‘Am I personally insolvent?’
This is a question you may need to ask yourself when facing financial hardship. It’s a fair question too, given the definition of personal insolvency isn’t as clear cut as you might expect. Before you can begin answering the more complex questions of personal insolvency, you first need to know whether you classify as insolvent.
What is Personal Insolvency?
Insolvency in Australia is currently outlined by two key pieces of legislation: the Bankruptcy Act 1966 (Cth) (for Individuals), and the Corporations Act 2001 (Cth) (for Corporate Insolvency). Strangely, neither of these pieces of legislation directly define what personal insolvency is, instead, they describe what it’s not:
- A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they became due and payable.
- A person who is not solvent is insolvent.
Building on this definition, personal insolvency can be defined as an individual’s inability to pay all debts as and when they fall due. This means determining whether or not you’re personally insolvent can be boiled down to one simple question: ‘if everyone I currently owe money to asked me to pay them back right now — could I do it?’
It’s important to note that this question is about much more than just your bank account; your entire financial position will be considered (particularly in the courts). This means a temporary lack of liquidity may not be enough to classify you as personally insolvent. You’ll still be considered solvent if you’re able to procure the necessary funds to pay off your debts — either by sale, mortgaging, or pledging assets.
The second factor to consider in matters of personal insolvency is time. The window of time you’re given to pay back your debts varies, meaning you don’t have to pay your bills the moment they arrive. Generally speaking, this window aims to give the debtor enough time to gather the necessary funds, while balancing the needs of the creditor to be paid in a timely fashion.
When Are You Considered Personally Insolvent?
Now that we know what it means to be insolvent, it’s time to work out when you are classified as insolvent.
As insolvency is an issue of time, it’s based on the point at which you were no longer able to pay your debts. You can be deemed insolvent retrospectively (meaning it happened at some point in the past), or prospectively (where your current circumstances mean you can be expected to become insolvent at some point in the future).
Identifying Insolvency Retrospectively
Determining insolvency retrospectively means answering one simple question: ‘when did the debtor become insolvent?’
While the question is simple enough, finding its answer can be a complicated task requiring a reconstruction of the debtor’s financial position throughout the years — often based on limited, incomplete, or inaccurate records. Determining the exact moment a debtor became unable to pay their debts only becomes more difficult the further back in time you need to look. Often, insolvency can be found to have occurred earlier than first thought, as it usually only becomes apparent when enough bills have piled up for people to notice.
Please note, a debtor can only be retrospectively classified as insolvent if the person is currently insolvent. This process cannot be used to prove past insolvency for a person who’s now solvent.
Proactively Identifying Insolvency
The process of determining future insolvency can be even trickier than identifying it in the past.
It’s difficult to predict the future with any certainty, which is likely why the Australian courts are reluctant to make forward assessments regarding insolvency. However, there is a general test for determining prospective insolvency. This test asks whether a person is currently able to pay all debts as and when they become due and payable. Debts that will be due in the future are considered in this test, but only if they exist at the time the debtor is insolvent.
Consideration is also given to the likelihood or certainty that you’ll be unable to pay future debts. This calculation will be influenced by your personal circumstances but will not take potential future assets into account.
Want to Learn More About Personal Insolvency?
We understand that financial troubles can lead to a lot of uncertainty and fear. Get in touch today to speak to a professional who can help you navigate the complexities of personal insolvency.
DISCLAIMER: This article is intended to provide general information and should not be relied upon as legal advice. Formal legal advice should be sought if you are concerned about, or require particular advice applicable to your specific circumstances in relation to, any topics covered in this article.