Household debt greater than disposable income, unemployment, bankruptcies on the rise…… these are trends individuals are experiencing according to information released by the Australian Financial Security Authority and the RBA, with those trends expected to increase into the 2017 financial year.
As the trend increases, more and more individuals will experience larger degrees of financial distress, some to a point where not only lifestyle but personal health and wellbeing will be severely affected.
So what options are available to individuals experiencing personal financial hardship? This newsletter aims to provide an overview of the types of formal personal insolvency appointments as well as the pros and cons associated with each.
Debt Agreements
A Debt Agreement is a binding financial agreement under Part IX of the Bankruptcy Act 1966 and can only be proposed if:
- You are insolvent;
- You have not entered into personal insolvency in the last ten years;
- You have unsecured debt below $109,036.20;
- Your divisible property (assets) is less than $109.036.20;
- Your after tax income is less than $81,777.15; and
- The lodgement fee (currently $200) is paid.
While Debt Agreements are suitable for those with limited income, assets and liabilities, there are positive and negative consequences of entering into a Debt Agreement, including:
Personal Insolvency Agreement
A Personal Insolvency Agreement, or commonly known as a PIA, is a legally binding Agreement between a Debtor and his/her creditors, under Part X of the Bankruptcy Act 1966 and can only be proposed if:
- You are insolvent;
- You are present in Australia (or have a connection to Australia); and
- You have not presented another proposal within the previous six (6) months.
A PIA proposal is aimed at those with higher incomes and more complex affairs, for the purpose of assessing whether or not an alternative to Bankruptcy is available.
Unlike a Debt Agreement, there are no restrictions on levels of incomes, assets or debts to be eligible to propose a PIA.
There are some positive and negative consequences of entering into a PIA, including:
Bankruptcy
Bankruptcy is the most common type of personal insolvency and consists of two (2) types:
1. Debtor’s Petition – Voluntarily entering into Bankruptcy
A person who wishes to declare themselves bankrupt, may only do so if:
- They are insolvent; and
- They are personally present or reside in Australia; or
- They have a dwelling or place of business in Australia; or
- They are carrying a business in Australia.
2. Creditor’s Petition – A creditor applies to the Court for a Sequestration Order forcing the Bankruptcy, if the debt owed is greater than $5,000.
While Bankruptcy may be a viable option, there are some positive and negative consequences of entering Bankruptcy, including:
How can Bankruptcy help?
There was once upon a time when the word “Bankruptcy” meant that you wished you were alone in the middle of the desert, but times have changed! The stigma of being bankrupt has faded and has become commonplace to help individuals get back on their feet…
Bankruptcy is more commonly known these days as a “degree in financial prudence”. No more paying credit card repayments, loan repayments, huge tax bills…the income contribution regime now allows more funds to feed back into the family!
Here are some of the common myths about bankruptcy:
“I will lose all of my assets”
Below is a summary of the divisible and non-divisible property that would be available under a Bankruptcy scenario:
Bankrupts can:
- retain cash at bank if their account has a combined balance of less than $2,000…
- maintain their property, by purchasing the equity from the Trustee by way of instalments…
- Bankrupts can maintain their motor vehicle, provided they continue to maintain the finance payments and purchase any equity from the Trustee…
“I will be released from all of my debts upon entering bankruptcy”
There is a common misconception that by entering Bankruptcy, the individual will be released from all their debts upon discharge. This is incorrect, as there are a number of debts that are considered “not provable” which are not released upon the discharge from Bankruptcy. The below table summarises the debts that are included and those that are excluded from a Bankruptcy:
“The Trustee will take all my income”
When a Bankrupt earns over the applicable income threshold, they are required to contribute 50% of the excess towards their estate. The current threshold for no dependents is $54,518.10 net of tax:
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.
