Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 56

Consider a Debt Agreement before you resort to bankruptcy

There are circumstances where a person is able to propose a ‘Debt Agreement’, which is a relatively low cost alternative to bankruptcy.

In the financial year ended 30 June 2013, just under 10,000 people filed Debt Agreements. That figure was up nearly 8% on the number in the previous financial year.

Debt Agreements enable creditors to receive a return which they may not otherwise receive in the event of a bankruptcy. A debtor can offer assets to creditors, such as funds from family members or other assets. It means that creditors can receive a higher dividend while the debtor avoids entering into bankruptcy.

Prior to 1996, there were few alternatives available to a person who was unable to pay their debts when they fell due, which resulted in insolvency. Whilst voluntary bankruptcy was available, it was often considered an undesirable outcome. Many would have preferred to enter into an agreement with their creditors. Fortunately, in 1996 some alternatives became available, including a Debt Agreement.

Four alternatives for creditors

As it stands today, if an individual is unable to pay creditors, four alternatives may be considered:

  • reach a private arrangement with all creditors
  • enter into voluntary bankruptcy
  • enter into a Personal Insolvency Agreement
  • enter into a Debt Agreement – the focus of this article.

A Debt Agreement is processed through Insolvency Trustee Service Australia’s Debt Agreement Service (DAS). It receives Debt Agreement proposals, conducts a voting of creditors and maintains records.

There are some situations when a Debt Agreement is not available, such as:

  • where a person’s unsecured debts exceed $100,664.20
  • if a person’s after-tax income for the last financial year exceeds $75,498.15 (amount indexed twice annually)
  • if a person is not insolvent.

A debtor who proposes a Debt Agreement must provide the Official Receiver with a written proposal, which must be in an approved form and:

  • properly identify the debtors to be dealt with under the Agreement
  • specify how the identified property is to be dealt with
  • authorise a nominated person to deal with the identified property in accordance with the terms of the proposal.

A person cannot propose a Debt Agreement if at any time during the past ten years, they have been bankrupt or been a party to another Debt Agreement. Any person who proposes a Debt Agreement must accept that the proposing of the Debt Agreement constitutes an act of Bankruptcy pursuant to the Bankruptcy Act.

Once a Debt Agreement is accepted for processing, the Official Receiver must provide a copy of the proposal to each creditor.

A Debt Agreement must be accepted by the majority of creditors (by value) within the ‘applicable deadline’. Following acceptance, a creditor cannot apply for alternative enforcement of the Debt. Further, a Sheriff must not take any action or further action to execute or sell property under any process issued by a Court, or to enforce the payment of any debt which is the subject of a Debt Agreement.

Once a Debt Agreement is in place, Section 185(N) of the Bankruptcy Act releases the debtor from all provable debts upon the completion of the Agreement. Completion usually occurs once the debtor has fulfilled the promise made in the Debt Agreement.

A person proposing a Debt Agreement must accept that if there is any property which is otherwise secured to a creditor, then the secured creditor is still able to deal with that property, irrespective of whether or not a Debt Agreement is approved.

Here’s another catch

There are provisions within the Bankruptcy Act which enable a Court, in certain circumstances, to declare a Debt Agreement void.

The principal advantage of a Debt Agreement is that a debtor is not required to declare bankruptcy. However, as the Debt Agreement is an act of bankruptcy, if the Debt Agreement is not accepted by the creditors, then any individual creditor is able to rely on the proposal of a Debt Agreement, as an act of bankruptcy for the purpose of applying to a Court to make the debtor bankrupt.

 

Terry Morgan is a Partner of Baker Love Lawyers.

 


 

Leave a Comment:

RELATED ARTICLES

Is growth of zombie companies real or fiction?

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Latest Updates

Investment strategies

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Planning

Super, death and taxes – time to rethink your estate plans?

The $3 million super tax has many rethinking their super strategies, especially issues of wealth transfer on death. This reviews the taxes on super benefits and offers investment alternatives.

Taxation

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Shares

The megatrend you simply cannot ignore

Markets are reassessing the impact of AI, with initial euphoria giving way to growing scepticism. This shift is evident in the performance of ASX-listed AI beneficiaries, creating potential opportunities.

Gold

Is this the real reason for gold's surge past $3,000?

Concerns over the US fiscal position seem to have overtaken geopolitics and interest rates as the biggest tailwind for gold prices. Even if a debt crisis doesn't seem likely, there could be more support on the way.

Exchange traded products

Is now the time to invest in small caps?

With further RBA rate cuts forecast this year, small caps may be key beneficiaries. There are quality small cap LICs and LITs trading at discounts to net assets, offering opportunities for astute investors.

Strategy

Welcome to the grey war

Forget speculation about a future US-China conflict - it's already happening. Through cyberwarfare and propaganda, China is waging a grey war designed to weaken democracies without firing a single shot.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.