Entering into informal agreements with creditors can sometimes be a cost effective way of dealing with unmanageable debt. However, if not all the creditors agree to the proposal, then there is no reason why one creditor cannot bankrupt the debtor. In such circumstances it may be possible to enter into a formal agreement that binds all creditors but does not involve the individual becoming bankrupt.
A Personal Insolvency Agreement, as contained in Part X of the Bankruptcy Act, is an agreement between an individual and his or her creditors to compromise debts owed to creditors and allow funds to be paid to them without going through bankruptcy. This allows a debtor to avoid many of the restrictions associated with bankruptcy. Further, creditors may receive a higher dividend, which is paid sooner, than in a bankruptcy.
Personal Insolvency Agreements are not for everyone. They require the individual to provide upfront funding to pay for the costs of the process. Further, there is no guarantee that creditors will accept the proposal. The proposal will only be successful if creditors approve the proposal by way of special resolution. A special resolution requires 50% in number and 75% in value of creditors to vote in favour of the proposal.
A Personal Insolvency Agreement still has an effect on the individual’s credit rating and may impose other restrictions on the debtor, depending on the terms of the proposal. Given the shorter timeframe and the additional funds that may be available, a Personal Insolvency Agreement is an option worth considering for any debtor facing unmanageable debt.
If you think a Personal Insolvency Agreement might be appropriate for you, please contact Woodgate & Co.