Using Bankruptcy to recover from Covid-19 with a Part 4 scheme

When a person cannot pay their debts as they fall due that person can file for the protection of bankruptcy. Once bankrupt creditors cannot sue for monies owing or undertake other activities for collection of monies owing. Creditors are limited to receiving funds from the bankrupt estate. This is commonly referred to as a dividend. 

So many times, we have heard a father or other family member say I want to help him but I am not prepared to throw good money after bad. Well there is a way family member can help without throwing good money after bad.

The bankruptcy legislation provides the option of the bankruptcy being annulled by use of a Composition or Scheme of Arrangement under Part 4 of the Bankruptcy Act. The Composition or Scheme must give creditors a better result than they will receive under the bankruptcy. Monies can be paid over time from future earnings.

If the proposed Composition or Scheme is approved by a meeting of creditors, the bankruptcy is annulled, the creditor protection remains, there is no restriction on being a company director, there is no restriction on being Trustee of a Self Managed Super Fund, family members can provide funds for the person to start another business without the funds being available to past creditors.

The risk is that the person is not released from past liabilities until he or she has complied with the terms of the Composition or Scheme of Arrangement. if the person does not adhere to the terms of the composition or Scheme of Arrangement it will be terminated and the prebankruptcy debts return. This risk is removed if the family member offers a lump sum as full and final payment or the family member remains in the background to ensure the terms of the Composition are complied with.


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