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Insolvency

Personal Insolvency Agreements Part X

In Part 2 of this three-part series, we consider the benefits of Part X - Personal Insolvency Agreements (PIAs) from the Debtors' perspective.

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Part X Personal Insolvency Agreements

PIAs comfort debtors by saying they have not gone bankrupt despite being insolvent. Some people, generally of the older generations, regard bankruptcy as having a stigma attached to it. Avoiding bankruptcy is cold comfort, as under all three formal personal insolvency administrations, the debtor’s credit rating is tainted for seven years, and AFSA maintains a permanent listing on the National Personal Insolvency Index (NPII) in any event.

Debt Agreements and PIAs

Part IX – Debt Agreements and PIAs have the same benefits in many areas. There is just the question of dollar figure thresholds that separate the two types of administrations. Under the thresholds, the debtor’s affairs can be handled under Part IX; Part X will apply over the threshold. When producing this newsletter, the thresholds for assets and liabilities are currently $236,126.80 and $118,063.40, respectively. Net income must not exceed $88,547.55.

To recap, the main advantage of PIAs and debt agreements is that they provide the possibility of retaining assets where no equity would be available for the benefit of creditors, i.e., genuine estate. Under bankruptcy, the property is exposed to action by the Bankruptcy Trustee for at least nine years. In addition, under bankruptcy, any assets that devolve in bankruptcy during the three years of bankruptcy are automatically caught up in the default and become available for the benefit of creditors. Inheritance is a classic example of this issue. Under bankruptcy, there is also an obligation, if a debtor’s income surpasses certain thresholds, for contributions to their bankrupt estate out of that income. This applies over three years. Under the two other formal administrations, if there is an improvement in earning capacity after the proposed agreements have been agreed to, the debtor keeps it unless offered in the proposal.

While the processes required to implement a PIA are more involved than debt agreements, they can be more flexible commercially.

Generally, creditors will likely approve a proposal for a PIA if they are likely to receive a higher proportion of their debt than would be available under bankruptcy. The Controlling Trustee of a Debtor’s Estate must report on this comparison.

For a PIA to be approved at a creditor’s meeting, a vote in favour is needed by a majority representing 75% in value of those present and voting at the meeting. If approved and executed, all creditors are bound, including the dissenting voters.

One example where PIAs have been successful for all parties was when a development application for a rural residential subdivision received council approval. The owner was insolvent as a result of a failed business. To have gone bankrupt would have meant the Trustee or the secured creditor would have had little choice but to auction the property. Comparative valuations and budget to finalise the development showed the likely net outcome for creditors was markedly better with the support of the secured creditor. It resulted in unsecured creditors receiving 95 cents in the dollar instead of about 30 cents. The debtor even ended up in a debtor surplus after the PIA.

Another example was when a sole trader wanted to sell his business to a related party once the acquisition was done. He had a possible exposure under Section 120 of the Bankruptcy Act for a transfer for less than the fair value if bankruptcy eventuated. What was offered under Part X was income and a share of profits, achievable over two years, better than, and had less risk than bankruptcy and was accepted by creditors.

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