If you’ve ever dealt with resolving debt from credit card debt or any other type of personal debt, you might have come across a personal insolvency agreement. What exactly is personal insolvency? How does it work as a debt solution?
Simply put, a personal insolvency agreement (PIA) is a unique type of agreement you can legally reach with creditors if you’re in a position where you can no longer afford to repay your debt. However, there’s a lot more that goes into this agreement than that. It’s only offered to certain types of debt, but it can be a valuable solution for those who qualify.
If you’re struggling to overcome your debt, you’re not in this alone. The debt crisis in Australia is a real problem, and in 2016 a startling 29% of households were considered to be “over-indebted.” This simply means they owe more than they can afford to pay in the near future.
The good news is you have options. With a personal insolvency agreement, you can agree to a new arrangement with your debtors without the risk of bankruptcy. In this guide, we’ll dive deeper into exactly how personal insolvency agreements work, who they’re for, and whether they’re right for your situation.
How Do Personal Insolvency Agreements Work?
Now that you’ve been introduced to PIAs, let’s uncover how they work. This is a legal agreement you reach with your creditors. However, it’s only available to those who are struggling to repay their debt.
When you proceed with a PIA, your debt is usually settled for less than you owe. However, it only covers unsecured debts such as:
- Unsecured personal loans
- Credit cards
- Payday loans
- Utility bills
- Unpaid rent
- Overdrawn bank accounts
- Medical fees
A PIA will not cover any secured debts like car loans or mortgages. In addition, because insolvency agreements are regulated under the Bankruptcy Act, you need to meet the eligibility criteria below:
- You’re not able to pay your debts by their due date
- You’re lawfully present in Australia or have an Australian connection
- Unless you have written permission from the Court, you cannot have proposed another PIA within the last 6 months
There are no debt, asset, or income limits involved with a PIA. Once your agreement has been approved, you’ll be appointed a Trustee who will take control of your property and make an offer to your creditors. This offer might be to pay only a part of your debts by instalments or a single lump sum.
Finally, your interest will be frozen on all of your unsecured debt, and your creditors cannot pursue you through the courts. You’re then able to focus on your new debt repayment plan. A PIA is an effective way to get out from under your debt once and for all.
Is a Personal Insolvency Agreement the Same as Bankruptcy?
There’s a lot of confusion around the difference between a PIA and bankruptcy, and many confuse them for the same thing entirely. While PIAs are protected under the Bankruptcy Act, this is not a form of bankruptcy.
Personal insolvency is actually a legal alternative to bankruptcy, and it doesn’t come with the same restrictions. You’re usually allowed to retain some of your assets or even continue operating a business under a personal insolvency agreement. This is not the case when filing for bankruptcy.
Similarly, PIAs differ from debt agreements. A debt agreement is also a formal agreement with your creditors, but there are stricter income and debt limits enforced with a debt agreement compared to a PIA. In addition, debt agreements are generally faster to arrange and they include fewer fees. Ultimately, a PIA is an entirely different way to free yourself from debt you’re unable to pay.
What Are the Consequences of a Personal Insolvency Agreement?
Like most debt arrangements, there are consequences that come along with a PIA. It’s important that you understand both the long and short-term consequences before deciding what’s right for you.
The first thing to remember is that there are fees to start this PIA process. You’ll need to speak to a Trustee to determine what they charge, and you’ll need to include this cost in your overall budget.
In addition, it’s possible that you won’t be released from all of your debts. As we mentioned before, only unsecured debts are covered under this type of agreement. If you’re struggling with secured debts like a home mortgage, this isn’t right for you.
The biggest impact is your credit score. Your details will appear on the National Personal Insolvency Index on a permanent basis. This is a public index that could affect your future ability to get credit. Finally, the details of this agreement will be listed on your credit file for up to 5 years. The exact length of time will depend on the terms of your agreement.
If your agreement fails and you don’t repay your debts as outlined in your terms, the court can actually make you bankrupt as a result. That’s why it’s essential to make sure this is the right option for you before entering an agreement.
Who Should Enter a Personal Insolvency Agreement?
There are a lot of benefits to entering into a PIA, but you’ll need to ensure it’s right for your budget. This might be a good fit for your financial situation if:
- You’re struggling to pay your unsecured debts
- You are willing to work with a Trustee
- You need help with paying off debt
- You can afford the initial fees and waiting period
- You understand the obligations and consequences
If these things above apply to you, a Personal Insolvency Agreement might be the right option. However, it’s still worth talking to a financial advisor before reaching out to a Trustee. There might be debt solution alternatives you haven’t considered.
Debt Solution Alternatives
If you’re struggling to make ends meet and pay down your debts, you have options. While a PIA can be a great solution for the right situation, it’s not your only option. Other options include debt consolidation, informal arrangement, debt agreements, and even bankruptcy. Here’s a brief overview of each option:
- Debt Consolidation – This is when you consolidate several debts into a single loan repayment, often with a lower interest rate. This can help multiple debts, such as multiple credit card debts, become more manageable over the long-term.
- Informal Payment Arrangement – In an informal payment agreement, you negotiate a new payment with your debtors based on what you can pay. This could be temporary or long-term, but it won’t involve the legal pros and cons of a formal debt agreement.
- Debt Negotiation – You can even negotiate directly with creditors to decide on a settlement proposal, reduced interest payment, or other solution to relieve your debt burden.
- Debt Agreement – With a debt agreement, you negotiate to pay a percentage of your debt that you can actually afford over a set period of time. You’ll then make repayments to your debt agreement administrator rather than the creditors themselves.
- Bankruptcy – Finally, bankruptcy is a last resort for when you cannot pay your debts. Once you declare bankruptcy, you give up control of your finances and assets to a Trustee in exchange for legal protection. This is the most damaging to your credit score.
With so many options, it can seem overwhelming to know where to begin. At the end of the day, you’ll need to take your unique financial situation into account first as well as your long-term goals.
What Are the Next Steps?
Before entering a personal insolvency agreement, make sure you’ve explored all of your options. This isn’t an agreement to enter into lightly. Like all big financial decisions, you need to do your research and weigh up your options.
Your first step should always be to seek professional advice. Talking to a debt adviser who can review your unique situation is the best way to gain clarity. Once you share your debt documents, income, assets, and more, you’ll know what debt relief options you’re eligible for.
As you can see from this guide, a PIA is just one of the formal options available under the Bankruptcy Act. There are many other alternatives like an informal payment arrangement or even debt consolidation that might have less of an impact on your credit score moving forward. Ultimately, you’ll need to make sure you’re aware of the real-life consequences of choosing a PIA or any other debt solution.
This is a big decision, but you don’t have to face things alone. With Australia facing some of the highest personal debt in the world, it’s no wonder there are so many solutions available for those who need them.
If you’re in a situation where you’re unable to pay your debts on time and you feel like you’ll never reach your goal of living debt-free, it’s time to take action. Talk to a financial expert today at Debt Busters on. Our friendly professionals can help you get your wallet back on track, whether you decide to go with a PIA or another alternative.
Life is complicated, but debt doesn’t have to be. Take the first step today to reach out to a debt specialist. You’re closer to relief than you think. Contact Debt Busters today on 1300 368 322 to get started.