Bankruptcy is a process whereby the financial affairs of a person who is insolvent are managed by a trustee in bankruptcy. The bankrupt is released from their liabilities and at the same time their property, if any, is handed over to the trustee who has responsibility to sell it and pay out the creditors.
A person is generally bankrupt for 3 years although the period may be extended if the bankrupt does not co-operate.
The Bankruptcy Act 1966 deals with all personal insolvency and only individuals can go bankrupt and not companies. The Bankruptcy Act provides for three main solutions to financial difficulties:
If you are unable to pay your debts and cannot come to a suitable repayment arrangement with your creditors you may voluntarily petition to become a bankrupt.
At the time of petitioning, you must be present in Australia or otherwise have an Australian connection.( eg: ordinarily live in Australia)
There is a permanent record of your bankruptcy on the National Personal Insolvency Index and the bankruptcy generally lasts for a period of 3 years, although it can be extended in certain circumstances.
Your creditors are notified of your bankruptcy and unsecured creditors should stop pursuing you for the payment of debts.
Note that creditors can also apply to the Court to make you bankrupt if they can satisfy the court that you owe them money above a minimum amount.
The trustee will:
- sell your assets ( Note: some assets are exempt from sale)
- request contributions from your income once you earn a certain amount
- investigate your financial affairs and may recover property or money that has been transferred to someone else at lesser of market value.
Part X Personal Insolvency Agreements (“PIA”) provide a debtor in financial difficulty with a formal mechanism where they can come to a binding arrangement with their creditors and avoid bankruptcy. They are an important feature of the personal insolvency system because creditors have the opportunity to make commercial decisions about how they will best receive money. There are no income, asset or debt limits. A debtor must be insolvent to enter into such a proposal and must be present in Australia or otherwise have an Australian connection.
A PIA may involve:
- a lump sum payment to creditors, via the trustee, either from the debtors own money or money from third parties (family and friends)
- an assignment of assets to the trustee, to be sold and the net proceeds distributed to creditors or the payment of the sale proceeds of assets to the trustee for distribution to the creditors
- periodic payments to the trustee to be distributed to creditors
A creditors meeting is held where creditors consider the proposal. 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 creditors debts( referred as a special resolution)
Part IX (Debt Agreements) was introduced into the Bankruptcy Act in 1996 with the aim of providing low income debtors and their creditors with an informal and inexpensive alternative to bankruptcy and the more formal and expensive Part X Arrangements.
A Debt Agreement can be proposed by a debtor who has:
- not been bankrupt, utilised a debt agreement or given an authority under Section 188 of the Bankruptcy Act in the last 10 years
- after tax income of less than $63,363.30
- unsecured debt of less than $84,464.40
- property that would be divisible among creditors if the debtor were bankrupt, valued at less $84,484.40
An insolvent debtor offers his creditors a proposal that is achievable and sustainable. The debt agreement proposal is sent to creditors to vote upon. It may be accepted or rejected by the creditors.
A proposal is accepted if a majority of creditors in value vote in favour of the debtors’ proposal. All creditors with provable debts are bound by the agreement, even those that have voted against it.
Some examples of kind of proposals offered are:
- periodic payments of amounts out of the debtors income
- a moratorium of debts
- payment from the proceeds of sale of property owned by the debtor.
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