Personal Insolvency and its Effects on Your Personal Credit

Kristen Beadle, Associate Director

Personal insolvency can result when an individual is unable to pay their debts as and when they fall due. Personal insolvency comes in many forms and has differing consequences for your credit record. 

Generally, the types of Personal Insolvency are:

• Bankruptcy
• Composition pursuant to Section 73 of the Bankruptcy Act 1966 (Cth)
• Debt Agreement (not to be discussed in this article)
• Personal Insolvency Agreement.

The above types of personal insolvency are formal processes under the Bankruptcy Act 1966 that can be initiated by an individual or a creditor when an individual is unable to pay their debts. For the above administration types, a licensed individual, usually known as a Trustee in Bankruptcy is appointed to manage the Estate of the individual.

Bankruptcy generally lasts for three (3) years and one (1) day (but can be longer), during which the individual is subject to certain restrictions and obligations.  The remaining types of personal insolvency administrations noted above have variable time frames depending on what has been accepted by creditors.  Release from a Personal Insolvency can either be through operation of law (i.e. after the prescribed period in the Bankruptcy Act 1966 ends), through annulment or if the individual (known as a Debtor) has fulfilled their obligations under an agreement with creditors.

One of the most immediate impacts of any personal insolvency is that notification of this fact is recorded on the individual’s credit file. Typically, it is reflected on credit records for a period of up to five years from the date of bankruptcy, or two years from the date of discharge from bankruptcy of the individual, whichever is longer.  At the date of writing this article, a record of an individual’s personal insolvency remains on the National Personal Insolvency Index (‘NPII’) indefinitely.  The NPII is available to the public and in addition to a credit file, is often utilised by potential lenders, employers, regulators, professional associations and landlords. This can make certain processes more difficult, such as if an individual wishes to apply to extend their credit.

Thankfully, there are ways to mitigate potential damage to an individual’s credit file if the individual is experiencing financial distress. 

The individual should seek advice from a Registered Trustee, such as Stephen Dixon, who will look at the individual’s unique financial position and may recommend one of the above Personal Insolvency administrations tailored to the individual’s circumstances.  In some cases, a formal arrangement under the Bankruptcy Act 1966 may not be warranted and the individual can seek to informally negotiate with their creditors.

The personal credit file of the individual will reflect the nuances of any Personal Insolvency administration under the Bankruptcy Act 1966.  For example, an individual’s credit file will reflect that they have proposed a Composition to creditors pursuant to Section 73 of the Bankruptcy Act. Which gives rise to an annulment under the Bankruptcy Act 1966, or specifically reflects a Personal Insolvency Agreement which will disclose that the debtor has fulfilled their obligations under the Personal Insolvency Agreement, rather than a bankruptcy which infers that no payment/s were made to creditors.  In some circumstances, these types of personal insolvency administrations and formal arrangements with creditors are viewed as being more favourable than a bankruptcy by certain stakeholders. 

At Hamilton Murphy we are well positioned to assist clients in financial distress and discuss their options.  We offer services that can help individuals manage their finances and improve their public credit disclosures. It is essential to take early steps to mitigate any future problems a poor credit history can bring. We recognise that any potential stakeholder using publicly available credit information on an individual are bound by their own policies and/or regulations.      

To learn more about how we can assist, read more about our personal insolvency services or reach out to our team.