Debt agreements are designed to provide a simple, low cost and flexible alternative to bankruptcy for debtors with an unmanageable debt that have some financial capacity to propose a deal to their creditors. It aims to assist debtors with relatively low income, low levels of debt and few assets.
Advantages of a Debt Agreement
(i) Provides a means by which a debtor can negotiate a collective agreement with creditors rather than having to manage individual creditor repayment arrangements.
(ii) creditors cannot enforce remedies to recover debts
(iii) bailiff/sheriff must not take action
(iv) garnishee must cease
(v) debtor is released from most debts
(vi) Both creditor and debtor may expect to receive a better outcome than if the debtor were to proceed to bankruptcy
Who is eligible to propose a Debt Agreement?
Debt agreement s are available to debtors who meet the following criteria:-
(i) Not been bankrupt, utilised a debt agreement or given an authority under Part X of the Bankruptcy Act in the last 10 years
(ii) After tax income of less than $56, 306
(iii) Unsecured debts of less than $75,075
(iv) Property not exempt under bankruptcy valued at less than $75,075
How is a Debt Agreement initiated?
A Debt Agreement is proposed by completing a Statement of Affairs and proposal form which is submitted to ITSA for processing. Creditors are notified of the proposal and provided with an opportunity to consider and vote upon the proposal. Creditors are encouraged to focus upon what the debtor can reasonably afford rather than on a minimum expected return on their debt.
Current law provides that a proposal is accepted if a majority of creditors with 75% of the value of total debts who vote, vote in favour of the proposal. If a proposal is accepted than all creditors are bound by the agreement, whether they voted against the proposal or did not vote at all.
Interestingly, as part of a review conducted on the effectiveness of the debt agreement regime, a reform being considered is reducing the requirement to achieve a favourable vote from 75% in value of creditors voting to 50%, in an attempt to shift creditors focus to what a debtor can afford to repay to his or her creditors.
Consequences for Debtor of entering a Debt Agreement
If accepted by creditors, ITSA records the debt agreement on the National Personal Insolvency Index and the decision of creditors which will remain on this public record forever.
If a debtor fails to carry out of any of their obligations under the agreement, creditors may vote to terminate the agreement and all debts bound by the agreement are again enforceable.
Lodging a proposal for a debt agreement, acceptance by creditors and breaching or terminating the agreement are all Acts of Bankruptcy. This means that creditors can rely on these acts to apply to the court for a debtor’s bankruptcy.
Lawler Partners Business Recovery & Insolvency team can assist debtors in reviewing their capacity to propose an affordable and attractive deal to their creditors, and are experienced in monitoring and effecting the process. Further information about Debt Agreements may be obtained by contacting our office: Rowena Sigelski – (02) 4962 2294
