Personal Bankruptcy

Personal financial difficulties can occur despite our best intentions to the contrary. It may be caused by the loss of a job, overspending or a poor investment. The presence of any of the following may indicate solvency problems:

• Bouncing cheques;
• Exceeding overdraft limits;
• Debt recovery actions;
• Inability to meet credit card payments;
• Rotating of credit card debts.

Sometimes these problems can be resolved without external assistance. However, that is not always the case. There are two main alternatives for a person in that position:

• Bankruptcy – whereby a Trustee is appointed to take control of a debtors assets and deal with the creditors; or
• Part X Arrangement – where a Trustee is appointed with the aim of assisting in negotiating a compromise with creditors, whilst protecting the debtor from creditor action.

Protecting Debtors and Creditors

The appointment of a trustee addresses the critical needs of stakeholders in three important ways:

1. It removes creditor pressure from the individual - it allows consideration of the interests of creditors as a whole, rather than reacting to the most pressing;
2. Assets and any trading operations are placed under the supervision of an independent person, the trustee;
3. It provides a statutory framework for dealing with creditors, so the process is controlled and therefore somewhat more predictable.

Bankruptcy

Bankruptcy has been developed for the protection of both:

• Debtors – a person is protected from being pursued by his or her creditors and at the conclusion of the bankruptcy (usually 3 years), the debtor is released from his or her debts; and
• Creditors - an independent person takes control of and investigates the affairs of the bankrupt and distributes the bankrupt's assets in the order required by the law.
• A person may become bankrupt in one of two ways:
  On their own application by lodging a “Debtor's Petition” with the Official Receiver; or
• on the application of a creditor to the Court which is called a Creditor's Petition.

Bankruptcy does have some downsides. In particular, a bankrupt can not act as a company officer or incur credit over a certain amount without first advising they are bankrupt. A bankrupt must also surrender their passport. But a bankrupt does not have to give all of their assets to the Trustee. For example, subject to certain limits, a bankrupt can keep necessary clothing and household items, tools of trade, a motor vehicle and some superannuation payments. And a bankrupt may continue to earn income, although they may have to make some contributions to the Trustee.

A bankruptcy normally runs for three years.

The debtor or creditor may obtain a Consent to Act from a Registered Trustee in Bankruptcy and lodge that Consent with their Petition. At CRS Warner Kugel we would be happy to meet you, free of charge, if you would like to obtain commercial advice or require the services of a Registered Trustee.

Part X Arrangement

The diagram below sets out an overview of Part X.

Part X is easily implemented by the signing of a form called a ‘section 188 authority’. Although it is preferable to prepare a list of assets and liabilities – called a ‘statement of affairs’ – before signing the authority, it is not compulsory. As a result, a controlling trustee can be appointed quickly if required.

Part X is designed to maintain the current position until the controlling trustee has had the opportunity to assess the financial position and prepare a report.

The Bankruptcy Act provides some relief to a debtor by restricting some types of recovery actions. The court also has the power to freeze any legal action involving the debtor.

A Part X arrangement is binding on all creditors, not just those who voted for its acceptance. It is administered by a trustee who is usually – but not necessarily – the person that acted as the controlling trustee.