An insolvent person is one who cannot meet his or her debts when they are due. There can be many precursors to individual insolvency – employment issues, health problems, poor investment choices or bad business decisions are just a few. These issues can be exacerbated by external factors, some beyond a person’s control.
What are my options if I am insolvent?
If you are having difficulty managing your financial affairs, sound professional advice can help you understand your legal position and guide you through options to manage your situation.
The Bankruptcy Act 1966 (Cth) is the commonwealth legislation that governs bankruptcy Australia wide. Importantly, the purpose of bankruptcy laws is not necessarily to ‘punish’ people who find themselves in an unfortunate financial position. Rather, they aim to provide a fair approach to repay creditors and explore options that may deliver the most effective outcome in light of the circumstances. Having said that, bankruptcy laws also facilitate investigation into the activities of scrupulous individuals such as conduct designed to defeat creditors.
How does a person become bankrupt?
Individuals may choose to be declared bankrupt if they have a debt that they are unable to pay. This is known as voluntary bankruptcy and requires the filing of a debtor’s petition and statement of affairs with the Official Receiver.
Alternatively, a person may be ordered bankrupt by court upon the lodgement of a creditor’s petition in circumstances where the creditor is owed more than $5,000. Usually, there must be a judgment in the creditor’s favour and a bankruptcy notice must have been served on the debtor. The grant of a sequestration order by the court declares the individual bankrupt.
In either case a trustee in bankruptcy is appointed to administer the financial affairs and deal with the assets of the bankrupt person.
Implications of bankruptcy
Bankruptcy is a legal process that protects an insolvent individual from being further pursued by creditors. The creditors must instead deal with an appointed trustee in bankruptcy who manages the financial affairs and property of the bankrupt.
The bankrupt must advise the trustee if he or she changes name or address and obtain permission from the trustee to travel overseas. Any passport is surrendered to the trustee upon the trustee’s request.
Apart from certain personal assets, all property vests in the trustee who may sell those assets to pay debts. The following is excluded:
– clothing, personal and household items;
– tools of trade or property (to a prescribed value) used to earn a living;
– a motor vehicle (to a prescribed value);
– awards of damages for personal injury and compensation payments;
– superannuation and life policies.
The bankrupt may continue to earn an income however earnings over a prescribed amount may need to be surrendered to repay debts.
The bankrupt may be prevented from acting as a company director or managing a company and / or restricted from continuing in certain professions that are governed by specific codes of conduct. At the least, the bankrupt will need to disclose his or her status to various entities such as governing bodies and lending institutions.
Upon the expiration of three years from the date the bankrupt lodges with the trustee his or her statement of affairs, the bankrupt is automatically discharged unless the trustee objects based on the bankrupt’s conduct.
Alternatives to bankruptcy
If possible, it may be preferable for an insolvent person to avoid bankruptcy by entering into an alternative arrangement. Talking to an insolvency expert can assist in exploring these avenues and making a decision that will provide the best possible outcome.
An informal agreement is usually the first option explored and involves negotiating a repayment plan with one or more creditors. This is most effective if negotiated sooner rather than later and where there are only one or a few creditors.
A debt agreement is a formal agreement between creditors and an insolvent person providing for the debtor to pay a lesser amount in satisfaction of the debt, or to repay the debt by instalments. In some cases, the debt agreement may provide for the debt to be completely waived.
A personal insolvency agreement is managed by a trustee who liaises with creditors who may vote in favour of a proposal to repay the debt. Although the agreement avoids some of the implications of bankruptcy, it is recorded on the National Personal Insolvency Index which may affect the person’s ability to obtain future credit.
By making a debt agreement or personal insolvency agreement proposal, an ‘act of bankruptcy’ is committed which effectively enables a creditor to apply to the court for a sequestration order to make the person bankrupt. It is therefore important to obtain professional advice before commencing negotiations.
Bankruptcy - the pros and the cons
The effects of bankruptcy on an individual can vary. These may be influenced by the circumstances leading to the financial issues, the person’s employment status, health and emotional resilience, and even an individual’s attitude towards money.
Relinquishing control of your financial affairs and property to a trustee may be daunting for some, yet others may feel an overwhelming sense of relief by no longer having to deal with the demands of creditors.
Restrictions from acting as a company officer or managing a company may be devastating for some people yet have little or no impact on others.
When facing personal insolvency, it is important to get considered advice from an experienced professional. All of our lawyers are recognised by the Law Society of NSW as accredited specialists in insolvency law and have assisted many clients move through the insolvency process to find workable legal solutions to their predicament.
If you need any assistance contact one of our lawyers at info@icllawyers.com.au or call 02 9138 7800 for a no-obligation discussion and for expert legal advice.