alternatives to bankruptcy handbook

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INTRODUCTION 2

The Public Record 2

ALTERNATIVES TO BANKRUPTCY 3

Informal Arrangements 3

Temporary Relief From Creditors 3

PART IX AGREEMENTS 4

PART X PERSONAL INSOLVENCY AGREEMENTS 5

The Personal Insolvency Agreement (PIA) 5

Starting the Process 5

The Controlling Trustee 6

The Meeting of Creditors 7

Variation of a PIA 8

Termination of a PIA 8

BANKRUPTCY – THE LAST RESORT 9

Voluntary Bankruptcy 9

Involuntary Bankruptcy 9

The Effects of Bankruptcy 9

Period of Bankruptcy 10

Compulsory Income Contributions 11

Contribution to Costs 12

Relief from Creditors in a Bankruptcy 12

What the Trustee does once he/she is appointed? 12

Protected Property 13

More Information 13

SCHEDULE 14

FURTHER INFORMATION 15

contents


The Bankruptcy Act 1966 is the legislation dealing with insolvent individuals. This document sets out:

Information about alternatives to bankruptcy; Information about how bankruptcy affects a person and the consequences of bankruptcy; Information about sources of financial advice and guidance to persons facing or contemplating bankruptcy; Information about a person’s right to choose whether the bankruptcy is administered by a registered trustee or the Australian Financial Security Authority (AFSA); a Federal Government agency; Other general information.

It is important that anybody contemplating an administration under the Bankruptcy Act 1966 reads this information and understands it. Once a Debtor’s Petition for Bankruptcy has been accepted, it is virtually impossible to undo if a person changes his or her mind. Before making a decision a person should talk to his or her creditors, or consult a financial counsellor, registered trustee, solicitor, accountant or other adviser, or contact AFSA. There are alternatives: bankruptcy is a last resort. Please only make a decision after all the alternatives have been considered and the consequences are known and understood. THE PUBLIC RECORD Details of Part IX Debt Agreements, Part X Personal Insolvency Agreements and Bankruptcy including the name, address, date of birth, occupation and the number of the administration will appear forever as a public record on the National Personal Insolvency Index (NPII), and certain papers filed with AFSA are open to public search. ALTERNATIVES TO BANKRUPTCY A person can settle their debts without going bankrupt. There are a number of options available which are set out below:

Informal Arrangements Temporary Relief from Creditors Part IX Debt Agreements Part X Personal Insolvency Agreements

introduction


INFORMAL ARRANGEMENTS Debtors can approach their creditors and explain their financial position to them. Many creditors, when they know of any genuine difficulties, may help by giving more time to pay, agreeing to re-negotiate the loan or settling for a lesser sum. A debtor can seek help from persons experienced in assisting people in financial difficulties. Advice can be sought from a financial counsellor, legal aid, a registered trustee in bankruptcy, solicitor or an accountant. Financial counsellors and other advisers may speak to creditors on a debtor’s behalf and help a debtor come to some agreement about his or her debts and settle disputes. To be effective informal agreements should be in writing and agreed to by all creditors. An informal arrangement will only be binding on those creditors who are a party to it and have agreed in writing to the arrangement. Usually the arrangement will be cancelled if the debtor doesn't keep up his or her repayments.

TEMPORARY RELIEF FROM CREDITORS If a debtor is being pressured by a creditor but needs some time to think about his or her available options, he or she can give a signed "Declaration of Intention to Present a Debtor's Petition" form to AFSA. For a period of 21 days, the debtor’s creditors or the bailiff or the sheriff cannot take action to court the debts. A debtor doesn't have to go bankrupt at the end of the 21 days. If the debtor does not take any action such as entering into a Part IX Debt Agreement or a Part X Personal Insolvency Agreement or file a petition to become bankrupt after the 21 day period, creditors may continue to pursue the debtor for recovery of debts or may take steps to bankrupt the debtor. A debtor can give only one Declaration every 12 months. Take Note: Giving a Declaration is an 'Act of Bankruptcy'. A creditor can use this to apply to the Federal Court or Federal Circuit Court for a Sequestration (Bankruptcy) Order.

alternatives to bankruptcy


A Debt Agreement is a simple flexible method for debtors to negotiate a legally binding compromise with their creditors. It releases a debtor from their debts once creditors accept the proposed Debt Agreement. A debtor can make a written proposal through AFSA. The debtor can propose to pay creditors by instalments, make a lump sum payment or even give an asset(s) to creditors. There is a fee payable of $200 to AFSA, plus any other fee if you engage external assistance for work carried out in setting up the Debt Agreement. A Debt Agreement is limited to a debtor who has:

Not been bankrupt, utilised a Debt Agreement or given an Authority under Part X of the Bankruptcy Act in the last 10 years; Estimated after tax income, for the 12 months after the proposal is given, of less than the threshold amount. (The current threshold amount is set out as Point 1 on the Schedule attached at the end of this document); Unsecured debts of less than the threshold amount. (The current threshold amount is set out as Point 2 on the Schedule); Divisible Property valued at less than the threshold amount. (The current threshold amount is set out as Point 3 on the Schedule);

The proposal must authorise a person, known as an administrator, to handle the Debt Agreement. The administrator could be a registered trustee, a relative, AFSA or any other person who is registered under the Bankruptcy Act. The administrator may charge a fee for handling the payments or other services provided. However the basis of the fee must be stipulated in the Debt Agreement where that fee is to be paid from funds and / or assets included under the Debt Agreement. Debt Agreement proposals are either accepted or rejected by creditors. Voting is normally done by letter, however a physical meeting may be held. A proposal is accepted if a majority in value of creditors who vote / reply before the applicable deadline state that the proposal should be accepted. Take Note: Giving a proposal to AFSA, or setting up a Debt Agreement and not keeping up the repayments is an 'Act of Bankruptcy'. A creditor can use this to apply to the Federal Court or Federal Circuit Court for a Sequestration (Bankruptcy) Order.

part IX agreements


A Part X Personal Insolvency Agreement is a formal legally binding arrangement that enables debtors to make an offer to their creditors in satisfaction of their debts. There are no income, asset or debt limits for Part X Personal Insolvency Agreements. The proposed Controlling Trustee may help a debtor prepare a proposal to put to his or her creditors. Personal Insolvency Agreements are very flexible and can be structured according to the debtor’s circumstances. The Personal Insolvency Agreement (PIA)

The PIA must:

Expressly state that it is entered into under Part X of the Bankruptcy Act 1966 (the Act).

Identify what property and / or income is to be made available to pay creditors claims.

Specify how that property and / or income is to be dealt with.

Specify the extent to which the debtor is to be released from the provable debts.

Specify whether or not the antecedent transaction provisions of the Act are to apply to the agreement.

Specify any conditions for the agreement to come into force.

Specify any circumstances where the agreement will terminate and the effect such termination will have on the release from provable debts.

Specify the order in which the proceeds of realisation of property and / or income is to be distributed to creditors.

Make provision for a person or persons to be appointed as Trustee(s).

Provide that the debtor will execute such instruments and generally do all such acts and things in relation to the property and income as is required by the agreement.

Specify any other relevant matters.

part X agreements


Starting the Process

To start the process, a debtor provides the following, to the proposed Controlling Trustee:

A Statement of Affairs (a Statutory Form in which he or she sets out all of his or her assets and creditors and certain personal and business details) including noting if any of those creditors are a related entity. A draft of the offer (PIA) the debtor wishes to make to the creditors for consideration.

A signed Authority under the Bankruptcy Act, called a Controlling Trustee Authority (the Authority), authorising either a registered trustee, the Official Trustee or a solicitor (who is a full member of the Insolvency Practitioners Association or has satisfactorily completed a course in insolvency approved by the Inspector-General) to call a meeting of the debtor’s creditors to vote on whether to accept the PIA or any amendment to it that may be agreed between the parties.

For the Authority to become effective it must be signed by the registered trustee, the Official Trustee or the solicitor. The registered trustee, the Official Trustee or solicitor then becomes known as the Controlling Trustee. An effective Authority creates a number of legal effects:

The Controlling Trustee takes control of the debtor’s property; the debtor loses control of his or her property. This means he or she can no longer deal with assets without the permission of the Controlling Trustee. A legal charge security is created over all the debtor’s property in favour of the Controlling Trustee.

If a creditor has petitioned for bankruptcy, that petition is stayed until the meeting of creditors is held.

Authorising a Controlling Trustee to take control of a debtor’s affairs is an ‘Act of Bankruptcy’.

part X agreements


The Controlling Trustee The Controlling Trustee has the power to gather information from the debtor and other parties regarding the debtor’s financial affairs. The Controlling Trustee has certain duties that he or she must perform, including:

Notifying the creditors of the signing of the Authority. Filing the Authority, Statement of Affairs and draft proposal for a PIA with AFSA.

Completing and sending a report to the debtor, creditors and AFSA, at least 10 days prior to the meeting of creditors taking place. That report will:

1. Provide a summary of the debtor’s assets and creditors. 2. Provide details of the results of any investigations made. 3. Comment on any relationships between the debtor and creditors. 4. Comment on any relationship between the debtor, any associated

entity and the Controlling Trustee. 5. Disclose any relationship between the debtor, any associated entity

and the proposed Trustee of the PIA. 6. Make a recommendation as to whether the PIA is in the best

interests of creditors. 7. Comment of the basis of remuneration for the Trustee of the PIA. 8. Calling a meeting of creditors within 25 working days of the date the

Authority becomes effective. That period is extended to 30 working days for Authorities signed during the month of December;

9. Advertise the meeting.

part X agreements


The Meeting of Creditors A debtor must attend the meeting of creditors unless prevented by illness or other sufficient cause. In order to vote at the meeting, the creditors must lodge a “Statement of Claim and Proxy Form” (a Statutory Form) with the Controlling Trustee. That form sets out certain information that must be provided by creditors, including:

1. The amount they claim, and whether they hold any security for that debt, as well as brief particulars of the debt.

2. Whether the debt has been assigned to them, and if so the consideration given for that assignment.

3. Whether or not they are a related entity. Creditors must disclose, either on the instrument appointing a proxy to vote at the meeting or to the Controlling Trustee when requested at the meeting, details of any financial incentive they may have received to vote in a particular way. At the meeting, creditors have the right to question the debtor about his or her financial affairs and circumstances leading to the insolvency. Creditors vote on the PIA (or any amendment to it that may be agreed between the parties) after the debtor’s affairs have been discussed. In order for the PIA to be accepted, it must be passed by a majority in number and at least 75% in value of creditors voting at the meeting. If creditors vote in favour of the PIA they must then appoint either a Registered Trustee or the Official Trustee to administer the PIA. If the PIA is accepted at the meeting of creditors, it is binding on all provable creditors, whether or not they agreed to its acceptance. At the meeting, creditors may also consider, and if appropriate, appoint a committee of inspection to help and oversee the Trustee in the administration of the PIA. The creditors need not approve the PIA and may require the debtor to present a Debtor’s Petition for Bankruptcy within 7 days after the meeting. If the debtor does not comply with that direction, a creditor or the Controlling Trustee can apply to the Federal Court or Federal Circuit Court for a Sequestration (Bankruptcy) Order.

part X agreements


Authorising a trustee to take control of a debtor’s affairs is an 'Act of Bankruptcy'. If creditors have voted at the meeting that a debtor should go bankrupt and he or she does not, that is also an 'Act of Bankruptcy'. A creditor can use these to apply to the Federal Court or Federal Circuit Court for a Sequestration (Bankruptcy) Order. Variation of a PIA A PIA that has been accepted by creditors can, with the consent of the debtor, be varied.

1. At a meeting (by creditors)

Creditors can vary a PIA by passing a special resolution at a meeting called for that purpose, provided the debtor agrees to that variation.

2. By Postal vote (by the trustee) The Trustee may be requested by the debtor to propose a variation of the PIA on the basis that their circumstances have changed. The Trustee may give notice to the creditors of the proposed variation, setting out the reasons for the variation, the likely impact it will have on creditors and specify a date (at least 14 days after the notice is given) on which the variation will take effect. That notice must also state that any creditor may by written notice (given to the Trustee at least 2 days before the specified date) object to the notice taking effect without a meeting being held. In such case a meeting must be held to consider the proposed variation. If no such notice is lodged by any creditor then the variation takes effect from the date specified in the notice. Termination of a PIA A PIA may stipulate certain circumstances upon which it will terminate, such as failure to comply with its terms. The PIA can also be terminated by creditors or the Trustee using the same procedures as outlined for the variation of a PIA. The Federal Court or Federal Circuit Court has the power to terminate a PIA and make any other appropriate order, such as issue a Sequestration (Bankruptcy) Order.

part X agreements


If a debtor cannot reach a compromise or settlement with his or her creditors, the last resort is bankruptcy. There are two ways in which a person can go bankrupt: Voluntary Bankruptcy A debtor can lodge a Debtor’s Petition for Bankruptcy accompanied by a Statement of Affairs with AFSA. A debtor can choose whether a Registered Trustee or AFSA administers the bankruptcy. However creditors can change the Trustee. For a Registered Trustee (Private Trustee) to act, a Consent to Act form must be signed by the Trustee and lodged with AFSA at the same time the Debtor’s Petition and Statement of Affairs are lodged. If a private trustee is not appointed, the Official Trustee (part of AFSA) is automatically appointed as Trustee . Once AFSA accepts the Debtor’s Petition the debtor becomes bankrupt. Involuntary Bankruptcy Under certain situations, a creditor who is owed more than $5,000 can issue a Creditor’s Petition against a debtor. The Federal Court or the Federal Circuit Court sets down a date for hearing the Petition. If the debtor does not contest the Creditor’s Petition or is unable to satisfy the Court that he or she should not be made bankrupt, the Court will make a Sequestration (Bankruptcy) Order against the debtor and he or she is then declared bankrupt. If the petitioning creditor has obtained a Consent to Act from a Registered Trustee, then that Trustee will be appointed to administer the bankruptcy. Otherwise AFSA will be appointed Trustee. The creditors can change the Trustee. After a Sequestration Order has been issued, the bankrupt has a legal obligation to lodge a Statement of Affairs with AFSA within 14 days of being notified of the bankruptcy. In practice that statement is usually given to the Trustee appointed, who then files it with AFSA.

bankruptcy


The Effects Of Bankruptcy What are a bankrupt’s main obligations

a. Complete and file a Statement of Affairs. b. Comply with any reasonable directions given by the Trustee. c. Advise the Trustee immediately of any change of name, address,

phone number or employment. d. Deliver to the Trustee all books and records relating to trade

dealings, property and affairs. e. Deliver his or her passport to the Trustee. f. Disclose to the Trustee as soon as practical any property acquired

during the term of the bankruptcy. g. Provide details of his or her income and the gross income of any

dependants. h. Aid the Trustee in the administration of the estate.

The main restrictions placed upon a bankrupt are:

a. The Bankruptcy Act does not stop a bankrupt from borrowing money or purchasing goods on credit. However, it does place on the bankrupt an obligation to inform the person he or she is dealing with, that he or she is an undischarged bankrupt, when the amount of credit being sought is above a prescribed limit. (The current prescribed amount is set out as Point 4 on the Schedule). Some transactions which fall into this category are hire purchase agreements, leases, monthly store accounts, credit cards, loan accounts, obtaining goods and services by cheque or promises to pay that exceed the prescribed amount.

b. It is an offence to carry on business under a name other than the bankrupt’s own name without disclosing to any party with whom he or she deals with, that he or she is an undischarged bankrupt.

c. It is an offence to attempt to leave the country without first obtaining the consent in writing from the Trustee.

d. A bankrupt cannot be a director or promoter of or take part in the management of a company without the permission of the Court.

e. A bankrupt has no legal power to sell or otherwise deal with any property existing as at the date of bankruptcy and / or any property he or she receives prior to the date of discharge (other than protected property).

bankruptcy


Period of Bankruptcy

a. Date of Discharge A bankrupt may be discharged from bankruptcy at the end of the period of 3 years from the date the Statement of Affairs is filed with AFSA. The period can be extended if an objection to discharge is lodged. An objection is usually lodged when a bankrupt fails to cooperate with the Trustee or to comply with a bankrupt’s obligations under the Bankruptcy Act. The period will generally be extended by a further two years or five years from the date the Statement of Affairs was filed with AFSA, depending on the reason why the objection was lodged. The effect of receiving a discharge from bankruptcy is that a bankrupt is released from his or her provable debts. It does not, however, release a bankrupt from the claims of any creditors incurred after the date of bankruptcy or certain other debts that are not ‘provable’ in the bankruptcy (eg. unpaid court fines, HECS debts, maintenance agreements, compulsory income liability).

b. Annulment The Trustee can annul the bankruptcy by issuing a Certificate of Annulment when:

All the debts and costs of the administration of the bankruptcy have been paid in full, or

The bankrupt makes an offer under section 73 of the Bankruptcy Act, which is accepted by creditors. Under that section, a bankrupt can make an offer of a sum of money or property in full and final payment of his or her provable debts. It may be payable as a lump sum or by instalments over a period of time. For example, a bankrupt may offer and creditors may accept regular periodic payments of an amount for a number of years. It must be accepted by creditors at a meeting and the bankrupt must satisfy the terms of the offer or it may be terminated and the person placed back into a fresh bankruptcy.

bankruptcy


Compulsory Income Contributions A bankrupt is required to give the Trustee:

Details of all his or her income. Details of any fringe benefits received (eg. use of a car, subsidised rent). The gross income received by any person he or she claims to be a dependant. Details of any relationship that may exist between the bankrupt and the employer.

The Trustee will use a formula to assess the income for each year of the bankruptcy. Income under the Bankruptcy Act 1966 is defined differently from income under the Income Tax Assessment Act and includes a number of provisions relating to deemed income. The Trustee can use information provided by any party to assist in assessing income. If the bankrupt’s after tax deemed income is above a threshold amount the bankrupt will be required to pay 50% of any amount in excess of that threshold amount to the Trustee. If a bankrupt’s income is below the threshold amount, no contribution is required. The threshold amount increases for each dependant a bankrupt has. (Details of the thresholds are set out at Point 5 on the Schedule). A person ceases to be a dependant if they earn an income in excess of a threshold amount (Details of the threshold is set out at Point 6 on the Schedule). If a bankrupt is liable to pay income contributions, the Trustee will seek to enter into a mutually suitable arrangement for the payment of the amount payable; usually by way of regular periodic payments. If the bankrupt does not agree to suitable terms, the Trustee may garnishee (make an automatic deduction without the bankrupt’s consent) a bankrupt’s income or bank account and / or extend the bankruptcy period if a bankrupt does not pay the required amount. In addition, the Trustee can require a bankrupt to deposit all of his or her income into a “Supervised Bank Account” if a suitable arrangement is not agreed upon for the payment of any income contribution liability. If this occurs, a bankrupt is not authorised to withdraw money from the account, unless authorised by the Trustee.

bankruptcy


Contribution to Costs The Trustee's fees are usually paid out of the proceeds of the sale of the assets or income in the bankrupt’s estate, prior to a distribution to creditors. Where there are insufficient funds in an administration to pay the Trustee’s fees and costs, a private Trustee may seek payment for his or her fees from the bankrupt or a third party. Alternatively, a debtor may file for bankruptcy with AFSA and no fee is payable. AFSA will still administer the bankruptcy and seek to recover funds where possible and appropriate. Relief from Creditors in a Bankruptcy Unsecured creditors can take no further action against a bankrupt without the permission of the Court. Bankruptcy does not affect the right of a secured creditor from entering into possession and selling that property over which security is held. Any shortfall incurred by a secured creditor on the realisation of the asset subject to security will rank as an unsecured creditor in the bankruptcy administration. Some debts are not provable in bankruptcy, and a bankrupt will not be discharged from the obligation to pay these debts. These non-provable debts are mainly fines imposed by the Court for breaches of the law, demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust, debts arising from fraud or a fraudulent breach of trust, maintenance payments and debts due to Centrelink as well as unpaid compulsory income contributions. What the Trustee does once he/she is appointed? The Trustee is appointed to look after the interests of the creditors. The Trustee’s obligation is to take control of all of the bankrupt’s property (apart from protected property), realise such property and distribute those funds in the order prescribed by the Bankruptcy Act. Property includes property a bankrupt has at the date of bankruptcy and certain property received or obtained up to the date he or she is discharged from bankruptcy. The Trustee must make assessments of a bankrupt’s income and collect any compulsory income contributions that he or she is liable to pay.

bankruptcy


The Trustee has an obligation to commercially investigate a bankrupt’s affairs to ensure that all property belonging to him or her has been dealt with. This investigation includes reviewing certain property and payment transactions handled by the bankrupt prior to the date of bankruptcy (antecedent transactions). These include:

i. Property transferred or sold by the bankrupt under market value within the 5 years prior to the commencement of the bankruptcy.

ii. Transfers of property carried out by the bankrupt for the purpose of defeating creditors prior to the commencement of the bankruptcy.

iii. Certain payments made to creditors prior to bankruptcy. iv. Property owned by companies or trusts over which the bankrupt

has effective control. Protected Property The Bankruptcy Act exempts certain property from being property available to be distributed amongst creditors. The main exemptions are:

a. Property held by a bankrupt on trust for another person. b. Necessary wearing apparel, household property and some limited

items of sentimental property as set out in the Bankruptcy Regulations.

c. Ordinary tools of trade, plant and equipment, professional instruments and reference books up to the prescribed amount. (See Point 7 of the Schedule for the current prescribed amount).

d. Property used by the bankrupt primarily as a means of transport being property whose aggregate value (equity) does not exceed the prescribed amount. (See Point 8 of the Schedule for the current prescribed amount).

e. A bankrupt’s right to recover damages or compensation for personal injury or wrong done to him or her, his or her spouse or a member of his or her family.

f. Amounts paid to a bankrupt under certain government assistance schemes.

g. An interest in a regulated superannuation fund.

bankruptcy


More Information Further information and copies of the Statutory Forms are available from our web site at www.svpartners.com.au. If you want more detailed information, pamphlets on various aspects of bankruptcy are available from AFSA; on its web site www.afsa.gov.au, at AFSA’s offices or telephone number 1300 364 785. DISCLAIMER: The information sheet is intended as a general guide. It is not intended or to be taken as advice to any person. While it is believed that the information contained herein is accurate and reliable, we do not warrant the accuracy and completeness of any statement or opinion. No liability is accepted by SV Partners, its Directors and or staff for any error or omission or on any other account. In summary, this information sheet is to be utilised as a guide only. Please do not hesitate to contact our office if you wish to speak directly to any accountant who specialises in bankruptcy and personal insolvency.

bankruptcy

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Index of current prescribed amounts as at 23 April 2014 1. After tax income (Part IX Debt Agreements) $ 78,815.10 2. Unsecured debts (Part IX Debt Agreements) $ 105,086.80 3. Property not exempt (Part IX Debt Agreements) $ 100,664.20 4. Credit limit allowed $ 5,333.00 5. Actual income thresholds:

No. of Dependents

After tax income able to be earned before contribution required (indexed)

No Dependents

$52,543.40

1 Dependent

$62,001.21

2 Dependents

$66,730.12

3 Dependents

$69,357.29

4 Dependents

$70,408.16

>4 Dependents

$71,459.02 6. Dependants allowable income $ 3,363.00 7. Tools of trade $ 3,600.00 8. Primary means of transport $ 7,350.00

schedule


QUEENSLAND Terry van der Velde 07 3310 2007 [email protected] Managing Director

David Stimpson 07 3310 2002 [email protected] Executive Director

Terry Rose 07 3310 2099 [email protected] Director

Jason Cronan 07 5479 6199 [email protected] Director

Anne Meagher 07 3310 2076 [email protected] Director

NEW SOUTH WALES Stephen Hathway 02 8986 8905 [email protected] Executive Director

Joe Atkinson 02 8986 8922 [email protected] Director

Daniel Quinn 02 4023 0847 [email protected] Director

Darren Vardy 02 9531 8365 [email protected] Director 02 4227 4086

Ian Purchas 02 8986 8977 [email protected] Director

Ross Mottershead 02 9531 8365 [email protected] Director

VICTORIA Michael Carrafa 03 9669 1111 [email protected] Executive Director

Richard Cauchi 03 9669 1127 [email protected] Director

David Lofthouse 03 9669 1129 [email protected] Consultant

Peter Gountzos 03 9669 1188 [email protected] Director

further information

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