If you’re worried about your debt, you might be considering all of your options. For some, this might mean jumping to bankruptcy. However, bankruptcy is a big financial decision with big consequences. That means you might want to consider other solutions, like a Personal Insolvency Agreement.
A Personal Insolvency Agreement is also known as a Part X or Part 10 Agreement. You can think of this as a final option before you consider filing for bankruptcy. When you’re unable to pay back your debts and they’re overdue, this is known as insolvency. By entering into a legally binding Personal Insolvency Agreement, you and your creditors agree on how you will pay your debts.
While the payment terms vary, it’s important to know what you’re getting into when you consider a Personal Insolvency Agreement. If you think this option is right for you, here’s how to apply for a Personal Insolvency Agreement plus what you need to know.
What Is a Personal Insolvency Agreement?
To begin, what exactly is a Personal Insolvency Agreement? With a number of debt solutions available, it’s not always clear which is right for you or how they differ. Also known as a Part 10 or Part X Agreement, this is a legally binding contract between a creditor and the person in debt. In this agreement, you decide how you will pay your debts.
In Australia, these agreements are regulated under the Bankruptcy Act. All agreements are supervised by a Registered Trustee. If your liabilities are too big for a Part 9 Debt Agreement, this becomes the only option.
The specific payment terms for your agreement depends on the size of your debt and your situation. The agreement comes to an end after your final payment is made. In many cases, this writes off some of your debts as part of your agreement. It’s important to note that a Personal Insolvency Agreement only covers unsecured debts. This includes things like personal loans, tax debts, and credit card debts.
Why Choose a Part 10 Debt Agreement
With this in mind, why choose a Personal Insolvency Agreement over other options? Like all things debt and money management, there is no one-size-fits-all. Many people confuse this option with a Part 9 Debt Agreement. Both are steps before filing for bankruptcy. However, a Part 9 Debt Agreement is negotiated between you and your creditors by a Registered Debt Agreement Administrator. These usually last between 3 and 5 years.
Under a Part 10 Debt Agreement, you negotiate with the help of a Registered Trustee. The Registered Trustee actually takes control of your property and assets to pay all or part of your debt back to the lender. This can be in instalment payments or even in a lump sum.
Why choose a Part 10 Debt Agreement? There are a few key benefits:
- Avoid bankruptcy: The biggest pro for this option is avoiding bankruptcy. When you file bankruptcy, this stays on your credit report for years.
- Fewer restrictions: Because you avoid bankruptcy, you also have fewer restrictions. You can still work in certain roles, and you don’t have any limitations on how you can travel.
- Debt repayment: Ultimately, your debt is repaid in a timely manner with help from a Trustee.
- Harassment: Lastly, you avoid harassment from creditors and debt collectors since you’ve entered a legally binding agreement.
That being said, this option isn’t without its consequences. The best debt solution is to avoid debt altogether. Because this isn’t always possible, it’s important to know what you’re agreeing to when you choose a new solution. Here are some of the consequences of a Part 10 Debt Agreement:
- This is seen as an act of Bankruptcy.
- If you fail to keep to your terms, your creditors can bankrupt you through the court.
- Your name is listed on the National Personal Insolvency Index (NPII).
- This agreement is listed on your credit file for 5+ years.
- You consent to allowing your Trustee to take charge of your assets.
Ultimately, a Part 10 Debt Agreement is a last resort. It may be still much better than choosing bankruptcy, but that doesn’t mean it’s right for everyone. If you’re worried about your debts, it’s a good idea to talk to a professional to create a plan.
Who Is Eligible for a PIA?
Similarly, you might wonder who is eligible for this type of insolvency agreement. In Australia, there are no restrictions on how much debt you need to have. There is no qualification amount. That being said, you must live in Australia, and you must appoint someone who lives in Australia as your trustee.
You are not eligible if you have proposed a Personal Insolvency Agreement within the past 6 months. You also need to prove you’re not able to make your repayments upon the original schedule. This is not something to be entered lightly.
How to Set Up an Agreement
If you’ve decided this is right for you, how do you set up a Personal Insolvency Agreement? To begin, you need to appoint a trustee. This is the person who manages your account throughout your agreement. You need to choose wisely, and it’s common to seek out a professional with a lot of experience. These often have fees, so be mindful of your choice.
When you’ve chosen your trustee, the next step is to create an agreement. Your trustee can guide you through this process. You’ll analyze your existing debts to create a plan for repayment that works both for you and your creditors. Finally, your creditors will discuss this agreement to determine if it’s acceptable. You need more than half of your creditors to approve the agreement, and these creditors need to add up to at least 75% of the total you owe.
When your agreement is in place, it’s time to begin managing it as you would any other debt solution. You’ll make repayments on the timeline you agreed. If there are any other terms, you’ll need to pay attention to these as well. Your creditors are legally bound to this agreement once it’s confirmed. That means they can’t take any action against you during this time.
A Personal Insolvency Agreement includes a variety of unsecured debts like:
- Credit cards
- Store debts
- Payday loans
- Personal loans
- Unpaid rent
- Utility bills
- Medical fees
- Overdrawn bank accounts
- Tax debt
- Joint debts
If your debt is tied to an asset (like a home or car), it cannot be placed in a Part 10 Debt Agreement. This is why it’s essential to consider your type of debt when deciding the debt solution that’s right for your financial situation.
Alternative Debt Solutions
Finally, there are other debt solutions that might be a better fit. There is no magic formula when it comes to debts, so it’s important to look at the big picture to create a plan. A Personal Insolvency Agreement is one of many solutions. These alternatives below might be better depending on your goals.
Debt consolidation
If you have a variety of debts, consolidating with a personal loan or debt consolidation credit card could be an easier option. This is especially true if you’re not falling behind on payments just yet. If you have a good or average credit score, odds are you can secure a better interest rate and payment terms.
Informal agreement
Another option if you’re still in good standing with your creditors is to enter an informal agreement. This is when you agree with a lender about new payment terms, typically for a short period of time. Because this is informal, it doesn’t impact your credit score.
Refinancing
If you’re struggling to repay a home loan or personal loan, you might be eligible for refinancing. Depending on your current interest rate, the market might be better suited now for savings. It’s always worth shopping around, especially if you’ve paid down a large bit of the principal loan balance.
Debt agreement
A debt agreement is a less severe version of a Personal Insolvency Agreement. If you’re in good standing with your lender and wish to change your payment terms, many are open to debt agreements. This might allow you to settle your debts for less than you owe, though it’s at the discretion of the lender.
Bankruptcy
Lastly, there are instances when bankruptcy is a good choice. By freezing and eliminating most of your debts and putting someone else in control, you have the opportunity to hit “reset” on your finances. If you’re truly struggling to repay your debt, it might be time to consider this final option.
Is This Right for You?
Ultimately, if you’ve reviewed your options, a Personal Insolvency Agreement might just be right for you. It’s important to consider your current situation, long-term goals, and financial outlook. This is a big decision, and it’s not one to take lightly.
When in doubt, ask our experts on 1300 368 322. Debt Busters has over 15 years of experience helping Aussies in all different financial situations. Our professional team is here to help you every step of the way, no matter the debt solution you choose.