SMSF Specialists

Personal Insolvency Agreements

Individuals with high debts might see bankruptcy as a solution to their problems. However, declaring bankruptcy has serious long-term consequences and should be considered a last-resort option.

A personal insolvency agreement (PIA) is a formal way to deal with unmanageable debt without declaring bankruptcy.

It provides a flexible way for individuals to come to an agreement with their creditors to settle debts. A PIA is a legally binding agreement in which an individual agrees to pay creditors in full or in part by instalments or a lump sum.

For an individual to propose a PIA, certain conditions must be met:

  • must be insolvent
  • must be present in Australia or otherwise have an Australian connection
  • must not have proposed another PIA in the previous six months

For a PIA to work, the insolvent individual must first appoint a controlling trustee to take control of their property. The controlling trustee examines the proposal, enquires into the individual’s financial affairs and reports to creditors.

A creditors’ meeting is held within 25 working days of the trustee’s appointment, at which the creditors consider the proposal. If the proposal is accepted, the creditors are then bound by the terms of the agreement. If it is rejected, the creditors will either vote in favour of bankruptcy or leave the decision to the individual.

The appointment of a controlling trustee:

  • automatically disqualifies the individual from managing a business until the terms of the PIA have been complied with
  • prohibits the individual from dealing with their property without the consent of the controlling trustee

Also, when an individual appoints a controlling trustee they are committing an ‘act of bankruptcy.’ A creditor can use this to apply to the courts to force the individual into bankruptcy if the attempt to set up a PIA fails.

You can not be a trustee for SMSF if you are bankrupt. You have six months to exit the SMSF trustee space. If you find yourself in this situation and need directions on what to do next to avoid SIS regulation breach and ATO penalties, book a call with our SMSF Specialist – Natalia Clack here.

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