PERSONAL EXPERIENCE

Bankruptcy

Bankruptcy is a statutory mechanism available for individuals experiencing severe financial difficulties.  It is the option selected generally as a last resort, when it is no longer possible to informally deal with the person’s creditors, or other formal arrangements under Parts IX and X of the Bankruptcy Act cannot be achieved.

There are numerous implications for a person going bankrupt, including:

  • creditors are unable to commence/continue recovery of their debts;
  • most significant assets are sold for the benefit of creditors;
  • higher income earners may be required to make payments to their bankruptcy trustee for each of the three (3) years of their bankruptcy; and
  • ramifications for professionals whose qualifications may be impacted.

There are often misconceptions about the effect of bankruptcy.  For example:

  • bankrupts are generally allowed to retain all of their household furniture and effects;
  • bankrupts are allowed to retain a motor vehicle and tools of trade up to certain values;
  • superannuation is generally retained by the bankrupt; and
  • bankrupts do not get imprisoned for simply not paying their debts.

Detailed information on bankruptcy is available from any one of the WA Insolvency Solutions offices. 

Before anyone enters bankruptcy they should consider all other available options.

For individuals who are interested to strike an agreement with their creditors, it may be possible to negotiate an outcome informally.  When an informal agreement is not possible, other alternatives include Part IX and Part X of the Bankruptcy Act.

Part X

A Part X proposal is normally offered on the basis that creditors will receive a higher return than in a bankruptcy scenario.  A Part X proposal once accepted by creditors is known as a Personal Insolvency Agreement (“PIA”).  A PIA is a tailor made formal agreement with the individual’s creditors, that is structured specifically to suit the circumstances existing at that time.  A PIA may, for example, include any of the following:

  • payment of a lump sum;
  • payment over time;
  • disposal of some or all assets; or
  • a combination of any of the above.

PIAs are totally flexible.  Once the proposal is accepted the PIA legally binds the individual’s creditors, and allows for full and final settlement of the debts, often at significantly less than the full amount.

Some examples of our work are outlined below.

Boat builder
Operating losses left this sole trader with debts to suppliers and the ATO totalling $150,000. He decided to continue his trade, but now as an employee. A compromise was reached with his creditors whereby a total of $50,000 was to be paid in over three years. The boat builder’s share of the equity in his family residence provided security for the deal.

Insurance broker
A self-employed insurance broker accumulated debts totalling $270,000. If the broker had gone bankrupt his contracts with insurance companies would have terminated. A proposal was accepted by creditors allowing for payments of $70,000 over 2 years, with the payments structured to meet an irregular seasonal income stream.

Engineering company director
The Director was pursued under personal guarantees following liquidation of his company. Debts totalling $4.2m were settled by payment of $50,000 from a third party.

Hairdressing salon
The sole proprietor of a hairdressing salon, which was located in a remote regional centre, had trading debts of approximately $135,000. The Debtor offered to pay $66,670 over three years by weekly instalments and the proposal was duly accepted by creditors.

Underground mine supervisor
The Debtor was an underground mine supervisor who became involved in a number of mass marketed “tax effective schemes” (“TESs”) which had been promoted by certain financial advisors. Due to the disallowance of certain TES related tax deductions and his continuing obligations pursuant to the TES investments, the Debtor did not have sufficient financial resources to satisfy his debts. The Debtor proposed a Personal Insolvency Agreement (“PIA”) whereby he offered to pay $35,500 over 24 months in full and final satisfaction of creditors’ claims totalling $200,000. All creditors, including the ATO, supported the PIA.

Penfolds Earthmoving
This sole trader earthmoving business experienced significant financial distress after taking on a $7M contract with a government agency. The business was undercapitalised and ultimately was unable to deal with the complexities of the contract. The business had effectively placed all its future financial reliance into this one project. Secured creditor exposure was approximately $2.5M, with ordinary unsecured creditors in the region of $2.4M. The Debtor entered into Part X and creditors accepted a Personal Insolvency Agreement proposal involving the realisation of business/personal assets.