What is a Part X Personal Insolvency Agreement (PIA)? - Insolvency/Bankruptcy

A personal insolvency agreement (PIA) is a legally binding agreement between a debtor and a creditor that aims to ensure debts are appropriately repaid.

In Australia, personal insolvency agreements are supervised under the Bankruptcy Act 1966.

A personal insolvency agreement is generally used to allow a higher level of negotiation to take place regarding the debt. It is administered by a trustee, who must be registered.

A PIA is perfect for tax debts, joint debts, some secured debts, and unsecured debts which are the same as those covered in bankruptcy.

Those who enter into a personal insolvency agreement are likely to experience the consequences of insolvency, so it is important to be aware of said consequences before signing.

A part X personal insolvency agreement requires:

The appointment of a bankruptcy trustee to take control of your property and
The bankruptcy trustee making an offer to your creditors to settle the debts (including the ATO).
The offer may be to pay all or part of your debts by lump sum or by instalments.

If the required amount of your creditors agree, then the agreement remains in place until it is completed, and the debtor avoids bankruptcy.

Part X (10) of the Bankruptcy Act 1966

Under section 188A, found in part X of the Bankruptcy Act 1966, personal insolvency must:

(1) A personal insolvency agreement is a deed that:
(a) Is expressed to be entered into under this Part; and
(b) complies with subsection 2).
2) A personal insolvency agreement must:
(a) identify the debtor's property (whether or not already owned by the debtor when he or she executes the agreement) that is to be available to pay creditors' claims; and
(b) specify how the property is to be dealt with; and
(c) identify the debtor's income (whether or not already derived by the debtor when he or
she executes the agreement) that is to be available to pay creditors' claims; and
(d) specify how the income is to be dealt with; and
(e) specify the extent (if any) to which the debtor is to be released from his or her provable debts; and
(f) specify the conditions (if any) for the agreement to come into operation; and
(g) specify the circumstances in which or the events on which, the agreement terminates; and
(h) specify the order in which proceeds of realising the property referred to in paragraph (a) are to be distributed among creditors; and
(i) specify the order in which income referred to in paragraph (c) is to be distributed among creditors; and
(j) specify whether or not the antecedent transactions provisions of this Act apply to the debtor; and
(k) make provision for a person or persons to be trustee or trustees of the agreement; and
(l) provide that the debtor will execute such instruments and generally do all such acts and things in relation to his or her property and income as is required by the agreement."

What are the expected outcomes of a PIA?

The expected outcomes include (inter alia):

The debtor will avoid the restrictions of bankruptcy.
The PIA will ensure that the creditors get a fair distribution of assets
The debtor will get relief from their debts and debt collectors.
The debtor can keep their jobs and maintain their source of income.
Provide a better result to creditor's than would be paid in bankruptcy.

These are just some of the advantages of using a part X insolvency agreement rather than going bankrupt.

What is the Process of a Part X Insolvency Agreement?

Before an individual is legally allowed to enter into a personal insolvency agreement, the following conditions must be fulfilled:

The debtor must be insolvent;
They must be present in Australia or have some connection to Australia;
They must have not entered another insolvency agreement within the previous 6-month period unless permission from the court has been provided.

For an insolvency agreement to pass then the creditors must pass a special resolution, which means that the majority of the creditors must vote for it, and over 75% of the dollar value of the debt owed by the creditors.

We will explain "insolvent" in more detail below.

The Debtor must be Insolvent

The definition in the Bankruptcy Act states:

A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

A person who is not solvent is insolvent.

So essentially, if you are unable to pay all of your debts as and when they become due and payable, then you are insolvent. This includes tax debts.

This may not always be the case, but this is the general principal.

A debtor must then, once the evidence of the above has been provided, select a trustee to supervise their agreement. They may select either a registered bankruptcy trustee or the Official Trustee ("AFSA").

Once selected, the debtor must provide the trustee with these documents:

An authority, as stated under section 188 of the Bankruptcy Act 1966, hands over control of assets, and allows them to organise a meeting with the creditors to discuss the control; and
A statement of affairs, discussing all assets, financial liabilities, and personal details; and
A personal insolvency agreement, in the form of a draft, explaining the action you wish to take and the agreement you wish to come to with your creditors.

These can be worked on between the debtor and the insolvency practitioner.

Why Should I Make a Personal Insolvency Agreement?

A personal insolvency agreement may be right for you if you find yourself unable to repay debts but do not wish to declare bankruptcy.

Bankruptcy can be detrimental to the financial future of an individual, a reason you may want to consider a PIA instead of declaring.

Declaring bankruptcy will likely cause your business or establishment to be seized and liquidated by your bankruptcy trustee, leading, as suggested, to the shutdown of your business.

Trustees will also generally be required to seize any other assets you may have had pre-bankruptcy.

Bankruptcy will generally last in Queensland for three years and one day. A personal insolvency agreement is an alternative you can take to bankruptcy to protect your finances and future economic health.

Why Choose a Personal Insolvency Agreement?

A PIA is great in certain situations. This can include:

There are no income, asset, or debt limits that apply to a PIA (unlike a Part IX Debt Agreement).
You will not be locked into the three (3) year bankruptcy term, as the length of the personal insolvency agreement will be set at the amount of time you negotiate.
In some cases, it may be possible to keep assets like your house or car if the terms of the PIA allow for it.

A personal insolvency agreement includes the following types of debts:

Joint debts (of the debtor and another person).
Secured debts (by way of mortgage or charge for example).
Tax debts (as a result of a director penalty notice for example).
Unsecured debts (most day-to-day debts, credit cards for example).

What about secured debts?

Secured Debts

A personal insolvency agreement may not release you from all unsecured debts. The trustee must disclose the PIA to the secured creditor and they can choose if they want to participate or seek to realise their security.

Some examples of secured debts include:

Any vehicle loan (the vehicle is used as security).
Any hire purchase agreements (the hired items are the security).
Home loan (real property) (the property is used as security by mortgage).
Business loans (the business assets are used as security).
Chattel mortgage (the chattel is used as security).

Some examples of debts which are not covered inclide:

Local council rates.
Debts incurred after the PIA.
Fraudulent secured debts.
Local water rates.

So, it is up to the debtor to see if this type of agreement is right for them.

Tax Debts with the ATO

Tax debts can be included in personal insolvency agreements.

So, if you have been served with a director penalty notice and this has now made you insolvent and/or unable to pay the notice, then a part X agreement could be the perfect option.

There is no upper limit on a part X insolvency agreement and so if you owe a significant sum of money to the ATO, then a part X agreement can be proposed.

If you owe significant tax debts, and you do not want to go bankrupt, then you can propose a part X insolvency agreement to reduce and clear those debts.

What are the Consequences of a Personal Insolvency Agreement?

As with most insolvency arrangements, several consequences are likely to accompany a personal insolvency agreement. It is vital that you are aware of these consequences so you can make an informed decision as to if a PIA is right for you.

When you enter into a PIA, there is a chance that you will not be cleared of all debts! Debts are only supported by this agreement if they are unsecured (unless the security holder allows for it - as above).

An unsecured debt, for those wondering, is a debt not supported by collateral.

Furthermore, to initiate the process of a PIA, you must pay a fee. This fee will depend on the trustee of your choice and will have to be paid before you can begin the agreement.

Depending on the severity of your financial situation, this may not be viable for you, so it is important to consider the fee before taking any action.

A personal insolvency agreement will have quite a large impact on your credit score. As with bankruptcy, your name will permanently appear on the National Personal Insolvency Index and the details of the insolvency will remain present on your credit file for up to a 5-year period.

If your Part X insolvency agreement is breached by the debtor then this is an act of bankruptcy pursuant to section 40(1)(m) of the Bankruptcy Act 1966, which says:

(1) A debtor commits an act of bankruptcy in each of the following cases:

(m) if a personal insolvency agreement executed by him or her under Part X is:

(i) set aside by the Court; or

(ii) terminated.

If the debtor commits an act of bankruptcy, then a creditor can present a creditor's petition, commencing the bankruptcy process.

A debtor will also be disqualified from being a director of a company for the duration of the personal insolvency agreement.

What if I'm the Creditor?

You may be reading this article as a creditor involved in a personal insolvency agreement and be questioning what your rights are in the matter.

As a creditor, your debtor will be required to, as aforementioned, appoint a trustee who will likely come to you with a proposal.

Just so you are aware, it is the responsibility of the trustee to take complete control of your creditor's property and prepare a report that details what you and your debtor will gain from the agreement.

Once the debtor has elected a trustee, they will then be required to organise a meeting of the creditors, a meeting that you will have to attend.

As stated on the Australian Financial Security Authority website, the trustee must send you the following information a minimum of 10 days prior to the meeting:

notice in writing of the date, time, and place of the meeting
the trustee's report
the trustee's statement about resolutions to vote on, and
an estimate of the trustee's costs for managing the agreement.

You may, at this meeting, vote on your acceptance or lack thereof on the terms of the personal insolvency agreement.

If the creditors decide to accept the agreement, they must comply with the terms discussed. They must then also select a trustee to manage the terms of the agreement.

This may be the same trustee as the one appointed by the debtor, but creditors may appoint a trustee of their choice.

If the creditors decide that they do not want to accept the agreement, they will then have a decision to make. They may return control to the debtor, or they may demand the debtor presents an application for bankruptcy within the following 7-day period.

They also may decide to not make a special resolution, meaning the trustee will remain in control of the individual's property until whichever of the following occurrences happen sooner:

Four months pass from the date the trustee was appointed; or
The property is released from the control of the trustee by a court of law; or
The debtor declares bankruptcy; or
The debtor dies.

Key Takeaways

A personal insolvency agreement may be a viable road for you to take if you do not wish to declare bankruptcy but find yourself insolvent.

There are however quite significant consequences to a PIA, so it is important you are aware of your rights and responsibilities regarding the matter.

Furthermore, it is recommended you pursue the help of a professional, such as a financial counsellor, if you find yourself considering a PIA!

It is vitally important that before entering a personal insolvency agreement

You seek advice from suitably qualified professionals.
You know and understand all of your options
You know and fully understand all of the consequences

Personal Insolvency Agreement FAQ

We get a lot of enquiries in relation to insolvency law, and especially debt agreements, insolvency agreements, and bankruptcy.

Here are just a few frequently asked questions in relation to personal insolvency agreements.

Does a Personal Insolvency Agreement hurt your credit rating?

Yes, a PIA will go on your credit rating, and you will be listed on the personal insolvency index PII.

How do I apply for a Personal Insolvency Agreement?

First, get advice. Secondly, appoint a trustee. The trustee will step through the process and the rest of the forms you will be required to complete.

How long does a Personal Insolvency Agreement stay on your credit history?

Five years. A PIA will remain on your credit record for five years sometimes longer). A PIA will always remain of the national personal insolvency index NPII.

How long does Personal Insolvency last?

A personal insolvency agreement will last however long you agree for it to last, or sooner if you can get it paid off faster.

How much does it cost for a Personal Insolvency Agreement?

It really depends on the amount of debt, type of debt, and the creditors. However, they can cost as much as $15,000.00.

What are the advantages of a PIA?

The debtor will avoid the restrictions of bankruptcy.
The PIA will ensure that the creditors get a fair distribution of assets
The debtor will get relief from their debts and debt collectors.
The debtor can keep their jobs and maintain their source of income.
Provide a better result to creditor's than would be paid in bankruptcy.

What are the alternatives to a Personal Insolvency Agreement?

Alternatives to a personal insolvency agreement include - an informal agreement, a part IX debt agreement, or bankruptcy.

What are the consequences of a Personal Insolvency Agreement?

Some of the consequences of a Personal Insolvency Agreement including paying a fee (sometimes over $10k), it has a large impact on your credit score, if breached by the debtor then this is an act of bankruptcy, and you will be disqualified from being a director of a company.

What is personal insolvency?

If you are unable to pay all of your debts as and when they become due and payable, then you are personally insolvent. This includes tax debts.

The definition in the Bankruptcy Act states:

A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

A person who is not solvent is insolvent.

What is the National Personal Insolvency Index?

The National Personal Insolvency Index (NPII) is a database which is publicly available (for a fee) of the record of personal insolvency in Australia.

What types of debts are covered by a Part 10 Debt Agreement?

The types of debts are covered by a Part 10 Debt Agreement includes tax debts, joint debts, some secured debts, and unsecured debts, and are the same as those covered in bankruptcy.

Who administers a Personal Insolvency Agreement?

A private bankruptcy trustee or the Official Trustee (Australian Financial Security Authority) ("AFSA").

Who can propose a PIA?

A debtor who is insolvent can propose a personal insolvency agreement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Australia: What is a Part X Personal Insolvency Agreement (PIA)?