At Pearce & Heers, we’re often called upon to assist clients who are unable to pay all debts they owe to creditors. These debts could include credit card debts, tax debts or debt from personal guarantees for a failed company. Bankruptcy can and does result from these circumstances, but it’s important to realise that in many cases, bankruptcy might not be the only option.
So, if you’ve reached the conclusion that you cannot pay off all your debts, what exactly are your options?
Don’t leave your creditors in the dark. Negotiate a possible resolution.
The key thing to consider when faced with possible bankruptcy is that creditors know a person filing for bankruptcy often provides them with little if any return.
In many cases, an option other than bankruptcy is more likely to provide creditors with at least some benefit and as such, they are often willing to negotiate a settlement of some kind. If you only have a small number of creditors, it may be possible to negotiate settlements with each of them individually. If all or most debts can be settled, then bankruptcy can be avoided.
We have negotiated numerous settlements with creditors, sometimes securing significant discounts on amounts owed. The approach we usually adopt involves providing creditors with a full summary of a client’s financial position, often with a comparison estimate of their position if they go bankrupt. This comparison helps creditors understand that should a person file for bankruptcy there may be little or no amount paid to them.
We will then make an offer of settlement to creditors on our client’s behalf and subsequently liaise with each creditor regarding the offer, any counter-offer received and if negotiations are successful, prepare a settlement agreement.
Providing creditors with information to fully understand a person’s financial position means they are more likely to be open to negotiating a settlement of their debt for a lower amount, reducing the interest on their debt for a period, or allowing deferred payment of their debt.
Informal arrangements can often be organised quite quickly, however they require acceptance of the proposed settlement offer by all of a person’s creditors (or at least, the vast majority of creditors) to be successful. If one or more creditors reject a proposed offer, the informal arrangement may not be able to proceed. Consequently, proposing informal arrangements becomes more difficult as the number of creditors increases.
How to avoid bankruptcy: Your options explained – Part 2
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.
Debt Agreements
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.
