Forsythes

Guide to Understanding Personal Insolvency

Personal insolvency administrations are governed by the Bankruptcy Act 1966 (the Act). The Insolvency and Trustee Service Australia (ITSA) administers the Act. Personal insolvency administrations may be administered by the Official Receiver, of which there is one in each State, or registered trustees. Registered trustees are most commonly practicing accountants. The Federal Court also plays a role in the administration of bankrupt estates.

Bankruptcy

A bankruptcy may be initiated voluntarily by a debtor or involuntarily by a creditor. The administrations are described as being initiated by debtor’s petition or a creditor’s petition.
A voluntary bankruptcy is initiated by the debtor completing a debtor’s petition and a statement of affairs and filing these documents, with the Official Receiver. The debtor is made bankrupt on acceptance by the Official Receiver of the debtor’s petition. The Official Receiver can reject a debtor’s petition where it appears that, within a reasonable time the debtor could pay all the debts listed in their statement of affairs and that the debtor’s petition is an abuse of the bankruptcy system.
The initiation of an involuntary bankruptcy is more complicated. A creditor’s petition must be based on an act of bankruptcy. The most common act of bankruptcy relied on is failure to comply with a bankruptcy notice. A creditor may obtain a bankruptcy notice from the official receiver if he or she has a judgement debt of greater than $2,000. The bankruptcy notice is a demand requiring satisfaction of the debt within the time prescribed in the notice. On the debtor failing to comply with the bankruptcy notice the creditor has an act of bankruptcy on which to base a creditor’s petition. Upon the court making a sequestration order against the debtor, the debtor becomes a bankrupt.
Upon the debtor being made bankrupt, the bankrupt’s divisible property vests in the trustee of the bankrupt’s estate. Further, any property obtained by the bankrupt during the period of the bankruptcy, normally three years, will also vest in the trustee. This is known as after acquired property. The Trustee will be either the Official Receiver or a registered trustee if a registered trustee has consented to act as trustee of the bankrupt’s estate. Divisible property does not include certain prescribed assets.
An example of an exemption presenting some problems is a bankrupt’s interest in an approved deposit fund, a regulated superannuation fund or a retirement savings account to the extent it does not exceed the bankrupt’s Reasonable Benefits Limit.
If the bankrupt’s net income exceeds a prescribed amount, the bankrupt will be required to contribute 50% of this excess to the estate. The definition of income is very broad and goes beyond its general meaning.

The following Actual Income Threshold Amounts (IATA) were current at 24 April 2007

Dependants Increase in Base Threshold $ Net Income

Nil Nil $39,457.60

1 18% $46,559.97

2 27% $50,111.15

3 32% $52,084.03

4 34% $52,873.18

> 4 36% $53,662.34
The trustee has broad investigative powers that can be used to make recoveries for the benefit of the creditors.

Part X Arrangements

The Act also provides a mechanism for creditors and debtors to conclude binding settlements while avoiding bankruptcy. These arrangements are known as Part X arrangements. Under Part X, a debtor may propose a deed of assignment, a deed of arrangement or a composition.
A deed of assignment is broadly equivalent to a bankruptcy whereby the debtor’s divisible property at the date of the execution of the deed is vested in the trustee. After acquired property remains with the debtor. The debtor is released from his or her debts on the execution of the deed.
A deed of arrangement is very flexible and can include any reasonable provisions. A debtor is only released if the deed provides for the debtor’s release. A composition may provide for acceptance by creditors of payment in full or in part of the debtor’s debts by lump sum or by instalments in full and final satisfaction of the debtor’s claims. The creditors release the debtor on the passing of the special resolution accepting the composition.
A debtor initiates a Part X arrangement by executing an authority authorising a registered trustee (the controlling trustee) to take control of his or her property and to convene a meeting of his or her creditors. The debtor is required to provide the controlling trustee with a statement of affairs and a proposal. The controlling trustee must then investigate the debtor’s affairs and prepare a report to creditors in which he or she must express an opinion as to whether the proposal is in the creditors’ best interest. Creditors determine the fate of the debtor’s proposal at a meeting of creditors held within 28 days of the execution of the authority by the debtor.

Part IX Debt Agreement

Debt agreements occur when:
1. Property not exempt under bankruptcy valued at less than about $73,236.80
2. their unsecured debts are less than about $73,236.80 and
3. their net income is less than $54,927.60
In other words debtors with low net assets and low liabilities who earn up to this amount may be come eligible to satisfy their debts by debt agreement, which means they can pay less than the full amount or make instalments to satisfy creditors.

Need Assistance?

Contact ITSA on (02) 8233 7800, located at level 8, 135 King Street, Sydney or obtain additional information, including a Statement of Affairs form, from ITSA’s Internet site http://www.itsa.gov.au/