There are circumstances where a person is able to propose a Debt Agreement, which is a relatively low cost alternative to bankruptcy, according to insolvency and bankruptcy partner TERRY MORGAN.
In the financial year ended 30th June, 2013, just under 10,000 people filed Debt Agreements. That figure was up nearly 8% on the number filed in the previous financial year.
Debt Agreements enable creditors to receive a return which they may not otherwise receive. A debtor can offer assets to creditors which would not otherwise be available in the event of a bankruptcy, such as funds from family members or assets which would not otherwise be available to a Trustee in Bankruptcy. In those circumstances, creditors can receive a higher dividend and the debtor is not required to enter into bankruptcy.
Prior to 1996, there were few alternatives available to a person who was unable to pay their debts when they fell due, which resulted in insolvency.
Whilst voluntary bankruptcy was available, it was also often considered an undesirable outcome; many wanted to enter into an agreement with their creditors. Fortunately, in 1996 some alternatives became available, including a “Debt Agreement”.
If an individual is unable to pay creditors, four (4) alternatives may be considered:
- Reach a private arrangement with all creditors;
- Enter into voluntary bankruptcy;
- Enter into a Personal Insolvency Agreement; or
- Enter into a Debt Agreement – the focus of this article.
A Debt Agreement is processed through Insolvency Trustee Service Australia’s Debt Agreement Service (“DAS”). It:
- Receives Debt Agreement proposals;
- Conducts a voting of creditors; and
- Maintains records.
There are some situations when a Debt Agreement is not available, such as:
- A Debt Agreement cannot be entered into where a person’s unsecured debts exceed $100,664.20.
- A person cannot propose a Debt Agreement if their after tax income for the last financial year exceeds $75,498.15 (amount indexed twice annually).
- A person cannot enter into a Debt Agreement unless that person is insolvent.
A debtor who proposes a Debt Agreement must:
- Provide the Official Receiver with a written proposal;
- The proposal must be in an approved form and must:
- Properly identify the debtors to be dealt with under the Agreement;
- Specify how the identified property is to be dealt with;
- Authorise a nominated person to deal with the identified property in accordance with the terms of the proposal.
There are certain restrictions as to whom may propose a Debt Agreement:
- A person cannot propose a Debt Agreement if:
- At any time during the past 10 years, he has been bankrupt or been a party to another Debt Agreement; or
- His income or debts exceed the limits expressed above.
- Any person who proposes a Debt Agreement must accept that the proposing of the Debt Agreement constitutes an act of Bankruptcy pursuant to the Bankruptcy Act.
Once a Debt Agreement is accepted for processing, the Official Receiver must provide a copy of the proposal to each creditor.
A Debt Agreement is accepted by the creditors when it is accepted within the “applicable deadline”. The acceptance must be from the majority in value of creditors who reply to the Official Receiver before the deadline saying that the proposal should be accepted.
Following the acceptance of a Debt Agreement by creditors, a creditor cannot apply for alternative enforcement of the Debt. Further, a Sheriff must not take any action or further action to execute or sell property under any process issued by a Court, to enforce the payment of any debt, the subject of a Debt Agreement.
If a Debt Agreement is accepted, then Section 185(N) of the Bankruptcy Act provides the release of the debtor from all provable debts upon the completion of the Agreement. Completion of the Agreement is usually when the debtor has fulfilled the promise made by the debtor in the Debt Agreement.
What’s at stake?
A person proposing a Debt Agreement must accept that if he has any property which is otherwise secured to a creditor, then the secured creditor is still able to deal with that property, irrespective of whether or not a Debt Agreement is approved.
Here’s the catch
There are provisions within the Bankruptcy Act which enable a Court, in certain circumstances, to declare a Debt Agreement void.
The principal advantage of a Debt Agreement is that a debtor is not required to declare bankruptcy. However, as the Debt Agreement is an act of bankruptcy, if the Debt Agreement is not accepted by the creditors, then any individual creditor is able to rely on the proposal of a Debt Agreement, as an act of bankruptcy for the purpose of applying to a Court to make the debtor bankrupt.