Download All material contained in this paper is written by way of general

PERSONAL INSOLVENCY
DILEMMAS
Financial & Consumer Right Council
Presented by:
Paul Burness & Matthew Kucianski
Worrells Solvency & Forensic Accountants
12 October, 2016
DISCLAIMER
All material contained in this paper is written by
way of general comment. No material should be
accepted as authorative advice and any reader
wishing to act upon material contained in this
paper should first contact Worrells for properly
considered professional advice, which take into
account specific situations.
DILEMMA 1
You have been approached by a husband and wife and
are advised of the following:
• Husband has been involved in a failed company
• The couples only asset is the matrimonial property
with equity of $300,000
• Husband has liabilities arising from guarantees to
do with the failed company of $250,000
• The couple have credit card debts of $50,000
SNAPSHOT OF ASSETS AND
LIABILITIES
Assets
Matrimonial Home
Less 1st Mortgage
Less 2nd Mortgage
Equity
$
$
$
$
1,000,000
300,000
400,000
300,000
Liabilities
Credit Cards
Guarantees
$
$
50,000
250,000
Net Assets
Nil
** Are there any other questions that need to be asked? **
POTENTIAL OUTCOME
Assets
Matrimonial Home $
Less 1st Mortgage $
Equity
$
$
Less 2nd Mortgage
Equity attributable
Joint
Husband
Wife
1,000,000
300,000
700,000
$ 350,000 $ 350,000
$ 350,000 $
50,000
Nil
$ 300,000
Liabilities
Credit Cards
Guarantees
$
$
40,000 $
250,000
10,000
Net Assets
-$
290,000 $
290,000
DILEMMA 1 (CONTINUED)
• The “Equity of Exoneration” argument opens up
many additional options
• The husband could go bankrupt, and effectively
maintain the maximum family wealth
• He could consider a Personal Insolvency
Agreement
• He could consider a bankruptcy and subsequently
a section 73 composition
DILEMMA 2
You are approached by a client and are advised of the
following:
• He has worked for the same employer for the last
20 years and the employer has just gone into
Receivership
• He has been made redundant and his entitlements
have not been paid
• He believes he is owed $80,000 in Annual Leave
and Long Service Leave and $10,000 in
Superannuation
WHAT OPTION ARE AVAILABLE
TO THE CLIENT
The Fair Entitlements Guarantee (FEG/GEERS)
scheme is not available in a Receivership.
The client can:
1. Hope there are assets in the Receivership to pay
him.
2. Make an application to Court to place the
employer into Liquidation – then apply for FEG.
WHAT IS “FEG” AND WHAT
DOES IT COVER
• Covers employees who lost their job because their
employer became bankrupt or went into liquidation
• Claimant must be entitled to reside permanently in
Australia
• The scheme does not cover subcontractors
• Will apply if the employee resigned or lost their job
within six months before the appointment of the
insolvency practitioner
FEG COVERS
•
•
•
•
•
•
Up to 13 weeks unpaid wages
Unpaid annual leave
Unpaid long service leave
Up to 5 weeks payment in lieu of notice
Up to 4 weeks redundancy for each year of service
Capped at a weekly maximum rate of $2,451 (circa
$127,500 per annum)
DILEMMA 3
You are approached by a client and are advised they are
struggling to pay their bills. A review of their financial
position suggests the following:
•
•
•
•
•
•
Equity in the family home $200,000
Motor vehicle with equity of $7,000
Credit card debts totalling $300,000
Income from employment of $90,000 p.a.
Superannuation of $600,000
HECS/HELP debts and fines of $6,000
SNAPSHOT OF FINANCIAL
POSITION
Assets
Equity in the Family Home
Motor Vehicle
Superannuation
Total Assets
$
$
$
$
200,000
7,000
600,000
807,000
Liabilities:
Credit cards
HECS Debt
Perin Court Fines
Total debts
$
$
$
$
300,000
5,000
1,000
306,000
Shortfall
$
501,000
On this information what would you advise the client?
MORE INFORMATION…
• You become aware that the client was involved in
a serious accident 5 years ago.
• What further information do you need to assess
the client’s options?
MORE INFORMATION…
• So we uncover that the client has received a
compensation payout for the accident and that the
compensation payment was entirely used to buy
the house - how does that affect the options
available to the client?
POTENTIAL OUTCOME
Assets
Equity in the Family Home
Motor Vehicle
Total Assets
$
$
$
200,000
7,000
207,000
Liabilities:
Credit cards
HECS Debt
Perin Court Fines
Total debts
$
$
$
$
300,000
5,000
1,000
306,000
Shortfall
-$
$
$
Bankruptcy
Exempt
Exempt
-
$
300,000
Non-provable
Non-provable
300,000
99,000 -$
300,000
WHAT ABOUT THE INCOME
• If income derived during a bankruptcy is
above the prescribed threshold, half of that
after-tax income is payable to the Trustee
• Threshold (after tax and s139N
deductions):
– No Dependants $54,736
– 5 Dependants $74,441
WHAT ABOUT THE INCOME
• If our debtor had no dependants and
no further deductions other than
income tax amount payable would be
$6,352 p.a.
• If the debtor was paying maintenance
of $1,000 p.m. the amount payable
would reduce to $352 p.a.
WHAT DEBTS WILL SURVIVE A
BANKRUPTCY?
•
•
•
•
Court Fines
HECS/HELP debts
Debts incurred by virtue of fraud
Child support debts
DILEMMA 4
You are approached by a client and are advised of the
following:
• She has credit card debts of $70,000
• Her 50% share of the equity in the family home is
worth $20,000 (husband owns the other 50%)
• She has no other assets or liabilities
• Cannot meet the repayments on the credit cards
and she is desperate to keep the family home
WHAT ARE THE OPTIONS
• Part IX – Debt Agreement
• Bankruptcy
• Agreement with the spouse to purchase
the debtors equity from the Trustee
• Could be on terms
• Could be over a period of time
DILEMMA 5
You are approached by a client and are advised that she
is struggling to pay her debts. You are advised:
• She owes $320,000 in credit card debts
• You are aware that she has been gambling
• Equity in the family home (totals $250,000 – jointly
with husband)
• Husband is 67, and has no debts.
• Husband has significant resources in super (over
$1m)
WHAT ARE THE OPTIONS
• Her equity $125,000
• Her debts $320,000
WHAT ARE THE OPTIONS
• Pay the debt with the support of the
husband
• Bankruptcy
• Personal Insolvency Agreement
EXAMPLE 1 - BANKRUPTCY
• Your client decides to go bankrupt
• The husband accesses his super and
makes an offer to buy the equity in the
property from the Trustee for $125,000
• Gambling – s 271 – did the gambling
materially contribute to, or increased the
extent of her insolvency?
EXAMPLE 2 – PERSONAL
INSOLVENCY AGREEMENT
• Wife decides to offer a PIA
• Husband contributes $200,000 that he gets
from his superannuation fund
• Offers a better return to creditors than they
would get in a bankruptcy
• Avoids bankruptcy
• Still the Section 271 issues
DILEMMA 6
You are approached by a client and are advised that she
was recently made bankrupt. She wants to know the
implications (if any) given she:
1.
2.
3.
4.
Is a director of a company
Is an executor of her mother’s deceased estate
Is a trustee of her own Self Managed Super Fund
Holds money on trust for her daughter
DILEMMA 7
• You act for a client, who has:
– $165,000 in credit card debt
– Income of $90,000
– No dependants
– Super of $800,000
– No assets outside his household
furniture and fittings
OPTIONS AVAILABLE
•
•
•
•
Struggle on and pay the debt
Informal agreement with creditors
PIA (formal agreement with creditors)
Bankruptcy
OPTIONS AVAILABLE
Available property
Divisible assets
Income Contributions $529 pm x 36 months
PIA Contributions - $2,000pm over 48 months
Total available assets
Bankruptcy
PIA
Nil
Nil
$
19,056 Excluded
$ 96,000
$
19,056 $ 96,000
WHAT ARE THE IMPLICATIONS
OF EACH OPTION:
• Better return for creditors under PIA
• After acquired property an issue in bankruptcy
• What if the debtor inherits from her elderly
mother in year 3
• Or she continues to buy tattslotto tickets and
wins the lottery in year 3
• What if you became aware that she had
transferred an investment property to the
husband for no consideration immediately prior
to bankruptcy?
DILEMMA 8
You are approached by the wife of a recent bankrupt
seeking your help. You are advised that:
• She owns the family home as joint proprietor
• There is no equity in the property
What do you advise the wife to do if she wants to
retain the property?
QUESTIONS
Feel free to contact us:
Paul Burness – (03) 9613 5510 – [email protected]
Matthew Kucianski – (03) 9613 5518 – matthew.kucianski@worrells,.net.au
www.worrells.net.au