Part X of the Bankruptcy Act allows individuals to propose an alternative to bankruptcy (a ‘Personal Insolvency Agreement’). Whilst it is used infrequently, the process can result in benefits to the individual debtor and a higher return to creditors than bankruptcy.
For individuals, when debt becomes unmanageable, bankruptcy is not the only option available to gain control of the situation.
A personal insolvency agreement (PIA), also known as a Part X agreement, is a legally binding agreement that exists between an individual and their creditors and presents a flexible solution to settle debts.
When conducting a PIA, a Trustee is appointed to take control of property and to facilitate the making of the individual’s offer to creditors to settle their debts. This may include an offer of a reduced settlement, instalments, or a lump sum payment.
How long does a PIA last for?
The length of a PIA is not mandated by legislation (such as bankruptcy) and is dependent on the agreement that the individual negotiates with creditors. Typically, a PIA will terminate upon the final payment to creditors.
However, it should be noted that there are consequences that can exist far beyond the termination of the PIA. Namely, the details of the individual entering into the PIA will remain on the National Personal Insolvency Index permanently. Furthermore, the PIA will be referred to on the individual’s credit file for up to 5 years, or longer in some cases, which can significantly impact on the individual’s ability to access credit services or have finance applications approved long after the PIA has concluded.
Other consequences of a PIA
Even though a PIA is considered as an alternative to bankruptcy, it is still considered as an act of bankruptcy. As such, in the event that a PIA fails, a creditor is able to apply to the Court to have the individual made bankrupt. Furthermore, much like in a case of bankruptcy, the individual is required to assist the controlling Trustee by providing information and documentation if requested and cannot deal with their property without the consent of the Trustee.
Unlike in a bankruptcy however, individuals in a PIA may still have the ability to be a director of a corporation when the terms of the agreement have been fully complied with, which may be an attractive upside for some individuals.
Furthermore, individuals in a PIA may continue to operate a business, however only if the terms of the agreement allow for this.
Debts that a PIA includes
It should be noted that in some cases a PIA does not release an individual from all debts, even when their obligations are complete.
As such, for any release to take place, the PIA must provide for the relief from all “provable debts”, which is a clause that can be include in a PIA.
The debts that are covered in a PIA are the same as those in a bankruptcy, such as secured debts, unsecured debts, tax debts, and joint debts (noting however that the creditor can still pursue the other person for the debt in these circumstances).
Difference between a PIA and a debt agreement
A debt agreement (otherwise known as a Part IX agreement), much like a PIA, presents an alternative to bankruptcy through entering into a formal arrangement with creditors.
Under a Part IX agreement, the individual negotiates to pay a percentage of their combined debt that they can afford over time, with payments being made to the debt agreement administrator (rather than to individual creditors).
The key difference between a PIA and a Part IX agreement is the matter of eligibility.
Namely, unlike a PIA, which has no asset, debt, or income limits to make an individual eligible to enter into the PIA, to enter into a Part IX the individual must meet the following criteria:
- the individual has not been made bankrupt, had a debt agreement, or a PIA in the last 10 years;
- the individual is unable to pay their debts when they are due;
- the individual has unsecured debts and assets less than the set amount of $119,119;
- the individual doesn’t have divisible property that adds up to more than the limit of $238,238; and
- the individual’s after-tax income for the next 12 months is estimated to be less than the set amount of $89,339.
There are clear benefits of entering into a PIA for both the individual and creditors, such as the avoidance of Court process and the Controlling Trustee’s immediate independent control of the individual’s property and affairs.
We have recently conducted a successful PIA, which has exemplified just how accessible and flexible the process can be, and really should be taken in consideration by individuals as a viable alternative to bankruptcy.