You may have heard of personal insolvency as an option for dealing with your overwhelming credit card debt, unpaid bills and loan repayments.

But what exactly is personal insolvency, and how does it differ from other debt solutions?

Let’s define personal insolvency

A personal insolvency agreement is a legal agreement you can reach with your creditors if you can no longer afford to repay the debt. This option is only available to people who have been struggling with debt for some time. In a personal insolvency agreement, you arrange to pay an agreed amount over a period of time (usually 3 to 5 years). Usually you can settle your debts for less than what is owed, and the balance will be formally written off.

Is personal insolvency the same as filing for bankruptcy?

In a word, no. Personal insolvency is a legal alternative to bankruptcy. It doesn’t impose the same restrictions as bankruptcy and creditors may allow you to retain some of your assets or continue to operate a business.

Personal insolvency agreements also differ from debt agreements. While both are formal creditor arrangements regulated by the Bankruptcy Act, the decision as to which agreement to enter comes down to your current debt levels, current income levels and the equity you have in your assets. If you do not meet the thresholds listed above in the criteria for personal insolvency, you may be eligible to apply for a Debt Agreement instead. The set up fees for a Debt Agreement are less and you can set one up more quickly.

What can a personal insolvency agreement (PIA) cover?

Personal insolvency covers certain kinds of debts, such as

Unsecured debts

These are debts not associated with specific assets like a car or a house. Some examples of unsecured debts include:

• credit card and store card debts
• unsecured personal loans and payday loans
• outstanding payments for utilities such as gas, electricity, phone, and internet
• overdrawn bank accounts and unpaid rent
• medical, legal, and accounting fees

But note that if your unsecured loan falls under any of the following categories, creditors can still seek repayment:

• debts incurred via fraudulent means
• debts under a maintenance agreement or court order
• court-imposed fines
• Higher Education Loan Program (HELP) debts

Also, to guarantee that you’re released from all demonstrable debts, your PIA must include a clause to this effect. Otherwise, a creditor may continue to pursue payment for any outstanding debt, even after you’ve met all the requirements of a PIA.

Tax debts

These are the debts owed to the Australian Taxation Office (ATO). But note that if you owe a debt to the Commonwealth, the ATO retains the right to withhold your tax refunds.

What PIA doesn’t cover

Secured debts such as

• mortgage
• car loan
• hire purchase or rent to buy arrangements

What about joint debts?

If you have debts jointly held with another person, or joint debts, creditors retain the right to demand repayment from the other individual involved. This is unless the other person files for PIA as well.

Who is eligible for personal insolvency in Australia?

Personal insolvency agreements are regulated under the Bankruptcy Act and your agreement is supervised by a Registered Trustee. There are certain criteria you must meet to be eligible for a personal insolvency agreement:

• You are considered insolvent, that is, unable to pay your debts when they fall due; and
• You have unsecured debts to the value of $133,278.60 or less; or
• You have equity in assets no more than $266,557.20; or
• You are regularly employed, and your annual income is equal to or less than $99,958.95 after tax.

(Figures current as of April 2023)

Consequences of personal insolvency

Entering into a PIA is a significant decision that can have consequences, both short-term and long-term, on the following aspects:

Credit rating

A PIA will be listed on your credit report for five years or longer if the agreement is not completed in that time. This may affect your ability to obtain credit in the future.

Public record

Your name, along with some personal details, will be listed permanently on the National Personal Insolvency Index (NPII), which is a public record. Anyone can access it for a fee. This means that potential lenders, landlords or employers who conduct a credit or background check on you can see this information. This could impact your ability to secure credit or rent a home.

Assets

Unless specified on the terms of the PIA, you may not undo an asset sold or transferred for less than its market value or recover payments made to your creditor before the agreement.

Income contributions

If the terms of the agreement require it, you may be obliged to make regular payments from your income for a certain period, which could impact your budget.

Professional restrictions

Some professions do not allow individuals who have entered into a PIA to practice or may impose certain restrictions, such as not allowing you to be a director, manage a corporation or be a member of professional associations until you’ve fully complied with the terms of the agreement.

Bankruptcy

If the creditors do not accept the PIA proposal, or if you do not meet the obligations set out in the PIA, you may be declared bankrupt. When that happens, a trustee is appointed to take control of your assets, including your house, car, and other items of value. The trustee can sell these assets to pay off your debts.

What’s the process?

Stage One – Appointment of a controlling trustee

This is the first step in the process. You would need to appoint a controlling trustee, usually a registered trustee, a solicitor or the Official Trustee. The controlling trustee will take control of your property and investigate your affairs. This stage begins with a declaration of intention to present a proposal for a PIA, which is lodged with the Australian Financial Security Authority (AFSA).

Stage Two – Investigation, proposal, and creditors’ meeting

The Controlling Trustee will investigate your financial affairs and prepare a report to your creditors, including a summary of your current financial position and proposed personal insolvency agreement. They will also recommend whether your proposed arrangement is in the best interests of your creditors or not.

The Controlling Trustee will call a meeting with your creditors within 25 days of being appointed. Your creditors will vote on your proposal at this meeting. For it to be approved, the majority in number and at least 75% of the dollar amount of those creditors have to agree. The agreement is then legally binding for all creditors, regardless of their vote.

If your proposal is approved, you may be released from all provable debt. You will then be responsible for making the agreed repayments to your Trustee for the term of the agreement.

Stage Three – Administration of the Agreement

If the proposal is accepted, the PIA comes into effect. The Controlling Trustee or another nominated trustee will administer the agreement, which involves distributing the debtor’s contributions to the creditors, monitoring compliance with the terms of the PIA, and reporting to creditors on the progress of the PIA.

How long will my personal insolvency agreement last?

The duration varies. These terms are negotiated between you, the trustee and your creditors. A PIA may stipulate a single lump sum payment (which could come from the sale of an asset), regular payments over a period or a combination of both.

Hence, if the PIA involves a lump sum payment, the agreement may be relatively short. If it involves regular payments, it could last several years.

What should I do before entering personal insolvency?

Consider the consequences

A PIA has serious legal and financial consequences that can affect various aspects of your life. It can impact your credit rating, making it more difficult for you to borrow money or get credit in the future.

Your name will also be listed on the NPII permanently, a public record that anyone can access, which could affect your future employment and business prospects.

Furthermore, if you fail to comply with the terms of the PIA, the agreement could be terminated, and you may be declared bankrupt.

Research all your options

A PIA is not the only form of debt relief. Other options include informal arrangements with creditors, a debt agreement, or bankruptcy. Each option has different implications for your credit, assets, and future borrowing ability, so it’s essential to understand them fully before deciding.

Seek professional advice

Given a PIA’s complexity and severe implications, it’s highly recommended to seek professional advice from a financial counsellor, lawyer, or insolvency practitioner. They can help you understand the terms and consequences of a PIA, as well as explore alternative options.

Call for Debt Relief Help Today

Navigating the path of financial stress and mounting debts can be overwhelming, but remember, you don’t have to face it alone.  Reach out to us so we can guide you through your options, whether that’s a Personal Insolvency Agreement or another form of debt relief.  You can also take fill out our form for a free debt assessment.