The Law Handbook 2024

Chapter 5.3: Understanding bankruptcy 383 A discharged bankrupt is still required to give assistance to the trustee in the realisation and distribution of property vested in the trustee (s 152). Other procedures under the Bankruptcy Act Part IX debt agreements A debt agreement is a flexible alternative to bankruptcy under Part IX Bankruptcy Act. A debtor with low to moderate levels of debt, assets and income can enter into a legally binding interest-free debt agreement with their unsecured creditors to pay the percentage of their debt that they can afford over a period of time without going bankrupt. When the debt is paid, the debt is finalised. Debt agreements provide ‘breathing space’ for small debtors who might be in debt because of unemployment or excessive use of credit. How debt agreements work • The debtor should talk to a financial counsellor and then to a registered debt agreement administrator about entering into a debt agreement. The latter will submit a proposal to AFSA on the debtor’s behalf. • The debtor negotiates to pay the percentage of their combined debt that they can afford over a period of time. • The debtor must have secure employment and a steady income and be able to afford the offer to creditors. • The debtor makes repayments to their debt agreement administrator instead of making payments to individual creditors. • After the debtor has completed the payments and the agreement ends, the creditors cannot recover the rest of the money owing. Advantages of debt agreements Some of the benefits of debt agreements: • Low costs. • The debtor is given a chance to trade out of their difficulties, the can reduce the amount of debt, they can continue to operate a business if allowed by the debt agreement and they are released from their obligations at the end of the debt agreement. • There are protections such as staying (suspending) enforcement action against provable debts and relief from harassment. • Unlike an informal agreement to settle debts, a debtor does not have to get all creditors to agree to a debt agreement proposal. • The debtor can keep their assets unless the terms of the debt agreement provide otherwise. It might be possible to keep a house, but the debtor should be very cautious. If the payments under the debt agreement are too high, the debtor may fall into arrears on their mortgage and have the house repossessed and sold anyway. • Creditors cannot charge interest or fees on the debt agreement amount. Disadvantages of debt agreements Some of the disadvantages of debt agreements: • Lodging a debt agreement proposal, accepting the agreement and breaching or terminating the agree- ment are all acts of bankruptcy under s 40(1)(ha)– (hd) of the Bankruptcy Act. Therefore, a creditor may seek to bankrupt a debtor where the Official Receiver (AFSA) or creditors reject a proposal, or where a debtor breaches or terminates the debt agreement. • The debtor’s details are public and will appear for five years on the National Personal Insolvency Index (NPII) on AFSA’s website from the time that the debt agreement proposal is accepted, or the date that the obligations are complete, whichever is later. If the debt agreement is terminated, the debtor’s details will appear on the NPII for five years from the date the debt agreement is accepted, or two years from the date of termination, whichever is later. The NPII can be searched for a small fee. • A debtor has to tell new credit providers about the debt agreement if they owe more than the credit limit of $6 852 (as at October 2023) (s 269(1)(a)– (ad)). • The debtor’s ability to obtain credit may be affected as details of the debt agreement may be recorded on the debtor’s credit file for up to seven years. • There are restrictions on working in certain industries or remaining a director of a company. • The fees charged by administrators can be expensive. Administrators take upwards of 25 per cent of every repayment, and set-up fees cost thousands of dollars. Debtors may pay more