A personal insolvency agreement (“PIA”), also known as a Part X agreement, is a formal arrangement that an insolvent debtor can propose to their creditors under Part X of the Bankruptcy Act 1966 (Cth) (“the Act”). The agreement provides an alternative to bankruptcy.
A PIA allows the debtor to discharge their debts without the more extensive and restrictive consequences of bankruptcy. Unlike debt agreements under Part IX of the Act, there are no limitations on the amount of debt or income for accessing a PIA. It is often utilised by individuals in business where the consequences of bankruptcy may be more severe and where the debtor has resources to make an offer to creditors in a significantly shorter period of time or with resources that are otherwise not available in bankruptcy.
There are numerous advantages of a PIA which include the following:
- Avoiding bankruptcy stigma: A PIA allows the debtor to avoid the social stigma associated with bankruptcy, as it is a formal arrangement rather than a declaration of bankruptcy (note that a PIA is still recognized as an act of Bankruptcy).
- Quick debt resolution: A PIA enables the debtor to be released from their debts and responsibilities more quickly compared to bankruptcy, which will usually involve a longer process.
- Fewer limitations: A debtor under a PIA typically faces fewer limitations compared to a bankrupt individual, such as restrictions, to travel, to trade a business and to incur debts and no requirement to pay income contributions.
- Partnership preservation: Unlike bankruptcy, a PIA does not lead to the dissolution of a debtor’s partnership, which can occur when a partner declares bankruptcy.
- No stamp duty: No State stamp duty is payable on an agreement related to a PIA.
However, there are also some potential drawbacks to consider when an insolvent debtor proposes a PIA to their creditors:
- Creditor acceptance: Creditors may not be persuaded by the debtor’s offer under a PIA. They may have concerns about the financial return and may prefer bankruptcy as it could offer them a better return, or they simply lack trust in the debtor. PIA’s require the majority of creditors voting and 75% of the value of creditors to vote in favour of the proposal.
- Uncertain financial return: The financial return for creditors under a PIA may be uncertain, which could impact creditors willingness to accept the agreement.
- Limited advantages: While a PIA provides advantages for debtors, such as avoiding the bankruptcy stigma and releasing them from debts and responsibilities more quickly, the extent of these advantages depends on the specific features of the agreement implemented.
- Limited liability: Although a PIA may limit the debtor’s liability to make income contributions, there may still be financial obligations that the debtor needs to fulfill.
- Inability to be a company director: A person subject to a PIA is unable to be a company director under the Corporations Act.
- Credit File: Unfortunately, an insolvent debtor’s details will appear on their credit file for up to 5 years, and sometimes longer.
