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Personal insolvency agreements vs bankruptcy

Insolvency and bankruptcy are both terms referring to a situation whereby an individual is unable to maintain repayments of their debts. However there are a number of legal differences between insolvency and bankruptcy.

 Personal Insolvency

If you are considering entering into a personal insolvency agreement then you either have higher liabilities than your assets, or you have cash flow issues preventing you from making the required debt repayments to your creditors when they are due.

The majority of creditors will accept a reduced payment plan from the debtor in full settlement of their debts. It may be that the debt is paid over a longer period of time, but creditors would rather see a borrower pay back the money, even if it takes a while, rather than see them declared bankrupt. The creditors run the risk of losing their money altogether, should the borrower declare bankruptcy.

You can make regular repayments as set out in the personal insolvency agreement proposal presented to your creditors. At end of the agreed term as set out in the proposal, you will become debt free as long as you maintain the monthly payments.

Bankruptcy

Bankruptcy is generally the last resort for anyone who is struggling to pay their debts and is suffering with personal insolvency. If you are unable to meet the payments required by your creditors, and cannot reach an agreement with your creditors, then bankruptcy is often the only option. Bankruptcy generally lasts for a period of three years but can sometimes be extended for a longer period of time and can last up to six years. A bankruptcy trustee will be appointed to your bankruptcy and will notify your creditors of your change in status.

A bankruptcy trustee will also pay your creditors from the recovered proceeds of your estate, this trustee will:

Dispose of some of your assets, although you will be able to keep certain types of assets. They will be responsible for the marketing and selling of any property you may own, any cars under your name, valuables in your possession etc.

Once you start to earn over a certain amount, the bankruptcy trustee will determine what contributions should be made to certain debts if there are still debts outstanding.

The trustee will become involved in all on-going investigations regarding your financial affairs and may seek to recover assets transferred to someone else for inadequate consideration.

A personal insolvency agreement may be the first step towards bankruptcy. However, it is also possible that the state of insolvency could be temporary and the personal insolvency agreement would in fact do as intended and get you out of insolvency. Therefore, insolvency does not necessarily lead to bankruptcy, however anyone declared bankrupt or under an insolvency agreement are deemed to be insolvent. Whether you are declared bankrupt or enter into a personal insolvency agreement, you will be registered with the NPII, therefore affecting any credit applications for at least seven years.

 Main Points of Difference

If you become insolvent more than once, then bankruptcy may become more difficult than a personal insolvency agreement. While previous insolvency does not of itself make you ineligible for bankruptcy, the Official Receiver may not accept the petition for bankruptcy a second time if the debtor was previously bankrupt or had some other personal circumstances related to insolvency. You can propose a personal insolvency plan every six months if needed, a previous record of insolvency is not detrimental in gaining approval on the proposal of a personal insolvency agreement.

Bankruptcy does not require any of the creditor’s agreement. A personal insolvency agreement requires 75% of your creditors to vote and approve your proposal of the agreement. Even if a creditor did not vote to accept the proposal, they must abide by the terms set out in the agreement by law, as long as your proposal has the 75% vote from the other creditors. Creditors would usually rather accept a personal insolvency agreement proposal than see a borrower go bankrupt. Bankruptcy means that a borrower with no assets could essentially just walk away from their debts. If the borrower never earns over a certain amount then the creditors will not see their money back. Therefore, a personal insolvency agreement is attractive to them as well as the borrower. There is of course the risk that the borrower will not stand by the agreement and keep up with the appropriate payments, however, under a personal solvency agreement a Controlling Trustee will take full control of your assets and liase between you and your creditors. This means that should you fail to meet the terms of the agreement they will seize your assets.

The period of Insolvency for bankruptcy tends to be 3 years or longer depending on the agreement with the bankruptcy trustee. The period of time a personal insolvency agreement runs over will be determined by the proposed agreement between you and your creditors.

If your income increases above a certain threshold then mandatory payments will need to be made to creditors under bankruptcy. This does not apply under a personal insolvency agreement as payments are made under the pre-negotiated proposal made to creditors and agreed to as per the terms of the personal insolvency agreement.

Your ability to retain assets remains whilst under a personal insolvency agreement but not under bankruptcy. Bankruptcy restricts certain things such as borrowing money again or even travelling. No such restrictions apply to you whilst under a personal insolvency plan.