An alternative to bankruptcy
Personal insolvency agreements (PIA) are outlined in Part X (Part 10) of the Bankruptcy Act 1966 (Cth), offering distressed individuals a flexible way to manage their debt and regain control of their finances. A PIA proposal will usually outline the sale of assets and payments to creditors over a period of time. It can alternatively include a lump sum payment.
The proposal must be accepted by a majority of creditors in number and 75% in dollar value. If accepted, the agreement becomes legally binding.
The benefits of a personal insolvency agreement for debtors
There are several general benefits for debtors:
- Retention of assets
The debtor may retain certain assets that would be unavailable in bankruptcy.
- Avoid the stigma of bankruptcy
Whilst a PIA is still an ‘act of bankruptcy’, this is a formal arrangement, rather than a declaration of bankruptcy. This may make future financing easier after the agreement has been fulfilled.
- Expediency
A debtor is generally released from their debts more quickly than bankruptcy.
The benefits of a personal insolvency agreement for creditors
There are several general benefits for creditors:
- Commerciality
A PIA may offer a better return to creditors. In bankruptcy proceedings, assets are sometimes liquidated at a discount and subject to administrative and trustee costs. A PIA outlines a clear timeline for what is owed and when it will be paid. It also avoids costly court processes.
- Protect ongoing business relationships
A personal insolvency agreement empowers a debtor to remain in control of their financial affairs or business. This flexibility can protect the ongoing business relationship between a creditor and debtor.
- Expediency
In bankruptcy proceedings, creditors will sometimes face extensive delays before receiving payments. Payments for a PIA usually commence shortly after the proposal is accepted.
The ATO and personal insolvency agreements
The Australian Taxation Office (ATO) remains focused on commerciality and compliance. If a PIA yields a higher return than bankruptcy proceedings, and the debtor has been diligent in their lodgments, they will usually support a proposal. However, this is assessed case-by-case, depending on the unique circumstances.
The takeaway
A personal insolvency agreement can offer distressed individuals a flexible alternative to bankruptcy, allowing them to retain assets and settle debts without the associated stigma. For creditors, PIAs often provide better financial returns and quicker payments, while preserving business relationships and avoiding the costs of bankruptcy.
