What is Personal Insolvency?

You may have heard of personal insolvency, as being 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.

Personal insolvency only covers unsecured debt, such as credit and store cards, unsecured personal loans and pay day loans, utility bills, overdrawn bank accounts and unpaid rent, and medical, legal and accounting fees. A personal insolvency agreement will not cover secured debts such as a mortgage or car loan.

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 $111, 675.20 or more; or
  • You have equity in assets more than $111,675.20; or
  • You are regularly employed and your annual income is more than $83,756.40 after tax.

(Figures current as at January 2018)

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 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.

Consequences and obligations

It is important to understand the short- and long-term consequences of entering into a personal insolvency agreement. Firstly, there are fees that apply to process, propose and manage the agreement. You must speak to a Trustee about the fees they charge.

You may not be released from all debts. Only unsecured debts can be covered under a personal insolvency agreement.

Your details will appear on the publicly accessible National Personal Insolvency Index, permanently.

Your credit score and file will be affected. Details of your agreement will be listed on your credit file for approximately 5 years, depending on the term of your agreement.

You are obliged to make the agreed repayments as outlined in the agreement. A creditor can apply to the court to make you bankrupt if the personal insolvency agreement fails.

What’s the process?

To set up a personal insolvency agreement, you must first appoint a Controlling Trustee. Your assets then become subject to the control of your Controlling Trustee. They will investigate your financial affairs and prepare a report to your creditors, including a summary of your current financial position and your proposed personal insolvency agreement. They will also recommend whether your proposed agreement 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. At this meeting, your creditors will be asked to vote on your proposal. In order 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 how they voted.

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.


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