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A Debt Agreement is an arrangement pursuant to Part IX of the Bankruptcy Act, 1966 ("the Act"). It is a formal agreement between a debtor, creditors and a person that administers the Debt Agreement (administrator), as a means of resolving debt problems of the debtor.
The Debt Agreement is similar to a Part X Agreement. Eligibility for individuals to enter into a Debt Agreement is limited based on the debtor's assets, liabilities, income and prior acts of bankruptcy. This is detailed below.
Click here for a brief summary of Part IX Debt Agreements.
Click here for a printable version of Part IX Debt Agreements.
Contact us to discuss the specific details of your individual situation.
OBJECTIVES OF A DEBT AGREEMENT
The main objectives of a Debt Agreement are to:
- provide relief to a debtor from debt problems and extinguish existing debts;
- provide a formal method for debtors to propose to their creditors an arrangement under the regulation of the Bankruptcy Act without becoming bankrupt;
- protect debtors from the stigma and restrictions of bankruptcy; and
- provide a better outcome to all stakeholders (generally a higher dividend to creditors) than would be expected in a bankruptcy.
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BENEFITS OF A DEBT AGREEMENT
Debtors
The benefits of a Debt Agreement for a debtor may include the following:
- prevent creditors from pursuing or harassing them in relation to unpaid debts and remove the concerns as to how monies owing are going to be repaid;
- allows the debtor to start life afresh;
- provides protection to the debtor and an orderly distribution amongst all creditors;
- avoids the stigma and consequences/restrictions of bankruptcy;
- can be structured to allow a great deal of flexibility for all parties concerned; and
- provides a formal agreement that is binding upon all parties.
Creditors
The benefits of a Debt Agreement for creditors may include the following:
- often provides for a better return/dividend to creditors compared to the returns expected in a bankruptcy;
- can often receive a dividend quicker than in a bankruptcy;
- crystallisation of uncertainty;
- provide a formal agreement that is binding upon all parties;
- generally are cheaper to administer than a Part X agreement or bankruptcy; and
- can be structured to allow a great deal of flexibility to all parties concerned.
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TYPES OF PROPOSALS
Debt Agreements are very flexible and can be tailored to meet the needs and demands of the debtor and creditors. A Debt Agreement proposal will generally involve a debtor providing property (usually money) to creditors that is less than the amount owed to creditors. A Debt Agreement does not have to, but may, provide for payment of all debts in full.
A Debt Agreement can take any form (as long as creditors accept the proposal) and may include the following:
- a lump sum payment of money or payments over a period of time (can be funded by the debtor or a third party) to an administrator to distribute to all creditors;
- a lump sum payment of money or payments over a period of time (can be funded by the debtor or a third party) to creditors directly;
- property (assets) assigned or transferred to an administrator to sell and distribute to all creditors or specific creditors;
- property assigned or transferred to specific creditors directly; or
- a moratorium on payments of debts owed to creditors for a period of time, especially if the debtor is experiencing only short term financial difficulties.
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DEBT AGREEMENT PROCESS
The process begins when a debtor puts forward a Debt Agreement proposal. This is filed with the Official Receiver (Insolvency and Trustee Service Australia - ITSA) along with a Statement of Affairs, detailing the debtor's financial position.
The Debt Agreement proposal must:
- identify the property that is to be dealt with;
- how that property is to be dealt with; and
- who is to deal with (administer) the property.
If ITSA is not appointed to deal with the property and the person dealing with the property is to be remunerated for the work involved, then the proposal must provide how the administrator is to be remunerated, otherwise no remuneration will be allowed.
ITSA will then determine whether the proposal is accepted for processing. Eligibility criteria are detailed below.
Upon accepting a Debt Agreement proposal for processing, ITSA (or its delegate) will either:
- Issue a report to creditors detailing the proposal and call a meeting to consider the proposal. A special resolution is required for acceptance of the proposal.
or
- Write to each creditor asking whether the proposal should be accepted.
The proposal is accepted if the majority in number and at least seventy-five per cent (75%) in value of the creditors who reply/vote before the deadline accept the proposal.
The deadline for acceptance is twenty-five (25) days after the proposal is accepted by ITSA for processing.
After creditors accept a Debt Agreement proposal and it is recorded on ITSA's database, the debtor is released from the debts that would have been provable in bankruptcy (if the debtor had become bankrupt).
The debtor and creditors are then bound by the terms of the Debt Agreement and all parties are required to fulfil their respective obligations. Creditors who do not vote in favour of the Debt Agreement are still bound by its terms if it is accepted. The administrator will usually monitor the Debt Agreement to ensure that the terms are fulfilled.
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ELIGIBILITY
A debtor can make a Debt Agreement proposal at any time provided that the debtor satisfies the following requirements:
- within the proceeding ten years, the debtor has not:
- been bankrupt;
- been a party (as debtor) to a Debt Agreement; and
- given an authority under section 188 under Part X of the Act.
- at the proposal time, the debtor's unsecured debts do not total more than the "threshold amount"(currently $72,381.40);
- the value of the debtor's divisible property are not worth more than the "threshold amount" (currently $72,381.40); and
- the debtor's "after tax income" in the year beginning at the proposal time is not likely to exceed $54,286.05.
The above amounts are indexed and are current as at 3 March 2006.
ITSA must refuse to accept a Debt Agreement proposal for processing if the person nominated as administrator is ineligible, in accordance with the regulations, to act as an administrator. This is detailed below.
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WHO CAN ADMINISTER A DEBT AGREEMENT?
The person appointed to administer the Debt Agreement and deal with the property can be ITSA, a registered Trustee or some other person.
The Act and the Bankruptcy Regulations provide that the following persons are ineligible to act as administrators of a Debt Agreement:
- an undischarged bankrupt or insolvent under administration, or a party (as debtor) to a Debt Agreement or a Part X administration within the 3 years before the proposed appointment;
- a person (registered Trustee) whose registration ceases, under section 155I of the Act, for a reason mentioned in paragraph 155H (1) (a), (b), (e) or (f) of the Act, or whose registration has ceased for any of those reasons within 10 years before the proposed appointment;
- a person who is prohibited, under the Corporations Act, from taking part in the management of a corporation;
- a person who is deregistered under the Corporations Act as a liquidator;
- a person who is convicted of a criminal offence involving fraud or dishonesty, or was so convicted within 10 years before the proposed appointment;
- is a person who the Inspector-General determines under subregulation 9.06 (3) has failed to properly carry out duties or cooperate with an inquiry or investigation, or in relation to whom such a decision was made within 3 years before the proposed appointment.
If a person is ineligible to act as a Debt Agreement administrator, any company of which the person is a director is also ineligible to act as an administrator.
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POWERS OF THE ADMINISTRATOR
The powers of the administrator are detailed in the Debt Agreement. These powers generally include:
- monitor the terms of the Debt Agreement;
- perform any functions bestowed upon them under the Debt Agreement, such as realise property, collect money and pay a dividend to creditors; and
- adjudicating on creditors' claims; and
- applying for the termination of the Debt Agreement in the event of non-compliance.
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EFFECT OF A DEBT AGREEMENT ON A DEBTOR
The major effects on a debtor upon the acceptance of a Debt Agreement are:
- It provides the debtor with a release from the debts that would have been provable in bankruptcy if the debtor had become bankrupt.
- Protects the debtor against any legal proceedings being commenced or continued against him/her by a creditor to recover a debt that would be provable in bankruptcy whilst the Debt Agreement remains in force.
- The debtor is required to adhere to the terms of Debt Agreement.
- The Debt Agreement is a legally binding agreement.
- The debtor is entitled to deal with any assets in accordance with the terms of the Debt Agreement. If certain assets of the debtor are not specified in the Debt Agreement, the debtor is entitled to retain those assets and deal with them as he/she wishes.
- The debtor is entitled to receive and earn an income whilst subject to a Debt Agreement. A Debt Agreement however may provide for the debtor to contribute a certain amount of their income.
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EFFECT OF A DEBT AGREEMENT ON CREDITORS
A Debt Agreement affects creditors in the following ways:
- Upon the acceptance by ITSA of the Debt Agreement proposal for processing (that is, prior to creditors accepting the proposal), creditors are prevented from enforcing their debt until:
- the proposal is rejected by creditors;
- the proposal lapses; or
- the deadline for acceptance expires.
- A creditor is not prevented however from starting a legal proceeding in respect of a "frozen debt" or taking a fresh step in such a proceeding (except to enforce a judgment) during the above period. A "frozen debt" means a debt that:
- is owed by a debtor who has given a Debt Agreement proposal that has been accepted by the Official Receiver (ITSA) for processing; and
- would be provable in bankruptcy if the debtor had become a bankrupt when ITSA accepted the Debt Agreement proposal for processing;
but does not include a debt arising under a maintenance agreement or maintenance order (whenever entered into or made).
- The debtor is released from the debts that would have been provable in bankruptcy if the debtor had become bankrupt.
- Creditors are bound by the terms of the Debt Agreement, even if they did not vote for the Debt Agreement or vote at all.
- While a debt agreement is in force a creditor cannot:
- present a Creditor's Petition against the debtor; or
- proceed further with a Creditor's Petition that was presented against the debtor before details of the Debt Agreement was accepted; or
- enforce a remedy against the debtor's property, or start or take a fresh step in legal proceedings, in respect of a debt that would have been provable had the debtor become bankrupt.
- A creditor is not however prevented from enforcing a remedy against the debtor or the debtor's property for a liability under a maintenance agreement or maintenance order.
- Secured creditors with valid security are able to enforce their rights pursuant to charges or securities that they hold over assets of the debtor.
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DISTRIBUTIONS / DIVIDENDS TO CREDITORS
The proposed distributions/dividends to creditors will be set out in the Debt Agreement. Generally, the administrator will collect the funds and/or property subject to the Debt Agreement and distribute it to creditors when the administrator believes sufficient funds and/or property are available or when the Debt Agreement specifies distributions are to be made. As noted above, money or property may also be paid or transferred directly to a creditor pursuant to a Debt Agreement.
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REMUNERATION & COSTS OF THE ADMINISTRATOR
If the administrator of the Debt Agreement is to be paid for his/her services, the amount of remuneration and costs must be specified in the Debt Agreement. If this is not detailed in the Debt Agreement, the administrator is not entitled to receive any remuneration.
The costs of an administrator under a Debt Agreement are generally less than the costs to administer a Part X arrangement and a bankruptcy.
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PUBLIC RECORD
Debt Agreement details are available to the public via a Government database known as the National Personal Insolvency Index ("NPII") and usually on databases of credit reference agencies. Access to the Government database can be obtained by contacting ITSA or information brokers such as Australian Business Research ("ABR"). Searches can be conducted by accessing our website at www.svpartners.com.au.
Details of the debtor's name, address, date of birth, occupation and the number of the Debt Agreement administration will remain on the NPII forever.
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VARYING A DEBT AGREEMENT
A debtor or creditor who is a party to a Debt Agreement may give ITSA a written proposal to vary the agreement. The proposed variation is then processed in the same manner as the initial Debt Agreement proposal and voted upon by creditors. If the amended proposal is accepted, the agreement is varied in the way set out in the proposal.
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FINALISATION/TERMINATION OF A DEBT AGREEMENT
A Debt Agreement is ended when the earliest of the following occurs:
- All the obligations under it have been discharged.
- When creditors terminate the agreement.
- When the agreement is terminated by an Order of the Court, if the Court is satisfied that:
- the debtor (or personal representative) has failed to carry out a term of the agreement and it is in the creditors' interest to terminate the agreement; or
- carrying out the agreement would cause injustice or undue delay to the creditors or the debtor; or
- for any other reason the agreement should be terminated and that it is in the interest of the creditors to do so.
In any of these cases, the Court may also make a Sequestration Order (an order for the bankruptcy of the debtor) on the application by a creditor.
- The debtor becomes a bankrupt.
Contact us to discuss the specific details of your individual situation.
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