Part IX debt agreements
Under Part IX of the Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act’), a debt agreement is an alternative to bankruptcy.
A debtor can enter into a binding 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.
Debt agreements provide ‘breathing space’ for small debtors who might be in a debt because of unemployment or excessive use of credit.
A debtor should get independent advice (from a financial counsellor if they are on a low income) on all their options before entering into a debt agreement.
Other options available to debtors might include applying for a hardship variation through the various ombudsmen, making an informal arrangement with creditors, voluntary bankruptcy, disputing the legality of a debt, selling assets to pay the debts, or doing nothing at all.
See Chapter 5.4: Financial counselling services, for a listing of financial counselling services.
Also see ‘Compare the formal options’ on AFSA’s website.
Advantages of debt agreements
Some of the benefits of debt agreement are:
- The debtor is given a chance to trade out of their difficulties, 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 – however, be very cautious here as if the payments under the debt agreement are too high, then you may fall into arrears on your mortgage and the house will be repossessed and sold anyway.
Disadvantages of debt agreements
Some of the disadvantages of debt agreements are:
- Lodging a debt agreement proposal, accepting the agreement, and breaching or terminating the agreement are all acts of bankruptcy under section 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 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 $5969 (as at April 2021, indexed) (s 269(1)(a)–(ad) Bankruptcy Act).
- 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 (see ‘Privacy and credit reporting’ in Chapter 12.4: Privacy and your rights).
- 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 under a debt agreement than the initial debts they were struggling to pay.
Other concerns with debt agreements include:
- A debt agreement may be detrimental to a debtor’s interests if other ways of settling a debt are not considered (e.g. negotiating informally with creditors, or applying to have the debt waived (given up) due to the creditor’s unconscionable conduct, etc.).
- A debt agreement can involve unaffordable repayments. If the debt agreement terminates early due to arrears, creditors can recommence collecting the full debt and back-date interest.
- The fees paid to the administrators of debt agreements is money that could have gone towards reducing debt.
- Debt agreements can unfairly ensnare poorly informed debtors who do not understand the true cost and consequences of a debt agreement, or do not know what other debt options are available, or who think the debt agreement is a debt consolidation loan.
- A debt agreement may be of no practical benefit for a debtor as their credit report is still adversely affected and they still have to make payments from their income that they may not be able to afford.
Complaints against debt agreement administrators
An administrator’s registration can be cancelled if they are unable or fail to properly carry out their duties. If you have a concern about a debt agreement administrator, you can lodge a complaint with AFSA.
Step 1: Is the debtor eligible to enter into a debt agreement?
A debtor is eligible to enter into a debt agreement if:
- the debtor is insolvent (unable to pay debts as and when they fall due);
- the debtor’s unsecured debts, and equity in divisible property do not exceed $119 119 (as at April 2021, indexed,) (s 185C(4)(b), (5) Bankruptcy Act);
- the debtor’s after-tax income in the 12 months after the beginning of the agreement is not likely to be more than $89 339.25 (as at April 2021, indexed) (s 185C(4)(d), (5) Bankruptcy Act); or
- the debtor in the past 10 years has not been a bankrupt or a party to a debt agreement, or given a Part X authority (s 185C(4) Bankruptcy Act).
Step 2: Appoint an administrator
A debtor can either:
- self-administer their debt agreement; or
- appoint a debt agreement administrator, who is required to be registered with AFSA under the Bankruptcy Act.
Step 3: Lodge the proposal with AFSA
To commence a debt agreement, the debtor, or their agent, gives a debt agreement proposal, an explanatory statement and a statement of affairs to the Official Receiver (AFSA) within 14 days of the documents being signed. A financial counsellor may be able to help a debtor to draft the proposal.
If it is proposed that an administrator is to administer the debt agreement, then they must certify that, among other things, they have reasonable grounds for believing:
- that the debtor is likely to be able to meet their obligations under the proposal; and
- that all the information required in the statement of affairs and explanatory statement has been set out.
Step 3: The Official Receiver (AFSA) considers the debt agreement proposal
The Official Receiver then assesses whether or not the proposal contains all the required information and whether or not the debtor is eligible to enter into a debt agreement.
Step 4: The Official Receiver (AFSA) asks the creditors to respond to the proposal
Once the Official Receiver (AFSA) is satisfied that the proposal complies with the Bankruptcy Act, it will write to the creditors and ask them to respond to the proposal (s 185EA Bankruptcy Act). If a majority of the creditors in value who reply to the proposal accept it, then the proposal becomes binding on all creditors (s 185EC Bankruptcy Act).
If a creditor holds property as security, the value of their debt for the purpose of voting on the proposal is deemed to be the amount by which the debt exceeds the value of the secured goods.
Content of a debt agreement proposal
Section 185C(3) of thw Bankruptcy Act provides that a debt agreement proposal can provide for any matter relating to the debtor’s financial affairs.
Examples of what can be included in a proposal are:
- payment of less than the full amount of all or any of the debts;
- instalment payments; and
- a moratorium on payment of debts.
The formal requirements of the debt agreement proposal are specified in section 185C of the Bankruptcy Act and include, among other things, that the proposal must:
- identify the property that is being dealt with under the agreement (e.g. motor vehicle, future income, money in bank);
- specify how the property is to be dealt with;
- authorise the Official Trustee (AFSA) or another specified person to deal with the property;
- provide that all provable debts in relation to the agreement rank equally and if the total amount paid by the debtor under the agreement is insufficient to meet those provable debts in full, those provable debts are to be paid proportionately;
- provide that a creditor is not entitled to receive, in respect of a provable debt, more than the amount of the debt;
- must not provide for the transfer of property (other than money) to a creditor; and
- if the agreement provides for the remuneration of the administrator of the agreement, the remuneration must be specified and expressed as a fixed percentage of the total amounts payable by the debtor under the agreement in respect of the provable debts. The administrator is entitled to take as remuneration the specified percentage of each payment made by the debt.
Varying a debt agreement
A debtor or creditor can put a written proposal in an approved form to the Official Receiver (AFSA) to vary a debt agreement (s 185M Bankruptcy Act). The agreement will be varied if the majority in value of the creditors accept the variation proposal. The procedure for varying the proposal is the same as the procedure for accepting the original debt agreement proposal.
Ending a debt agreement
A debt agreement will generally end when all obligations under the agreement have been satisfied.
A debt agreement can also be terminated if:
- a debtor puts a proposal to terminate the agreement to the Official Receiver (AFSA) and this is passed by the creditors in the same way as a debt agreement (s 185P Bankruptcy Act);
- a court order is made after an application by a debtor, creditor or the Official Receiver (AFSA) (s 185Q Bankruptcy Act);
- the debtor fails to make a payment under the agreement for a continuous period of six months (s 185QA Bankruptcy Act);
- the debtor failed to complete the agreement within six months of the time specified in the agreement for its completion (s 185QA Bankruptcy Act); or
- the debtor becomes a bankrupt.
As mentioned above (see ‘Disadvantages of debt agreements’), termination of a debt agreement constitutes an act of bankruptcy by the debtor and may be used by creditors to bankrupt the debtor (s 40(hd) Bankruptcy Act).
Personal insolvency agreements under Part X
Personal insolvency agreements provide a way for debtors to put a proposal to creditors to settle outstanding debts and to avoid bankruptcy. Personal insolvency agreements must be accepted by a special resolution of creditors before they are binding.
A debtor can make arrangements with their creditors under a personal insolvency agreement in return for a release from all debts.
These arrangements include:
- assigning all property to a trustee to be sold for the benefit of creditors;
- arranging to pay some or all debts by money or by property and maybe by instalments; and/or
- arranging for someone else to carry on the debtor’s business or for the debtor to carry on the business under supervision.
A personal insolvency agreement starts with a proposal by a debtor who is insolvent. The proposal must contain the information relevant to creditors (e.g. details of the debtor’s income and assets).
The proposal may include information about:
- any lump sum payment to creditors from the debtor or from third parties; and
- any transfer of assets to creditors or the payment of sale proceeds to creditors.
The personal insolvency agreement proposal must set out the order in which the debtor’s income and/or property is to be distributed among creditors, whether any assets have been disposed of to third parties before the agreement, and whether they can be recovered, and how the agreement is to end.
Personal insolvency agreements are usually organised by a controlling trustee (who may be a registered trustee or a solicitor). AFSA’s website has a list of all registered trustees in Victoria, and their contact details.
You can get quite a bit of free advice before starting the personal insolvency agreement process, as many registered trustees will give some free initial telephone advice and will also give a first free 30 minute consultation.
Personal insolvency agreements
Also see ‘Compare the formal options’ on AFSA’s website.
Advantages of personal insolvency agreements
Some of the benefits of personal insolvency agreements are:
- the debtor is given a chance to trade out of their difficulties, they can continue to operate a business if allowed by the personal solvency agreement, and they are released from their obligations at the end of the agreement;
- the administration of a personal solvency agreement may be cheaper and more flexible for both creditor and debtor than the alternatives;
- debtors may avoid the stigma, restrictions and liabilities of bankruptcy;
- the antecedent transaction provisions in sections 120–122 of the Bankruptcy Act may not apply (s 188A(2)(j));
- creditors do not have access to after-acquired property; and
- the debtor is not liable to make income contributions under Part VI Division 4B of the Bankruptcy Act.
Disadvantages of personal insolvency agreements
Some of the disadvantages of personal insolvency agreements are:
- The personal insolvency agreement procedures are often of little relevance to low-income earners who do not have the financial resources to bargain for an agreement.
- The debtor has to pay fees to a registered trustee for personal insolvency agreement procedures. The payment of the trustee’s fees is the first matter on the agenda at the meeting of creditors and they must agree to the payment of fees.
- A personal insolvency agreement may give rise to acts of bankruptcy (s 40(1)(i)–40(1)(m) Bankruptcy Act), so a creditor could start bankruptcy proceedings.
- The debtor’s details are recorded on the debtor’s credit file and on the NPII.
- A debtor with a personal insolvency agreement is restricted from working in certain industries.
- A debtor with a personal insolvency agreement is disqualified from managing a corporation until the terms of the agreement are complied with.