It is not always inevitable that a debtor will present a debtor’s petition or be served by a creditor’s petition. There are alternative ways to seek relief from impending bankruptcy. Once such alternative is a Debt Agreement under Part IX of the Bankruptcy Act 1966 (Cth) which offers an informal type of administration. A Debt Agreement can be useful for those insolvent debtors with a small amount of debt, low incomes and few assets. Debt agreements tend to deal with consumer bankruptcies and are processed through the Debt Agreement Administrators (DAA).

How is it Proposed?

If a debtor wishes to consider a Debt Agreement, they must appoint a DAA. The DAA will determine if the debtor is insolvent and prepare a debt agreement proposal for creditors. The proposal must identify:

  • The debtor;
  • The dollar amount of the offer;
  • Provide information relating to the debtor’s income, expenses, assets and liabilities; and
  • A statement of affairs.

Once a proposal for a Debt Agreement is provided, that is considered an act of bankruptcy for the purposes of a creditor’s petition for bankruptcy.

Who Cannot Enter Into a Debt Agreement

Certain debtors are disqualified from giving a proposal to creditors if any of the following apply:

  • The debtor was bankrupt at any point in the past 10 years;
  • The debtor’s unsecured debts are greater than the threshold amount at the time;
  • The debtor’s divisible property is greater in value than the threshold amount at the time;
  • The debtor’s aftertax income at the time of the proposal is likely to be more than half of the threshold mark.

Acceptance of Proposal

Once a proposal is completed is must be lodged with the Official Receiver within 14 days of it being signed. The Official Receiver then sends the proposal to creditors to consider. Creditors must vote on the proposal by returning the statement of claim form.

If a majority of the votes accept the proposal, the proposal becomes a Debt Agreement. If the proposal is not accepted, creditors can pursue the debtor.

The Debt Agreement

Once a Debt Agreement is in place, creditors are unable to present a creditor’s petition against the debtor, pursue a previous creditor’s petition or take any action in respect of a creditor’s debt against the debtor.

The debtor’s assets are distributed among creditors in proportion to their debts that have been proved.

If there is some issue with the Debt Agreement, it is possible for it to be varied in the same manner as its original acceptance by the creditors.

Once the Debt Agreement comes to an end, the debtor is released from their debts.

End of the Debt Agreement

The Debt Agreement comes to an end once it is successfully completed or if the debtor has been unable to comply with their obligations under the Debt Agreement. The agreement formally comes to an end either on termination by a written proposal, a special resolution of creditors or by the bankruptcy of the debtor.

The Debt Agreement can also come to an end through court order if the agreement is void, the debtor has failed to fulfil one of the terms of the agreement, there would be some injustice or undue delay or any other reason in the best interests of the creditors.

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If you are a debtor or a creditor and require advice in respect of bankruptcy or alternative debtor arrangements, get in touch with our insolvency lawyers on 1300 544 755

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