling trustee will then convene a meeting of creditors at which each of the creditors will vote on the PIA proposal. For the proposal of a PIA to be accepted, it must be approved by a special resolution of creditors, which means approval by the majority of individual creditors, and by more than 75% of the value of creditors voting at the meeting.
If the proposal is accepted, it is binding on all creditors. Subject to compliance, the person making the proposal will then avoid bankruptcy. If the proposal for a PIA is rejected, the creditors can vote in favour of the debtor becoming bankrupt. However, a debtor does not have to accept this if they can find an alternative means of resolution.
A proposal for a PIA may take many forms and may commonly involve:
- The sale of certain assets which a person owns; and/or
- Payment of a lump sum amount by a relative or associate of the debtor; and/or
- Payment of amounts over time by instalments by the debtor; and/or
- Certain creditors associated with the debtor agreeing not to claim for a dividend if the proposal is accepted.
A person who has net assets, creditors and income under a certain statutory limit may be able to avoid bankruptcy by putting forward a proposal for a Debt Agreement. This type of proposal will usually involve agreeing to pay a certain amount in a lump sum or by instalments over time, which is generally less than the total amount owed to creditors.
If the proposal is accepted by the majority of the person’s creditors, then it is binding on all unsecured creditors and the administrator of the agreement will collect the amounts payable by the person and distribute the funds received to creditors on an equal pro rata basis.
If you do have to declare bankruptcy…
If no other alternatives are available, a person can voluntarily become bankrupt by lodging a Debtor’s Petition. A creditor who is owed more than $5,000 and has a court judgment can also make someone bankrupt.
If a person becomes bankrupt, a third party (a bankruptcy Trustee) is appointed to take control of their affairs for a period of three years (unless the bankruptcy is extended).
The role of a bankruptcy Trustee includes:
- Conducting investigations
- Collecting or selling any assets which are able to be sold in bankruptcy, such as cash at bank, real property, shares and motor vehicles (valued over a certain statutory limit)
- If a person earns over a certain income level, collecting amounts from the person’s income
- Pursuing recovery actions, such as claims against entities which have received transfers of assets for less than fair value
- Reporting to the person’s creditors
Bankruptcy shouldn’t always be considered a bad thing. In some cases, it’s the best option for a person in financial difficulty. While it will affect a person’s credit rating and potentially their professional reputation for some time, it does mean that person is relieved of most of their debts, allowing them to rebuild their finances without being pursued by creditors.
How we can help
Pearce & Heers have highly skilled team on hand including Chartered Accountants, Registered Liquidators and Registered Bankruptcy Trustees. Our experienced insolvency professionals are best equipped to analyse your individual situation and advise on the options available.
If you or one of your clients requires assistance regarding financial problems, Pearce & Heers are here to help. We encourage you to contact us for a free initial consultation.