Bankruptcy and insolvency procedures are complicated and can be difficult to understand. These FAQs will give you a general overview of these processes and how they affect you; they are not legal advice. It is important to get sound, independent legal advice on your particular problem, so contact one of our legal specialists today for a no-obligation assessment, regarding any insolvency or bankruptcy legal issues you may have.
What is insolvency?
Being insolvent means you cannot pay your debts as and when they fall due.
What are the options available to me if I become insolvent?
You may enter into a Debt Agreement or a Personal Insolvency Agreement.
What is a Debt Agreement?
You are allowed to enter into a Debt Agreement with your creditors where your liabilities and income fall within the permitted thresholds. To proceed with a Debt Agreement, you will first need to supply your creditors with a Debt Agreement proposal who will then vote on it. The vote will pass when the majority of your creditors vote in favour of the Debt Agreement.
What is a Personal Insolvency Agreement?
A Personal Insolvency Agreement is an agreement between yourself and your creditors which details how your assets and liabilities are to be dealt with during the administration process. All of your creditors will be bound by the Personal Insolvency Agreement, which will operate to release you from all provable debts. To proceed with a Personal Insolvency Agreement, you must be insolvent, resident in Australia and not have proposed another Personal Insolvency Agreement in the previous six months. A trustee will be appointed to carry out the terms of your Personal Insolvency Agreement, including selling your assets and collecting payments from you or others to help pay your debts.
What are some of the benefits in proceeding with a Debt Agreement or a Personal Insolvency Agreement?
You will not be placed under formal bankruptcy, and will avoid some of the restrictions that apply under formal bankruptcy. You will be able to:
- keep some of your assets that would normally be sold under bankruptcy;
- get future loans and credit;
- travel overseas;
- act as a company officer; and
- trade under a registered business name without revealing your bankruptcy status.
What are the disadvantages in proceeding with a Debt Agreement or a Personal Insolvency Agreement?
Debt Agreements and Personal Insolvency Agreements do not apply to your secured creditors, who can still repossess secured goods (including your house or car) if you fail to make repayments in terms of the Debt Agreement or Personal Insolvency Agreement. Proposing a Debt Agreement or a Personal Insolvency Agreement is an act of bankruptcy, which entitles your creditors who do not accept your proposal, to start bankruptcy proceedings against you instead.
Insolvency law is one of IBLawyers’ key areas of expertise. Let us help you through the insolvency process as painlessly and cost-effectively as possible.
What is bankruptcy?
Bankruptcy is the legal process by which an individual is declared bankrupt by the Court because they are insolvent. It removes the pressure of unmanageable debt whilst also aiming to provide a fair and reasonable outcome for your creditors. The process involves appointing a trustee, to whom you will have to supply all the necessary information including financial records and bank statements. During this process, you will be protected from any legal action by your creditors.
Am I eligible to apply for bankruptcy?
You can apply for bankruptcy if you are:
- unable to pay your debts when they are due (you are insolvent); and
- present in Australia or have a residential or business connection to Australia.
Importantly, any amount of debt can qualify you for bankruptcy.
How do you become bankrupt?
You can become bankrupt by:
- personally lodging a Debtor’s Petition and a Statement of Affairs to the Official Receiver (voluntary bankruptcy); or
- one of your creditors lodging a Creditor’s Petition to the Federal Court to obtain a sequestration order against your estate (involuntary bankruptcy).
What are the advantages of bankruptcy?
Your unpaid unsecured debts will be written off at the end of your bankruptcy period. Creditors will no longer be able to pursue you for payment and must deal with the trustee. You can keep your necessary personal effects such as clothing, bedding and furniture.
What are the consequences of bankruptcy?
Bankruptcy may affect you in the following ways:
- having to make compulsory payments to the trustee of your estate should you earn over a set amount during and after your bankruptcy;
- restricting your ability to travel overseas;
- having your bankruptcy status appear on your credit record and your name in the National Personal Insolvency Index;
- restricting your ability to obtain future loans and credit;
- having some of your assets sold, including your house and property;
- not being allowed to deal with your assets that belong to the trustee in the bankruptcy period;
- not being able to act as a company officer;
- not being able to trade under a registered business name without advising people of your bankruptcy status; and
- the need to continue paying child support, Centrelink debts, higher education debts and any court fines, where applicable.
How long does bankruptcy last?
Bankruptcy usually lasts for three years and one day and is calculated from:
- the date your bankruptcy application is accepted by the Australian Financial Security Authority for voluntary bankruptcy; or
- the date your Statement of Affairs is filed for an involuntary bankruptcy. In some cases, the trustee can lodge an objection to extend the bankruptcy period for up to eight years.
Are there alternatives to declaring bankruptcy?
If you are insolvent (unable to pay your debts as they fall due) but still have a regular income and can make some payments towards your debts, then there are other options you can consider before applying for bankruptcy, including:
- making a declaration of intent to present a debtor’s petition, which provides you with temporary relief from being pursued by creditors while you seek help and decide how to proceed;
- applying for hardship with each of your creditors, who may grant you certain temporary reprieves; or
- proposing a government-regulated repayment plan, also known as a Debt Agreement or a Personal Insolvency Agreement. These agreements do not carry all of the negative consequences of bankruptcy.
What happens if a person in bankruptcy continues to generate income?
You can still earn an income (subject to compelled contributions to creditors – through the trustee – should your income exceed a specific threshold).
What are the options available to me should my company become insolvent?
The three corporate insolvency procedures available to you are voluntary administration, liquidation and receivership. Each of these procedures has its own advantages and disadvantages; so it would ultimately depend on your company’s unique position which option to take.
What is voluntary administration?
Voluntary administration begins when a resolution is passed by a majority of directors in the company. A voluntary administrator will be appointed to take control of the company’s affairs. During this period, the creditors of the company cannot start any recovery action against the company. The voluntary administrator will, amongst others, investigate the company’s affairs and report to the creditors on the three options available, namely:
- end the voluntary administration process and return the company to the directors’ control;
- approve a deed of company arrangement according to which the company will pay off all or part of its debts. This option aims to distribute a larger amount to the creditors than they would have received in liquidation; or
- wind up the company and appoint a liquidator.
This process aims to keep the company in operation and avoids any court involvement.
What is liquidation?
A company goes into liquidation when a liquidator is appointed to take control of the company so that its affairs can be wound up by selling the company’s assets and then distributing the proceeds between the creditors in the order stipulated by the Corporations Act 2001 (Cth). The two types of insolvent liquidations are creditors’ voluntary liquidation (initiated by the directors and shareholders) and court liquidation (initiated by a creditor and ordered by a court). After a company goes into liquidation, unsecured creditors cannot commence or institute legal action against the company, unless the court provides otherwise.
What is receivership?
A company goes into receivership when a receiver is appointed by a secured creditor, or by a court in special circumstances. The receiver’s primary focus is to recover sufficient funds to pay off the secured debts that the company owes to the secured creditor that appointed the receiver. The receiver has no obligation to report to unsecured creditors but should still take reasonable care not to sell the company assets for less than market value or, if there is no market value, the best price reasonably obtainable.
How does a voluntary administration differ from liquidation?
The main goal of a voluntary administration is to save the insolvent company so that it can continue operating, whereas a liquidation winds up and finalise the affairs of the insolvent company.