Managing the unmanageable: legal and formal options for debts in Australia

Today, you can hear about bankruptcy at every corner. Businesspeople are talking about it, ordinary men are talking about and it is constantly on the news. Countries are even going bankrupt these days. This is all the consequence of the Great Economic Crisis, since it has brought a lot of problems with credits and loans, thus causing a great problem for anyone. The world is still recovering from it, so it is advisable to get acquainted with the options that exist should you be in the danger of becoming bankrupt.

When a person, an organization (business) or a country go bankrupt, this means that their overall debt exceeds their income and assets, and that there are no or little possibilities that they are going to pay that debt off. Before they officially declare bankruptcy, this economic state is called insolvency. A few options exist during the state of insolvency, and certain steps need to be followed in order to stop being insolvent, but if all that fails, then bankruptcy has to be declared. When bankruptcy is declared, that person or business is forbidden from taking further credits and loans and there are other legal implications that follow, usually leading to the repossession of your assets. This will in the end clear you of all your debts, but the price is that you will be financially dead for the next couple of years and it will be recorded in your credit ratings that you went bankrupt, so you will not be generally regarded as a trusted customer for the financial institutions.

In Australia all proceedings and options that exist for bankruptcy are regulated by the Bankruptcy Act of 1966. This legal document also contains all the possible formal options for avoiding bankruptcy and coming out of the state of insolvency.

Formal Options

If you have tried all you can to come out of insolvency, and have tried all the possible informal options and you have failed, there are the formal options which you can take for avoiding bankruptcy and which are regulated by the Bankruptcy Act of 1966. However, it is strongly recommended by ITSA (Insolvency and Trustee Service of Australia) that you seek independent financial guidance before turning to these options, and that they should be regarded as a last resort.

There are two options under the Bankruptcy Act:

1      Debt Agreements

2      Personal Insolvency Agreement

Once again, it must be stressed that these options should be your last resort, since they have some consequences associated with them.

1      Debt agreements

First of all it should be stated that only the debtors that are in the state of insolvency can enter a debt agreement with their creditors. The debtors that are solvent are not allowed to conclude such an agreement, because it would undermine the system of credit and the system of the debt agreements.

Debt agreement is the agreement between the debtor and all of the creditors of that debtor in which there is a change in the regulations for paying all the outstanding debts of that debtor. The debtor can propose the agreement to the creditors, and all of them get to vote on the proposal. If the majority of the creditors agree, then the agreement is in place.

Options that are available for changing the payment of the debts include:

●     Change in the periodic payments of all the provable debts to the creditors, out of the debtors income. This usually changes the amount of time that the debtor has, in order to pay off all the debts owed.

●     Lump sum payment of a part of the provable debt

●     A moratorium on the debt payments. This means that the debtor gets a certain grace period for the debts in order to be able to acquire the money needed.

●     Payment from the sale of the debtor’s property.

These agreements are also known as Part IX Agreements, according to the Bankruptcy Act, since they are explained in the part IX of the Act.

2      Personal Insolvency Agreements

Personal Insolvency Agreements are another way to avoid going bankrupt. These are explained in the Part X of the Bankruptcy Act. They are a flexible way to come to an agreement with the creditors for the payment of the debts that include no asset, income or debt limits.

The debtor, however, has to be a resident in Australia, or to have some kind of business connection to Australia (to be involved with a business in Australia), in order to be an appropriate candidate for the Personal Insolvency Agreement. Also, you have to be in the state of insolvency.

Personal Insolvency Agreements operate via a trustee, and these agreements may involve:

●     Lump sum payments via a trustee to the creditor from the debtor’s money or money of a third party (e.g. friends and relatives);

●     Assigning assets to the trustee to be sold and the net proceeds to be distributed to the creditors as payment, or assigning the proceeds of the sale to the trustee to be further distributed;

●     Periodic payments to the trustee to be further distributed.

These two options are the last resort, sort of a last guard before bankruptcy. Since anyone should strive to avoid bankruptcy, it is advised that you look at these options. However, as said above, ITSA strongly advises seeking independent financial guidance before consulting these options, and even provides a list of independent councilors, registered debt agreement administrators and registered insolvency trustees