Managing Debt and Finding Solutions – Beyond COVID


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Managing Debt and Finding Solutions – Beyond COVID

As Australia emerges from the pandemic, businesses and individuals can once again hope to enjoy the prosperity and open economy of the pre-COVID world. However, the greatest challenges faced by businesses and individuals may still be to come in the post-lockdown period with the rolling back of most government support.

This article is prepared to assist individuals struggling with financial difficulties by providing a concise overview of the current legal framework and the options available.

Seeking advice – who to trust?

Individuals experiencing financial difficulties are often faced with uncertainty when seeking professional advice and may not know who they can trust. This can compound the stress of debt.

Advice given by a professional to someone facing debt problems could have wide-ranging ramifications and consequences. It is therefore important that one seeks advice from an accredited and sufficiently experienced professional who demonstrates a high level of knowledge of all alternatives.

From 1 July 2021, any business that provides ‘debt management services’ such as credit repair and debt negotiation must hold a credit license.

Change to AFSA’s approach in transferring matters        

From 1 July 2021, many bankruptcy applications submitted directly to the Australian Financial Security Authority (AFSA) will be allocated to a private trustee.

As private trustees operate in a different business environment to the government, there may be variances in the operating styles, attitudes, and approach to recoveries from trustee to trustee.

This creates greater importance for someone seeking to go bankrupt to consider whether they might prefer to approach a private trustee to take the appointment from the outset.

What solution is best?

Everyone’s circumstances are different. Many key factors will determine which solution will provide the best outcome and minimise the impact on individuals.

Below are some of the key factors that will inform which solution is optimal:

  1. The value of personal assets
  2. Whether the debt is secured or unsecured
  3. Size and age of the debt(s)
  4. Attitudes of creditors
  5. Occupation of the debtor and any licensing requirements 

Options explored – Informal

Individuals seeking a solution to their debt problems should determine whether an informal alternative would provide a better outcome than bankruptcy.

Refinance and debt negotiation

This is a good option for individuals who have sufficient assets to pay all or some of their debts and would be adversely affected by bankruptcy.

A refinance could involve a refinance of personal property or selling off some assets to pay towards their liabilities.

Negotiating with creditors via a professional is often the best way to settle their claims. An offer can consist of a one-off lump sum payment, payments in instalments, or a combination of both.

Informal Arrangement

An informal arrangement is a structured negotiation with some or all creditors through a professional, usually an insolvency practitioner, that acts as an agent for the individual.

It is an alternative for individuals who want to avoid bankruptcy and keep their financial difficulties confidential.

For this to be effective you must be able to bind all creditors.

Rent in Arrears

Individuals who are struggling to pay rent in arrears still have time to seek relief under the various COVID-19 relief state government legislation in place for landlords and impacted tenants. Landlords may be willing to negotiate outstanding liabilities.

Options in Bankruptcy

The 3 main options individuals have in bankruptcy are:

  1. Debt Agreement
  2. Personal Insolvency Agreement
  3. Bankruptcy

Debt Agreements and Personal Insolvency Agreements are both legal alternatives to bankruptcy to individuals who prefer to avoid bankruptcy.

These alternatives allow an individual to make an offer to their creditors. If accepted, the agreement binds all unsecured creditors.

Debt Agreement

Debt agreements are a streamlined administration that does not require a meeting of creditors to vote on a resolution.

Certain eligibility requirements must be met to qualify for a debt agreement. At the time of writing, to be eligible, an individual must not have unsecured debts greater than $121,030, income over $90,722 or property and assets that are worth more than $242,060.

Personal Insolvency Agreement (PIA)

A PIA does not have any thresholds and therefore any individual is eligible.

Similar to a debt agreement, a PIA allows an individual to make an offer to their creditors. The offer will usually involve either a lump sum settlement or payment in instalments. So long as the individual maintains their agreement, they will be able to carry on with their lives without the control of a trustee in bankruptcy. All creditors are bound if the majority of creditors agree.

Bankruptcy

Bankruptcy may be the best option for individuals who are faced with debts that cannot be settled with their creditors or where a creditor is in the advanced stages of seeking legal proceedings.

The current statutory length of bankruptcy in Australia is three (3) years and one day.

Bankruptcy releases an individual from all their unsecured debts and allows them a fresh start. However, during the three-year period, the bankrupt’s eligible assets vest in the trustee and bankrupts are also liable to pay income contributions if their income is above a threshold.

Bankrupts are also required to adhere to certain duties to cooperate with the trustee.

A bankrupt cannot be a director of a company or obtain credit without disclosing the bankruptcy status.

1-year bankruptcy

In 2015, the government introduced a bill for one (1) year bankruptcies. Submissions from the professional community to the Attorney General did not appear to support the one-year bankruptcy proposal.

At present, the Attorney General’s department is continuing to review the Enterprise Incentives Bill with a view to address concerns raised by stakeholders.

It is unknown if and when one-year bankruptcies will be introduced, but it is unlikely to occur in the foreseeable future, and those seeking to wait until its introduction will need to balance the benefit of delaying their bankruptcy with the severity of their financial difficulties and other important factors.

Conclusion

There is no single one-stop-shop solution for all individuals seeking to overcome their financial difficulties. Seeking advice from an accredited and experienced professional with a high ethical standard will ensure solutions are catered for an individual’s unique circumstances that will minimise the consequences.

While bankruptcy is unlikely to be a consequence-free magic pill solution, it does offer a fresh start and may be the best option available to those affected by debt and would not find it possible to pay or resolve in a settlement.

Author profile – Anthony Bagala

Anthony became a registered trustee in bankruptcy in 2020 and has over 15 years of knowledge handling a wide range of personal and corporate insolvency administrations and restructuring.

If you would like to explore the various options discussed in this article or your financial circumstances generally, please contact Anthony Bagala at dVT Group on (02) 9633 3333 or by email abagala@dvtgroup.com.au.