Part IX debt agreements
A An arrangement between a debtor and a creditor for the repayment of an unpaid debt, often by instalments. Generally negotiated because the debtor has been unable to pay the debt as originally agreed. is an alternative to When a debtor who cannot pay their debts has their money and property taken over and managed by a trustee who uses it to pay back creditors. The debtor is then called a bankrupt. (under Part IX Bankruptcy A written law made by parliament. Also called an ‘Act of parliament’, ‘statute’ or legislation.). A A person who owes a debt. can enter into a binding Money that is owed by one person or business to another. 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 A debt that does not have to be paid until some future time. Being allowed to pay later, in the future, for something you are getting now..
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, Done by your own free will. See also community treatment order (CTO). 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.
For further information about debt agreements, visit the websites of AFSA (www.afsa.gov.au) and the Financial Rights Legal Centre (https://financialrights.org.au).
Also see ‘Compare the formal options’ at www.afsa.gov.au/insolvency/cant-pay-my-debts/compare-formal-options.
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 Money owed that is due on a certain date and is late being paid (overdue). on your A restriction attached to ownership of property to secure the repayment of money borrowed. The mortgage stops the owner of the property selling it until they have paid off the debt. and the house A document that sets out what a person wants to happen to their money and other property after they die. 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 The person or organisation to whom a debtor owes a debt. 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 The end of something. Contracts terminate when the parties have done what they agreed. A contract can also be terminated without being completed, for example if one party breaks the contract, or it is impossible to carry out., 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)).
- 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 ‘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 Behaviour that takes unfair advantage of a vulnerable person in a contract or other transaction. The vulnerability can be due to factors such as poor education, disability, language difficulties or being affected by alcohol., 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 (1) (wills) Someone who takes legal responsibility for the possessions of a person who has died without making a will, or who is still alive but cannot manage their own possessions. For example, an administrator may be appointed to manage the money, house or other possessions of a person who has a severe mental disability. (2) (companies) A manager appointed by the directors of a company that is in financial difficulty. This may give creditors a better chance of getting their money back because the company can keep trading under supervised management instead of being wound up., 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 Being unable to pay your debts in full when they are due. (unable to pay debts as and when they fall due);
- the debtor’s unsecured debts, and (1) Fairness and justice. (2) A right to property that the court will recognise even though it does not amount to full legal ownership. (3) A set of legal rules that aims to reduce any harshness that would result from strict application of the law. in Property belonging to a bankrupt that can be used to pay off debts. Some property such as tools or trade, ordinary household furniture and a low-value car are excluded from the property that can be taken and sold. See also bankruptcy. 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)); or
- the debtor in the past 10 years has not been a bankrupt or a A person or organisation directly involved in a court case. Parties include the plaintiff or applicant, the defendant, and any third party added to the action, but not independent witnesses. to a debt agreement, or given a Part X authority (s 185C(4)).
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 A person who acts for someone else. They can make decisions, carry out tasks or make agreements for the other person. For example, if you ask someone to bid for you at an auction they will be acting as your 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).
If a creditor holds property as Money or property promised to be handed over as a guarantee for repayment of a loan, or as a guarantee that a defendant will meet their bail conditions., the value of their debt for the purpose of voting on the proposal is Treated by the law as if something is the case, even if that is not the reality. For example, children may be deemed to have the same home as their parents, whether they actually live there or not. Or a person may be deemed to have given their consent to something if they hear about it and do not object. Compare rebuttable. to be the amount by which the debt exceeds the value of the secured goods.
Content of a debt agreement proposal
Section 185C(3) provides that a debt agreement proposal can provide for any matterrelating 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 In a bankruptcy, a debt accepted by the trustee for proportional payment from available funds. The creditor receives a share of the bankrupt’s estate and the bankrupt is released from having to pay the full amount of the 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 An independent body that hears legal claims brought by parties and decides between them. Serious cases are heard by a judge and jury, or just a judge. Less-serious cases are heard by a magistrate. order is made after an application by a debtor, creditor or the Official Receiver (AFSA) (s 185Q);
- the debtor fails to make a payment under the agreement for a continuous period of six months (s 185QA);
- the debtor failed to complete the agreement within six months of the time specified in the agreement for its completion (s 185QA); or
- the debtor becomes a bankrupt.
As mentioned above (see ‘Disadvantages’), termination of a debt agreement constitutes an An action of a debtor that shows they cannot pay what they owe to their creditors. by the debtor and may be used by creditors to bankrupt the debtor (s 40(hd)).
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 A document signed by parties ending a court action. The party who began the action agrees to drop it, often in exchange for a payment by the other party. Also called terms of settlement. 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 A legal practitioner (lawyer) who sees clients and opens files to deal with their legal matters but usually does not appear in court. See also barrister.). AFSA’s website (www.afsa.gov.au) 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
For further information about personal insolvency agreements, visit the websites of AFSA (www.afsa.gov.au) and the Financial Rights Legal Centre (https://financialrights.org.au).
Also see ‘Compare the formal options’ at www.afsa.gov.au/insolvency/cant-pay-my-debts/compare-formal-options.
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 Prior. Something that happened before. 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.