Personal insolvency requires a separate assessment from the failure of a company. A director may face personal guarantees, director penalties, tax debt or other liabilities even after the company has entered a formal process.
The available options under the Bankruptcy Act have different eligibility rules, consequences and voting requirements. The correct starting point is the individual’s complete position: debts, assets, income, secured finance, joint liabilities, guarantees and the likely outcome under each option.
Bankruptcy
A person may apply for their own bankruptcy, or a creditor may obtain a court order after completing the required enforcement steps. A registered trustee or the Official Trustee administers the estate.
Property that is not protected under the Bankruptcy Act may vest in the trustee and be realised for creditors. A person’s interest in a family home is not automatically protected merely because it is their residence. Secured creditors generally retain their security rights.
Income is assessed during bankruptcy. If after-tax income exceeds the applicable threshold, compulsory contributions are generally calculated as 50% of the amount above that threshold. The thresholds change and depend on the number of dependants. AFSA provides the current income-contributions calculator.
Bankruptcy ordinarily lasts at least three years and one day, although it can be extended. It releases most provable debts on discharge, but important exceptions remain. It also carries disclosure, travel, corporate-management and National Personal Insolvency Index consequences.
Can bankruptcy end before discharge?
Yes. Automatic discharge is the usual way a bankruptcy ends, but an undischarged bankruptcy can be annulled earlier. Annulment effectively cancels the bankruptcy, although the administration and its annulment remain recorded on the National Personal Insolvency Index.
Section 73 proposal: An undischarged bankrupt may put forward a composition or scheme of arrangement through the bankruptcy trustee under section 73 of the Bankruptcy Act. The trustee reports to creditors and convenes a meeting. Acceptance requires a special resolution: a majority in number and at least 75% in value of the creditors who vote. If accepted, section 74 provides that the bankruptcy is annulled on the day the resolution is passed. The proposal must address the costs and expenses of the bankruptcy administration and ordinarily requires value that improves on what creditors would otherwise receive.
Payment in full: Section 153A provides for annulment where the trustee is satisfied that all of the bankrupt’s debts have been paid in full. The required payout includes interest where payable, the realisations charge and the costs, expenses and remuneration of the trustee. This can occur before the ordinary discharge date if sufficient funds become available.
A separate court-annulment route exists under section 153B where the court is satisfied that the sequestration order should not have been made or the debtor’s petition should not have been presented or accepted. That is different from negotiating a composition or paying the administration in full.
AFSA’s guidance on annulling a bankruptcy explains these routes, the voting threshold and the amounts that must be covered for a full-payment annulment.
Part IX debt agreements
A debt agreement is a binding arrangement for an eligible individual to pay an affordable amount to unsecured creditors. It is not bankruptcy, but it is an act of bankruptcy and is recorded on the NPII.
Debt, asset and after-tax income limits apply and are indexed. A person must also satisfy restrictions relating to previous insolvency. Because the thresholds change, eligibility should be checked against AFSA’s current debt-agreement information, rather than relying on an old dollar figure.
Debt agreements are generally designed for less complex unsecured-debt positions. They do not prevent a secured creditor from relying on its security if repayments are not maintained.
Part X personal insolvency agreements
A personal insolvency agreement—or PIA—is a flexible proposal under Part X of the Bankruptcy Act. There are no debt, asset or income limits. A PIA may involve a lump sum, instalments, sale proceeds, third-party funding or a combination of contributions.
The debtor appoints a controlling trustee. The trustee takes control of the debtor’s property for the proposal period, investigates the position, reports to creditors and compares the proposal with the likely bankruptcy outcome. Creditors vote at a meeting.
AFSA explains that a special resolution is required: a majority in number and at least 75% in value of voting creditors. If accepted, the PIA is administered according to its terms. AFSA’s PIA overview explains the process and consequences.
A PIA can sometimes preserve an asset—such as a family home—where the proposal gives creditors a better estimated return than bankruptcy after accounting for sale costs, trustee costs, secured debt and other claims. That outcome is not automatic. It depends on value, funding, the terms offered and creditor approval.
Bankruptcy, Part IX and Part X compared
The following table is a high-level comparison. The outcome still depends on the person’s assets, income, secured debts, excluded debts, prior insolvency history and the terms creditors are prepared to accept.
| Comparison point | Bankruptcy | Part IX | Part X |
|---|---|---|---|
| Typical purpose | Provides relief from most debts and enables an immediate fresh start, subject to the obligations and consequences of bankruptcy. | To reach a binding compromise on unsecured debts without becoming bankrupt, within the Part IX eligibility limits. | To reach a binding compromise on debts without becoming bankrupt, using flexible terms agreed with creditors. |
| Eligibility limits | No general maximum debt, asset or income threshold, although the statutory connection and petition requirements must be met. | Indexed debt, property and after-tax income limits apply, together with restrictions based on previous insolvency. | No debt, asset or income limits. The proposal must still be practical and capable of creditor approval. |
| Who administers it? | A registered trustee or the Official Trustee administers the bankruptcy estate. | A registered debt agreement administrator manages the proposal and, if accepted, receives and distributes payments. | A controlling trustee investigates and reports on the proposal. If accepted, a registered trustee administers the agreement. |
| Creditor approval | A voluntary bankruptcy does not require a creditor vote. A creditor-initiated bankruptcy requires a court order following the statutory process. | Acceptance requires a majority by dollar value of creditors who vote. | Acceptance requires a majority in number and at least 75% in value of creditors who vote. |
| Property | Non-protected property may vest in the trustee and be realised. An interest in a family home is not automatically protected. | Property is not ordinarily transferred to a trustee merely because of the agreement, but eligibility limits apply and secured creditors retain their rights. | The proposal specifies how property is treated. An asset may sometimes be preserved where the proposal produces a better estimated creditor return. |
| Income and payments | Statutory income contributions may apply where after-tax income exceeds the applicable threshold. | Payments are based on the affordable amount offered and accepted under the agreement. | The proposal may use instalments, a lump sum, sale proceeds, third-party funding or a combination. |
| Duration | Ordinarily at least three years and one day, but the period can be extended. | Usually a maximum of three years. It may be up to five years where the debtor has a qualifying interest in their principal residence, or in limited variation circumstances. | There is no fixed three-year statutory maximum. The duration depends on the terms negotiated with the trustee and creditors and may span several years. |
| Overseas travel | Prior consent from the bankruptcy trustee is required before travelling overseas. | No statutory restriction on overseas travel. | No statutory restriction on overseas travel. |
| Managing a corporation | An undischarged bankrupt cannot manage a corporation unless the court grants leave. | Part IX does not itself disqualify a person from managing a corporation. | A person cannot manage a corporation until the agreement terms have been fully complied with, unless the court grants leave. |
| Credit file impact | Generally recorded for five years from the bankruptcy date or two years from when the bankruptcy ends, whichever is later. | Generally recorded for five years from the agreement start date and may remain longer in some circumstances. | Generally recorded for five years from the agreement start date and may remain longer in some circumstances. |
AFSA publishes a more detailed comparison of formal personal insolvency options, including consequences and eligibility considerations that should be checked when a decision is being made.
Temporary debt protection
Temporary debt protection can provide a short statutory period in which unsecured creditors are restrained while the individual obtains advice. It does not compromise the debts and has consequences, including being an act of bankruptcy. It should not be used merely to postpone a deadline without a plan for what happens next.
Questions that change the comparison
- Which debts are secured, unsecured, joint or excluded from release?
- What property is owned, and with whom?
- What is the individual’s equitable interest after secured debt and sale costs?
- What income contributions may arise in bankruptcy?
- Are family or third-party funds genuinely available for a proposal?
- Do director penalties, guarantees or company loan accounts create additional exposure?
- What will each option return to creditors after costs?
The objective is not simply to avoid the word “bankruptcy”. It is to compare the legal and financial consequences of each option with the outcome the individual can realistically fund.
AFSA’s formal-options comparison is a useful public starting point. This article is general information only and does not replace advice on a particular personal position.