Insolvency Law FAQs

Find out more about insolvency from a legal point of view by reading the frequently asked questions below. For further information, our lawyers can provide professional advice in all areas of insolvency law.

What is insolvency?

Insolvency is defined as a financial condition or state experienced when:

  • A legal entity or a person’s liabilities (debts) exceeds their assets, commonly referred to as “balance-sheet” insolvency; or
  • When a legal entity or person can no longer meet their debt obligations on time as they become due, commonly referred to as “cash-flow” insolvency.

What are the options available to me if I become insolvent?

  • For individuals, there are four options under the Bankruptcy Act 1966 (Cth):
    • Declaration of intention;
    • Debt agreement;
    • Personal insolvency agreement;
    • Bankruptcy.
  • For companies, as discussed separately, the three most common corporate insolvency procedures are:
    • Voluntary administration;
    • Liquidation;
    • Receivership.

What is a Debt Agreement?

A Debt Agreement is a legally binding agreement between a debtor and their creditors, which can be a flexible way to come to an arrangement to settle the debt without becoming bankrupt.

In a Debt Agreement, a debtor can offer to settle their debt by:

  • paying a lump sum that may be less than the amount the debtor owes;
  • repaying their debt in instalments;
  • freezing the debt for a certain time, so the debtor will not need to start repaying it until the debtor gets back on their feet.

To make a Debt Agreement, the majority of the debtor’s creditors will need to accept it. The debtor must also meet certain conditions to be eligible, including having the debtor’s income, assets and debt under a certain limit.

What is a Personal Insolvency Agreement?

A Personal Insolvency Agreement lets a debtor pay off their debt in a way that suits their financial situation. It is like a Debt Agreement, but the debtor’s debt, income and assets do not have been under a certain limit.

A Personal Insolvency Agreement involves:

  • The appointment of a trustee to take control of the debtor’s property and make an offer to their creditors.
  • The offer may be to pay part or all of the debtor’s debt by instalments or a lump sum.

What are some of the benefits in proceeding with a Debt Agreement or a Personal Insolvency Agreement?

Once creditors have accepted a debtor’s Debt Agreement or Personal Insolvency Agreement, the debtor and their creditors are bound by the terms of that agreement. This means:

  • A trustee or Debt Agreement administrator is appointed to manage the debtor’s payments to creditors.
  • Unsecured creditors can no longer contact the debtor about the debts that the debtor have included in the agreement.
  • If creditors are still contacting the debtor about a debt, the debtor can advise them of their Australian Financial Security Authority administration number and start date.
  • Creditors are no longer able to add any interest to the debts.
  • Creditors may receive more money than if the debtor were to become bankrupt.

Are there disadvantages in proceeding with a Debt Agreement or a Personal Insolvency Agreement?

Entering a Debt Agreement or a Personal Insolvency Agreement may have a serious impact on a debtor, so make sure the debtor understands the consequences of each before deciding.

  • The negative consequences of a Debt Agreement

    • Proposing a Debt Agreement is an act of bankruptcy and creditors can use this to apply to the court to make the debtor bankrupt.
    • A Debt Agreement may affect a debtor’s business. If the debtor trades under a business name that is not their own, the debtor must disclose the agreement to all people they do business with.
    • A Debt Agreement does not release the debtor from all debts. Secured creditors may seize and sell any assets which the debtor has offered as security for credit if the debtor is behind in their payments. A Debt Agreement does not release another person from a debt jointly owned with the debtor.
    • The debtor’s name will appear on the National Personal Insolvency Index (“NPII”) for a limited time. The amount of time the debtor’s Debt Agreement appears on the NPII will vary depending on their circumstances, and how their agreement ends.
    • Entering a Debt Agreement can affect the debtor’s ability to obtain future credit. Their details may appear on a credit reporting agency’s records for up to 5 years, or longer in some cases.
    • Debt Agreement fees will be incurred. There is $200 for lodging a Debt Agreement proposal. Normally, there are also other fees involved in proposing and managing a Debt Agreement. The fees between administrators vary, usually, 20% of the value of the proposal accepted by creditors will be charged. The total set up fee and any ongoing fees must be included in the debtor’s Debt Agreement proposal.
  • The negative consequences of a Personal Insolvency Agreement

    • A debtor is committing an act of bankruptcy – a creditor can apply to the court to make the debtor bankrupt if the Personal Insolvency Agreement fails.
    • The debtor’s details will appear on the NPII permanently.
    • The debtor’s details will appear on their credit file for up to 5 years, or longer in some cases.
    • The debtor is not able to deal with their property without the consent of their controlling trustee. The debtor may, however, be able to run their business if the terms of the agreement allowed.
    • The debtor is not able to manage a corporation until the terms of the agreement have been finalised.
    • The debtor is obligated to assist their trustee by providing information and documentation if requested.
    • Personal Insolvency Agreement fees will be charged. There are fees to propose, lodge and manage a Personal Insolvency Agreement. The fees between trustees vary, usually, 20% of the value of the proposal accepted by creditors will be charged. The total set up fee and any ongoing gees should be in the debtor’s proposal.

What is bankruptcy?

Bankruptcy is a legal process where a debtor is declared unable to pay their debts. It can release the debtor from most debts, provide relief and allow the debtor to make a fresh start.

There are two ways to become bankrupt:

  • the debtor can volunteer to become bankrupt;
  • creditors can apply for the debtor to be made bankrupt.

Becoming bankrupt means a registered trustee will take control of most of the debtor’s finances and try to pay off their debts. They may sell their assets (though the debtor can keep some types of assets, like personal belongings) and take any income the debtor earns over a certain limit.

The debtor’s bankruptcy will be permanently recorded on the National Personal Insolvency Index and included in their credit report for seven years.

Am I eligible to apply for bankruptcy?

You can apply for bankruptcy if you meet these 2 requirements:

  • you are unable to pay your debts when they are due (payment); and
  • you are present in Australia or have a residential or business connection to Australia.

There is no minimum or maximum amount of debt or income you need to be eligible.

There is no fee to apply for bankruptcy.

If you are currently in a Debt Agreement and want to apply for bankruptcy, contact your administrator. You must terminate your Debt Agreement first before applying.

What are the advantages of bankruptcy?

    • Discharge from bankruptcy clears most debts

Once a debtor is declared bankrupt, most unsecured creditors are unable to pursue further legal action (although in rare cases the courts have allowed creditors to continue with court action).

    • The debtor is free from harassment from their creditors

When a person who has a number of debts is being harassed by creditors to pay these debts, the pressure on the debtor can be almost unbearable at times. Generally speaking, the harassment will stop once the person enters bankruptcy. All further communications regarding the debts should take place between the creditors and the bankrupt’s trustee in bankruptcy.

    • Low income earners do not need to pay their debts

A bankrupt with no dependents and an income of less than $55,837.60 net per annum cannot have any of that income taken off of them to pay their debts. High thresholds apply to bankrupts with dependants. Low income earners can make voluntary payments to their bankruptcy trustee but are not required to pay contributions.

    • Bankruptcy protects the debtor’s payments for superannuation, life assurance and personal injuries

The Bankruptcy Act 1966 (Cth) (“the Act”) grants significant protections to superannuation payments, life assurance payments and compensation payments for personal injuries. The Act also grants some protection to assets bought with these payments. However, these payments and assets are not protected if the debtor is not bankrupt and the creditors are successful in having a court order payment of a debt.

What are the consequences of bankruptcy?

  • A debtor will have a trustee that will manage their bankruptcy

A trustee is a person or entity that manages the debtor’s bankruptcy. They work with the debtor and their creditors, to achieve a fair and reasonable outcome for all. During bankruptcy, the debtor has an obligation to provide information to their trustee, including changes to their circumstances. This may involve supplying books, bank statements and other documents that the trustee asks the debtor to provide.

When the debtor applies for voluntary bankruptcy, they are able to nominate a registered trustee of their choice. If they do not nominate a trustee, the Official Trustee (Australian Financial Security Authority) is normally appointed. In some cases, the Official Trustee may transfer the administration of the debtor’s estate to a registered trustee.

  • Bankruptcy may affect the debtor’s income, employment and business

If the debtor earns over a set amount, they may need to make compulsory payments to their trustee. There may also be some restrictions on their employment and running a business.


  • Bankruptcy does not release the debtor from all debts

Most unsecured debts are covered in bankruptcy – this means the debtor no longer have to repay these debts. There are some exceptions, however, including court imposed penalties and fines, child support & maintenance, HECS & HELP debts (government student loans), debts incurred after bankruptcy begins, unliquidated debts (e.g. a debt where the debtor and their creditor are yet to determine the amount). This means the debtor is still liable for these debts.

  • It affects the debtor’s ability to travel overseas

The debtor must request permission from their trustee to travel overseas. It is an offence to travel overseas without consent in writing. The debtor’s trustee may ask for further details to consider their request.

  • The debtor’s name will permanently appear on the National Personal Insolvency Index

The National Personal Insolvency Index is a searchable public register listing insolvency proceedings in Australia.

  • Bankruptcy can affect the debtor’s ability to obtain future credit

If the debtor applies for credit over a set amount, they must inform the credit provider of their bankruptcy. Credit reporting agencies keep a record of their bankruptcy for:

  • 5 years from the date the debtor became bankrupt; or
  • 2 years from when their bankruptcy ends, whichever is later.
  • The debtor’s trustee may sell their assets

The debtor is able to keep:

  • ordinary household goods;
  • tools up to a set amount used to earn an income; and
  • vehicle(s) with a value up to a set amount.

The debtor’s trustee can sell other assets including their house and property. They must not dispose of any property belonging to the trustee. They must declare any assets they have when they apply for bankruptcy and any they receive during bankruptcy.

  • The debtor may lose the right to take or continue legal action

If the debtor is involved in any legal action, they need to inform their trustee. If they have a pending court case, they should contact the court to confirm whether they must still attend.

How long does bankruptcy last?

Bankruptcy normally lasts for 3 years from the day you file your statement of affairs. This starts from the day your bankruptcy application is accepted. If a creditor makes you bankrupt, the bankruptcy period is calculated from the date you file your statement of affairs.

During this time, the debtor will be restricted in what they can do. For example, they may be restricted from running a company or working in certain trades and professions.

In some cases, your trustee can lodge an objection to extend the bankruptcy for up to eight years.

What are the options available to me should my company become insolvent?

An insolvent company is one that is unable to pay its debts when they fall due for payment.

The three most common corporate insolvency procedures are voluntary administration, liquidation and receivership.

What is the voluntary administration?

If your company goes into voluntary administration, an administrator is appointed to take control of it. The administrator must not be a part of your company. They will try to either:

  • save your company or your company’s business;
  • put your company in a position where it can best pay off its debts, without going straight into liquidation.

What is liquidation?

If your company is not saved by the voluntary administrator, it will go into liquidation. Liquidation involves winding up the company so that it can repay debts (even if it cannot pay the full amount), which proceeds as a creditors’ voluntary liquidation with any payments of dividends to creditors made in the order set out in the Corporations Act 2001 (Cth). The voluntary administrator becomes the liquidator unless creditors vote at the second meeting to appoint a different liquidator of their choice.

What is receivership?

Your company may go into receivership if a secured creditor decides to appoint someone (known as a receiver) to collect and sell the company’s assets, in order to pay off the debt the company owes them. A secured creditor is someone who has secured a debt owed by the company through a claim to company assets.

Different conditions may apply depending on the agreement with the secured creditor (for example, in some agreements, they are only allowed to sell certain assets of the company to pay off the debt).

Your company can be in receivership and voluntary administration at the same time.

How does a voluntary administration differ from liquidation?

There are some key differences between voluntary administration and liquidation:

Trading position

  • Voluntary administration: severe cash flow problems are being experienced by a company, but the underlying business is viable and insolvency may be avoided;
  • Liquidation: the company is insolvent and cannot pay its creditors. There is no hope for the future; assets need to be sold before the company is closed down.

Main objective

  • Voluntary administration: to rescue a company by restructuring or otherwise returning it to profitability, so avoiding insolvency;
  • Liquidation: to wind up the company by realising its assets so that creditors/shareholders can be repaid.


  • Voluntary administration: company interests are at the fore, alongside those of creditors;
  • Liquidation: with the exception of Members’ Voluntary Liquidation, the interests of the company are no longer relevant once the process is under way. Maximising creditor returns is the main concern.

Role of appointee

  • Voluntary administration: administrators are responsible for investigating the company’s affairs and bringing out a solution that will be the most lucrative for creditors;
  • Liquidation: liquidators, on the other hand, wind down the company and realise its assets to pay off creditors in priority order.

Impact on creditors

  • Voluntary administration: impact on creditors depends on the terms of a Deed of Company Arrangement;
  • Liquidation: priority creditors are those that are paid first, with the remaining funds distributed according to priority.

For further advice on insolvency, contact ABKJ today. Servicing the Gold Coast and surrounding regions.