What is personal insolvency?What is personal insolvency?

What Is Personal Insolvency?

  • July 6th, 2021
  • Domenic Calabretta

Financial hardship can be sudden and unexpected. Loss of employment, ill health, excessive use of credit and poor decision making are just some of the reasons why individuals encounter financial difficulties. A subsequent failure to meet financial commitments and escalating debt leave individuals at a crossroads. At this point, it is important to understand personal insolvency and the options available.

What is personal insolvency in Australia?

Personal insolvency is a term used to describe the financial status of an individual. Specifically, it is related to an instance where you are unable to service personal debts at the time that they are due. Notably, personal insolvency are limited to unsecured debts such as:

  • Credit cards
  • Unsecured personal loans
  • Overdrawn bank accounts
  • Unpaid rent
  • Outstanding legal, medical, and accounting fees.

Contrary to the thoughts of many, a failure to meet financial commitments does not have to result in bankruptcy. We will explore the alternative options to bankruptcy in detail and how you can utilise them.

Is personal insolvency the same as bankruptcy?

Personal insolvency is a legal alternative to bankruptcy and does not impose the same restrictions. Bankruptcy is when you legally declare that you cannot repay any debts that you owe and should always be a last resort due to the consequences associated with it. Bankruptcy may affect your income, employment, and ability to obtain future credit among other things.

As a result, there is a growing interest in alternatives to bankruptcy which include personal insolvency agreements (PIA) and debt arrangements. The Bankruptcy Act 1966 (Cth)outlines the threshold for each option and any limitations.

Am I eligible for a debt agreement?

While a debt agreement is not a declaration of bankruptcy, it is essential to explore all other options as there are consequences associated with an agreement. It will impact your credit rating and is considered an ‘act of bankruptcy’. To be eligible you must meet the following criteria:

  • Are unable to pay debts and legally insolvent
  • Have not been declared bankrupt or entered into a debt agreement in the last decade
  • Classify your debts and establish which are applicable. Limited to unsecured debt with any fines being deemed ineligible
  • Meet Australian Financial Security Authority (AFSA) criteria for unsecured debts.

For those who are eligible, debt agreements can be an effective way to avoid bankruptcy. They are structured in a way that allows for repayment of debts over a period of 3-5 years. In addition, the debts are consolidated into a single payment plan which makes it easier to service. Most importantly, all interest charges are paused for the duration of the agreement which effectively makes it easier to repay any debts owed.

What is the difference between a debt agreement and a personal insolvency agreement?

The most significant difference between a debt agreement and a personal insolvency agreement (PIA) lies in the eligibility criteria. Also known as a Part X Personal Insolvency Agreement, there is no cap for a Part X. This means that individuals with high debt amounts are still able to propose them, including those who are classified as high-income earners.

Personal insolvency agreements (PIA) are more complex in that they require a registered trustee rather than an administrator. Moreover, you will also be unable to act as the Director of a company if you have entered into a personal insolvency agreement.

When should I apply for bankruptcy?

If your debts are not sustainable and you are unable to access alternative options, bankruptcy may be the most suitable path. Bankruptcy is the legal process of declaring that you are unable to pay your debts. In normal circumstances, an individual remains bankrupt for a period of 3 years and 1 day from the time of declaration.

Many people are unaware that bankruptcy is broken down into voluntary and involuntary. The latter involves a court declaring an individual bankrupt following the application of an individual or organisation that is owed money. In contrast, voluntary bankruptcy can prevent debts from continuing to mount. Being proactive may provide you with the opportunity to keep valuable assets including your home and car.

What are the implications of bankruptcy?

Declaring bankruptcy does not release you from all debts. Most debts such as credit cards and utility bills are covered but there is a list of debts that bankruptcy does not cover. This includes court-imposed penalties, student loans, and any debts accrued during the period of bankruptcy.

It is important to understand the consequences of bankruptcy as it may affect your ability to get credit, prevent you from traveling, or hinder your ability with respect to some types of employment. If you are experiencing financial difficulties, expert advice can both save and secure your financial future.

Bankruptcy does not have to be the end of the road but should instead be looked at as the first step to rebuilding your financial foundations. Develop a post-bankruptcy plan and focus on the following:

  • Cooperate with your trustee or administrator
  • Don’t borrow any money until your bankruptcy is discharged
  • Start a saving plan and stick to it
  • Develop a budget
  • Rebuild your credit

At Australian Debt Solvers our team has the experience to deal with all insolvency matters. Our business advisory services can help save, shape, and build your financial future. Contact us today.

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