Help! I can’t pay my debts: Understanding your insolvency options.
While social distancing lockdown measures may be easing across Australia, the economic fallout from COVID-19 is in its infancy. Cashflow for many businesses have dried up, and sadly, for many more their coffers will soon be empty. Undeniably, the financial impact of the lockdown measures is (and will be) immense.
For employers and employees alike, the Jobkeeper payment and other stimulus measures are helpful and is undoubtedly a lifeline. For many others, the simple concept of recovering financially from the economic knock-on effect of COVID-19 seems unachievable and quite simply unrealistic. Getting proper informed advice as to what legal options you may have available to you as an individual, to help you manage your debt, has never been more important.
Many Australians are now (or will soon be) faced with unmanageable debt. The earlier you seek help, the more informed you’ll be and likely to gain control of your situation.
Insolvency -What are my options?
At the outset, it is important to note that you are deemed to be insolvent under the Bankruptcy Act 1966 if you can’t pay your debts when they fall due. A scary concept given the cashflow constraints faced by so many Australians right now.
If you are insolvent, then you are at risk of being made bankrupt by one of your creditors (if the relevant bankruptcy thresholds are met, and the applicable bankruptcy procedures followed). However, you may have other options available to you, that may see you avoid formal bankruptcy (either now or at some time in the foreseeable future).
If you have unmanageable debt, you generally have four formal insolvency options available to you, or, other informal options such as informal negotiations with your creditors. Regardless of which option you are considering, the consequences of the decisions you make now as to how to deal with your creditors, can be severe.
Overview of formal Insolvency options:
1. Temporary debt protection (TDP) – This option provides you with a six-month protection period from being pursued by unsecured creditors. This is a serious step and advice should be obtained prior to being taken as the consequences can be serious.
*Caution – while creditors may be unable to enforce recovery of unsecured debts from you if you choose this option, they are still able to commence or continue legal action, including to obtain judgment against you. Creditors just won’t be able to enforce that judgment via bankruptcy for six months. Secured creditors on the other hand, can continue recovery of their secured debt. By lodging a temporary debt protection form (formally called a declaration of intention to lodge a Debtors Petition) you are committing an act of bankruptcy and importantly, some debts are not covered by TDP.
2. Bankruptcy – Last for three years and one day and at the end of this period, you are released from most of your debts. Although bankruptcy releases an individual of their debts (or most of their debts), owed at the time of the bankruptcy, there are serious consequences of bankruptcy and you should seek advice if you are considering self-declaring bankruptcy by way of a Debtors Petition.
Consequences of bankruptcy may include impacts on your ability to get credit, restrictions on overseas travel or gaining some types of employment or hold certain licences (such as a builder’s licence). Further, bankruptcy details, such as a bankrupt’s name, address, date of birth and occupation are available to the public via a Government database known as the National Personal Insolvency Index (“NPII”) permanently and usually on databases of credit reference agencies.
3. Debt Agreements – a formal binding agreement between you and all your creditors whereby your creditors agree for you to repay a reduced sum, over a period of time (which you can afford) in final and full satisfaction of the full balance(s) outstanding. These payments are made to your Debt Agreement Administrator, who then distributes the funds to your creditors. Once the agreed payments are made, and the agreement comes to an end, your debts are discharged.
*Caution – There are eligibility criteria for Debt Agreements, for example, you can’t propose a Debt Agreement to your creditors if you owe more than $118,063.40 in unsecured debt, or your after-tax income is more than $88,547.55, or your divisible assets add up to more than $236,126.80. Further, some debts will not be released or included in a Debt Agreement and will still need to be repaid. Additionally, entering into a Debt Agreement may effect your ability to get credit and may appear on the NPII or other public register for a period of time.
4. Personal Insolvency Agreements (PIA’s) – similar to a Debt Agreement and is a formal binding agreement between you and all your creditors whereby your creditors agree for you to repay a reduced sum, over a period of time. However, a PIA involves a trustee taking control of your property and making offers to your creditors on your behalf.
*Caution – There are serious consequences involved in a PIA and by entering into a PIA with your creditors, you are committing an act of Bankruptcy. A PIA may be suitable if you do not qualify for a Debt Agreement, for example if your after-tax income is more than $88,547.55 or your divisible assets add up to more than $236,126.80. Further, some debts will not be released or included in a PIA and will still need to be repaid. Additionally, entering into a PIA will affect your ability to get credit and will appear on the NPII permanently.
If you are considering one of the above four formal insolvency options, it is important that you seek advice as to which option may be best suited to your individual circumstances.
Informal Insolvency options:
Information options that may assist in avoiding one of the four formal scenarios outlined above, include working with your professional advisors (such as an accountant or lawyer), to informally negotiate with your creditors. An experienced practitioner may be able to help you negotiate:
- More time to pay; Reduced payment amounts;
- Moratoriums or standstill agreements;
- Variations (or hardship variations) to your credit contracts;
- Lower interest rates; and/or
- Waiver of penalties.
While many people successfully negotiate with creditors themselves, there can be benefits in utilising a professional advisor. One not so subtle benefit of using a lawyer being that you are demonstrating to your creditors that you are seeking advice and that you are serious about reaching a resolution. Quite often, creditors respond more favourably to a letter coming from a lawyer, than for example an email sent from your personal account.
While creditors may seem sympathetic now, that position is likely to change, and change quickly in the coming months. It is therefore becoming increasingly important for individuals who are facing financial difficulties now, to properly inform themselves as to what their legal options are in dealing with their creditors.
Should you require assistance in reviewing your solvency position or would like to discuss what insolvency options may be best suited to your individual needs, please contact our office on 07 3009 8444.