Part X Personal Insolvency Agreements

Part X Agreements provide an avenue for a person who is unable to pay their debts to reach an agreement with their creditor(s) for repayment, particularly where that person is ineligible for a Part IX Debt Agreement.

What is a Part X Personal Insolvency Agreement?

A Personal Insolvency Agreement, otherwise known as a Part X Agreement, is a legally binding agreement between a debtor and their creditor(s) to pay off their debts. These agreements are legislated under Part X of the Bankruptcy Act 1966 (Cth).

Under a Personal Insolvency Agreement, a trustee is appointed to take control of the debtor’s property. The trustee will then make an offer to the debtor’s creditors for repayment of some or all of their debts. Such an agreement may provide for only a portion of any debts to be paid back and the remainder forgiven, or for the full amount of the debt to be paid back under a payment plan. The specific terms of the agreement, including its length, will depend on what each party is willing and able to agree.

Once all payments under the agreement have been made, a debtor is released from the remainder of their debts, with creditors being unable to recover any further money relating to those debts after its completion.

Am I able to enter into a Personal Insolvency Agreement?

Before entering into a Personal Insolvency Agreement, a debtor should consider whether there are any other avenues of debt management available. One such avenue may be a Part IX Debt Agreement.

Debt Agreements are similar to Personal Insolvency Agreements as they are also a legally binding agreement between a debtor and their creditor(s) to arrange for payment of debts. The main difference is that Debt Agreements do not involve the appointment of a trustee over the debtor’s property, or any of the fees and additional requirements that come with this appointment.

Be aware that Debt Agreements can only be entered into by debtors whose income, debts, or assets are below a certain threshold. As such, Personal Insolvency Agreements are more suited to higher income earners or those with more complicated financial situations.

If a debtor:

• Is unable to pay their debts when they fall due,
• has a necessary connection to Australia, and
• has not proposed a Personal Insolvency Agreement in the previous six months,

they should be eligible to enter into a Personal Insolvency Agreement. Unlike Debt Agreements, there are no eligibility restrictions relating to a debtor’s income, assets or the amount of their debt.

Though a Personal Insolvency Agreement can be entered into in relation to most debts, they cannot release a debtor from paying the following debts:

• Court fines,
• Student loans, such as any HECS, HELP, or SFSS debts,
• Victims of Crime payments,
• Debts incurred after the Australian Financial Security Authority (‘AFSA’) receives the debtor’s proposal,
• Secured debts such as a mortgage(s) or car loan(s), and
• Tax debts. These can be included in Debt Agreements, however it is important to note that the Australian Tax Office is able to retain tax refunds to cover any remaining debt.

Certain other debts also may not be covered by the agreement. AFSA provides a helpful guide to the types of debt which may be covered by bankruptcy and debt agreements. The unsecured debts covered by Personal Insolvency Agreements are the same as those covered by bankruptcy.

Debts which are shared with another person may be included in a Debt Agreement. However, this does not release that person from paying their debt.

What are the benefits and consequences of entering into a Personal Insolvency Agreement?

Whether or not a Personal Insolvency Agreement is appropriate will depend on the circumstances.

For debtors

Personal Insolvency Agreements provide a way for a person to repay their debts without becoming bankrupt. Bankrupt persons are subject to certain prohibitions during the period of their bankruptcy that are not imposed on debtors who enter into Personal Insolvency Agreements. For example, bankrupts are prohibited from:

• travelling overseas without approval from the trustee,
• acting in positions of management in a company, or
• trading without advising of their bankruptcy.

Further information on the consequences of bankruptcy can be found here. These restrictions do not generally apply to persons who enter into Personal Insolvency Agreements, though such persons are unable to act as a Director of a company while the agreement is in force.

Other consequences of entering into a Personal Insolvency Agreement is that doing so constitutes an act of bankruptcy. As such, a debtor’s name is then placed on the National Personal Insolvency Index ('NPII') permanently. The NPII is a public record of insolvency proceedings in Australia and therefore has the potential to affect future business opportunities.

A Personal Insolvency Agreement will also be recorded in the Public Record of a debtor’s credit file for up to five years from the date the agreement is entered into. As such, it is likely to affect their credit score and may make it difficult to obtain loans or other financial assistance while the agreement remains on a person’s record.

There are also certain costs associated with a Personal Insolvency Agreement that will need to be factored into the agreement, including fees to manage the administration of the agreement. A debtor has obligations under a Personal Insolvency Agreement to assist the trustee through the provision of requested information and documentation. This is an obligation that persists throughout the agreement’s lifetime.

For creditors

Where a debtor has failed to repay money and there is a possibility that they may be insolvent, a Personal Insolvency Agreement is often more likely to provide an opportunity for the creditor to be repaid than if the debtor were to be made bankrupt. It can provide security and protection for creditors which an informal repayment agreement cannot, as the agreement must be administered by either the Official Receiver or a registered trustee. The trustee is required to enforce the terms of the agreement, sell assets, and collect and distribute any money to creditors.

In the event that the agreement is terminated, all the debtor’s debts are reinstated as if the Personal Insolvency Agreement never occurred. Creditors may then take action against the debtor accordingly, including through issuing a Bankruptcy Notice and commencing bankruptcy proceedings.

How can Sharrock Pitman Legal assist?

If you require advice on whether a Personal Insolvency Agreement may be right for you, please feel free to contact a member of our Litigation team on 1300 205 506, or alternatively fill in the form below. We have an Accredited Specialist in Commercial Law and an experienced Litigation team. Our lawyers are able to provide you with advice regarding your options, in addition to guiding you through the steps that are appropriate for your circumstances.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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