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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 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 ** Are there any other questions that need to be asked? **
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 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 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?
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 s 139 N 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 $1 m)
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
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 – paul. burness@worrells. net. au Matthew Kucianski – (03) 9613 5518 – matthew. kucianski@worrells, . net. au www. worrells. net. au