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

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 628 with weekend update

Australian investors have been pouring money into US stocks this year, just as they start to underperform the rest of the world. Is this a sign of things to come? This looks at 50 years of data to see what happens next.

  • 11 September 2025
Exchange traded products

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement

We need a better scheme to help superannuation victims

The Compensation Scheme of Last Resort fails families hit by First Guardian and Shield losses, as well as advisers who are being wrongly blamed for the saga. It’s time for a fair, faster, universal super levy solution.

Investment strategies

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Economy

How bread vs rice moulded history

Does a country's staple crop decide elements of its destiny? The second order effects of being a wheat or rice growing country could explain big differences in culture, societal norms and economic development.

Investment strategies

Small caps are catching fire - for good reason

Small caps just crashed the party like John McClane did in the movie, Die Hard - August delivered explosive gains. With valuations at historic lows, long-term investors could be set for a sequel worth watching.

Defensive growth for an age of deglobalisation, debt and disorder

Today’s new world order appears likely to lead to a lower return, higher risk investment environment. But this asset class looks especially well placed to survive, thrive, and deliver attractive returns to investors.

Economy

Will we choose a four-day working week?

The allure of a four-day week reflects a yearning for more balance in our lives. Yet the reliability of studies touting a lift in productivity is questionable and society may not be ready for such a shift anyway.

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.