ALTERNATIVES TO BANKRUPTCY

Debtor's petitions

Subject to certain exceptions a debtor may present to the Official Receiver a declaration to present a debtor's petition [Bankruptcy Act 1966 s 54A]. Once accepted this has the effect of freezing action against the debtor by a creditor for seven days. This allows a debtor time to seek advice or make arrangements with creditors and prevent the need to become bankrupt. These arrangements have no effect on the rights of secured creditor to deal with their security. A declaration is not available to business partners and can only be filed once in any twelve month period.

Compromise agreements

Often creditors are persuaded that it is better to reach a compromise without a debtor being declared bankrupt. There are four procedures in the Act for such a compromise agreement, each involving the agreement of a majority of creditors and three-fourths in value of creditors attending and voting at a creditors' meeting and a trustee taking control of the assets of the debtor or carrying on the debtor's business in the interest of the creditors. Because the agreement binds all creditors the immediate pressure of the courts and debt collectors is removed. Anyone wishing to know more about these procedures should consult a lawyer an accountant or a financial counsellor.

Formerly only business debtors who have property and income became involved in these formal procedures, which can be expensive. In addition, when a debtor authorises a trustee, accountant or lawyer to organise a compromise arrangement, they effectively give control of their affairs to the creditors, who may still force them into bankruptcy.

Debt agreements

Amendments to the Bankruptcy Act 1966 that came in on 16 December 1996 create a new procedure which allows people to enter into a 'debt agreement' with their creditors as an alternative to filing for bankruptcy. Unlike other alternatives to bankruptcy, there are no fees for processing a debt agreement and this method may be particularly attractive for people on low incomes. There are fees where you make arrangements with an Administrator to look after your debt agreement. An initial approach should be made to the Insolvency and Trustee Service Australia (ITSA). A reasonable offer should be made as ITSA do not have to accept the proposal for processing unless it is in the best interests of creditors. ITSA looks at how much creditors will receive from the proposal and how much they would get if the debtor became bankrupt. Relevant consideration will include the debtor's income and assets, see EFFECTS OF BANKRUPTCY.

If ITSA accepts the proposal for processing, creditors are provided with a copy of the proposal and given 25 working days to accept or reject the proposal. The proposal becomes a debt agreement if accepted by a majority in number and three quarters in dollar value of creditors responding by post. People cannot enter into debt agreements if:

they have been bankrupt or entered into a debt agreement within the previous ten years
their unsecured debts are more than $74 292.40 (this is an indexed amount)
their divisible assets are more than $74 292.40 (this is an indexed amount)
their after tax income in the year beginning at the proposal time is more than $55 719.30 (this is an indexed amount).

The indexed amounts are current as at 29 September 2005 and will alter in line with increases in the basic social security pension rate.

Once an agreement has been accepted it gives the debtor the same protection as bankruptcy in relation to action by creditors. However, it does not stop action being taken to enforce a child support order or agreement.

Either a debtor or a creditor can apply to vary a debt agreement. An agreement ends once the debtor completes all the agreement's obligations. If the debtor fails to carry out a term of an agreement a creditor can apply to the court to end the agreement and can proceed to have the debtor declared bankrupt. A creditor can also apply to end an agreement if there is some other injustice or it is in the creditor's interests.

This alternative will be particularly attractive for people with relatively few debts, low income and few assets.

Advantages

Bankruptcy is generally a last resort. However, it can have some advantages, for example:

it wipes the slate clean as far as most debts are concerned. Once a bankrupt is discharged, provable debt incurred before bankruptcy are automatically and totally cancelled with a few exceptions, see debts.
When people enter bankruptcy, some of their property comes under the protection of the Act and cannot be taken away to help pay their debts [Bankruptcy Act 1966 s 116, Bankruptcy Regulations 1996 Reg. 6.03 and 6.04]. This includes necessary household furniture and a primary means of transport eg motor vehicle or motorbike worth less than $5800 (indexed), see property a bankrupt can keep. This means that most ordinary household items can be kept by the bankrupt.
a person cannot be pursued by creditor once the person enters bankruptcy [s 58]. All further communications about the debts should take place between the bankrupt's creditors and trustee.
social security payments are protected under the Act.
The trustee will ask a bankrupt to pay part of his or her income if there is money left over after allowing for all ordinary living expenses, such as rent, food, clothes, and even pocket money for children unless assessed as a compulsory contributor, and then in accordance with the legislation. As many people entering bankruptcy have been paying large portions of their income to creditors, this can be a great relief.
If a bailiff has recently taken away necessary household items to be sold to pay creditors, it may be possible to have them returned once the person enters bankruptcy. If the items have already been sold, it may be possible to have the proceeds of the sale paid to the bankrupt.

Disadvantages

People who become bankrupt also face many disadvantages, for example:

bankrupts receiving over a certain income must pay contributions during the bankruptcy (but not from social security payments), see income.
the bankruptcy may be published in trade journals or a newspaper, and information is available on a computerised register of bankruptcies called the 'National Personal Insolvency Index'. Information can be obtained by anyone who pays a search fee which is currently $21 (including a copy of an extract). A search can be carried out at ITSA or can be obtained from private information brokers who charge an additional amount for their service.
money and valuable goods (with certain exceptions) owned or being paid off (see consumermortgage and bills of sale) at the date of bankruptcy, or acquired during the bankruptcy, may be taken away
a payment made to a creditor within six months before the filing of a debtor's petition and potentially a longer period under a creditor's petition, which gives that creditor a preference over other creditors, is void and may be recovered by the trustee and distributed to all the creditors [Bankruptcy Act 1966 s 122].
it is an offence against the Bankruptcy Act 1966 for a bankrupt to borrow, or write a cheque for $3000 (indexed) or more without informing the other person of the bankruptcy [Bankruptcy Act 1966 s 269(1)(a)]
bankrupts who do not co-operate with their trustees by fulfilling certain duties (such as notifying details of earnings and changes of address) may be punished by the court or have their bankruptcy extended
former bankrupts are likely to have difficulty in obtaining credit in the future
the bankruptcy is likely to last for three years. If the Official Receiver, the trustee or a creditor lodges an objection which is not withdrawn, the bankruptcy will last for five or eight years, see ending bankruptcy.
under the Corporations Act 2001 (Cth) [s 206B(3)] a current bankrupt cannot be a director, promoter, or manager of a company without the permission of the court
a bankrupt may operate a business (not a company), but if a business or assumed name is used, every person with whom they have dealings must be told of their bankruptcy and real name [Bankruptcy Act 1966 s 269(1)(b)]. Any assets acquired by the business may be claimed by the trustee.
in some situations the court can order that the property of an entity (eg a company, trust or partnership) controlled by a bankrupt vest in the trustee. This may occur where the bankrupt was unable to pay his or her debts and provided personal services for, on behalf of, the entity [ss 139D, 139E]
a bankrupt may have committed a criminal offence if, within two years before going bankrupt, the person gambled or speculated in a rash and hazardous way in light of the person's financial position at that time [Bankruptcy Act 1966 s 271]. The penalty is gaol for up to one year
a person cannot hold a licence for some trades while bankrupt. A building licence cannot be held for ten years after going bankrupt [s.9(1)(c) of the Building Work Contractors Act 1995 ]
the Second-hand Dealers and Pawnbrokers Act 1996 [s.6], prohibits bankrupts and people who are subject to a composition or deed or scheme of arrangement from being second-hand dealers or pawnbrokers.
the Plumbers, Gas Fitters and Electricians Act 1995 [s.9(1)(c)], prohibits bankrupts and people who are subject to a composition or deed or scheme of arrangement from holding a licence to practice as a plumber, electrician or gas fitter.
a person can be employed as a real estate sales person, but cannot hold a real estate licence under the Land Agents Act 1944 [s.8(1)(d)] if bankrupt or subject to a composition, deed or arrangement.