Bankruptcy: Life Sentence or Ticket to Freedom

The type of administration that will work depends on the commercial parameters and emotional inclination of each individual.


Formal Personal Insolvency Series – Part 2

Previous editions of our newsletter have covered Debt Agreements (DAs) under Part IX of the Bankruptcy Act (The Act) and Personal Insolvency Agreements (PIAs) under Part X of The Act. Now, we look at bankruptcy from the perspective of the debtor.

To enable a comparison, you will recall that DAs are formally orchestrated deals with creditors and generally look at something between a repayment plan and a compromise where usually the debtor at the least makes contributions from income. For a DA to apply, a Debtor’s total assets and liabilities must be below thresholds currently set at $238,238.00 and $119,119.00, respectively. Net income must not exceed $89,339.25.

PIAs also involve compromises with creditors where payments to creditors generally come out of assets, income or contributions from third parties or combinations of all three. It is more expensive to implement than a DA. Generally, the only constraint here is that usually, for creditors to approve a PIA, the outcome for creditors is likely to be better than it would be under a Bankruptcy.

Now for the “positives” of bankruptcy. With one or two exceptions, creditors’ legal actions are stayed by default. This is no different to the other two administrations. General household appliances and furniture are exempt property and can be kept by the Bankrupt. Therefore, as with the other administrations, the Sheriff can’t levy execution or go on with any sales of assets or possession or distribution of proceeds.

If the debtor’s net income is below the current threshold of $59,559.50 (for no dependents), there is no need to make income contributions to the estate, unlike a DA, which is usually required.

Subject to certain practical commercial constraints, bankruptcy is allowed to continue in business. They must, however, notify suppliers if they are incurring credit over a limit currently set at $5,934.00 that they are an undischarged bankruptcy.

The main benefit for Debtors of Bankruptcy is the creditors stop phoning them. A line has been drawn, and after three years in bankruptcy, the debtor is free to start again.

Some people regard bankruptcy as having a stigma; however, they are misguided and are keen to avoid it at all costs.

The downside of bankruptcy is that all divisible property goes into the debtor’s estate. They are in default for a minimum of 3 years and are exposed at this time to a property that devolves on them and falls within the definition of divisible. They must fill out income questionnaires annually for three years and provide proof of the income information given.

The fact that the debtor has become Bankrupt is also entered on their credit rating for seven years. This is not any different from PIAs and DAs.

In conclusion, each formal administration under the Act has advantages and disadvantages for Debtors. The type of administration that will work depends on each individual’s commercial parameters and emotional inclination. Please feel free to run any possible scenarios past us.

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