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.