Understanding bankruptcy

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 under a debt agreement than the initial debts they were struggling to pay. Other concerns with debt agreements include these:
• 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 credi- tors, or applying to have the debt waived (given up) due to the creditor’s unconscionable conduct).
• A debt agreement may 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 who 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.

  Practice

  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 $137  537 (as at October 2023) (s 185C(4)(b), (5) Bankruptcy Act);
• the debtor’s divisible property – property that could be sold by the trustee if the debtor were bankrupt – does not exceed $275 075 (s 185C(4) (c),(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 $103 153 (as at October 2023) (s 185C(4)(d), (5) Bankrupty Act); or
• the debtor in the past 10 years has not been a bankrupt, 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. 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 4: 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 5: 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, the proposal becomes binding on all creditors (s 185EC). 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 the 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 s 185C of the Bankruptcy Act and include, among other things, that the proposal must: 1 identify the property that is being dealt with under the agreement (e.g. motor vehicle, future income, money in bank); 2 specify how the property is to be dealt with; 3 authorise the Official Trustee (AFSA) or another specified person to deal with the property; 4 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; 5 provide that a creditor is not entitled to receive, in respect of a provable debt, more than the amount of the debt; 6 must not provide for the transfer of property (other than money) to a creditor; and 7 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 agree- ment 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);
• the debtor fails to make a payment under the agreement for a continuous period of six months (s 185QA);
• the debtor fails 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’), term­ ination 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)).

Personal insolvency agreements (PIAs) are legally binding agreements between a debtor and their creditors and can offer a flexible arrangement to settle debts without becoming bankrupt. They 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 the 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 (www.afsa.gov.au) has a list of all registered trustees in Victoria and their contact details.

  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 ss 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 irrelevant 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 National Personal Insolvency Index.
• 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.

The AFSA website has detailed information comparing the insolvency options available under the Bankruptcy Act. It also offers a tool debtors can use to help identify the formal insolvency option that suits their circumstances.

Go to www.afsa.gov.au/i-cant-pay-my-debts/ compare-your-insolvency-options.