Binding debt agreements and personal insolvency agreements are alternative formal arrangements to settle an unmanageable debt without becoming bankrupt. Both have advantages and disadvantages and it is advisable to obtain professional advice before entering into such an agreement.
Part IX debt agreements
Under part IX of the Bankruptcy Act, a debtor can enter into a binding debt agreement with their unsecured creditors as an alternative to bankruptcy.
The number of part IX debt agreements being entered into has increased rapidly over recent years and personal bankruptcies are declining. The increase in debt agreements is largely due to heavy marketing by debt agreement administrators and by companies that receive commissions for referring people to administrators. As a result, the suitability and appropriateness of debt agreements to some consumer debt circumstances is being questioned.
Financial counsellors, consumer advocates and other community workers who work with people in financial difficulty have raised concerns about debt agreements actually worsening a debtor’s situation, particularly when private firms administer agreements. These concerns relate to the lack of regulation and expertise of debt administrators, the charging of large fees by administrators, and proposals often being unsustainable due to payments being set too high, and agreements generally being of no benefit to debtors.
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 part IX debt agreement. Other options available to debtors might include applying for a hardship variation through the various ombudsmen, making an informal arrangement with creditors, voluntary bankruptcy, disputing the legality of a debt, selling assets to pay the debts, or doing nothing at all.
See Financial counselling services, for a listing of financial counselling services.
On 14 February 2018, the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018 (Cth) was introduced into federal parliament. The Bill proposes a number of reforms to protect both creditors and debtors.
The Commonwealth Attorney-General, Christian Porter, stated that the reforms “will boost confidence in the professionalism of debt agreement administrators, deter unscrupulous practices and enhance transparency”.
Some of the proposed reforms include:
• limiting the length of a debt agreement to three years;
• increasing the asset eligibility threshold;
• providing the Official Receiver with the power to reject debt agreement proposals that would cause undue financial hardship to the debtor;
• introducing a new “payment-to-income ratio” as an affordability gauge;
• expanding the grounds for debtors to apply to court to void their debt agreements, including where a debt agreement administrator breaches a duty under the Bankruptcy Act;
• increasing the penalties for debt agreement administrators who engage in misconduct.
At the time of writing (30 June 2018), the Bill had not passed parliament.
Some of the benefits of entering into a debt agreement are:
• once the debt agreement proposal is lodged, protections apply, such as staying enforcement action against provable debts, and relief from harassment;
• release from debts that would be provable in a bankruptcy if the debtor satisfies all the obligations under the debt agreement;
• unlike an informal agreement to settle debts, a debtor does not have to get all creditors to agree to a debt agreement proposal;
• unlike bankruptcy, there are no restrictions on working in certain industries or remaining a director of a company; and
• it might be possible to keep a house, however be very cautious here as if the payments under the agreement are too high, then you may fall into arrears on your mortgage and the house will be repossessed and sold anyway.
Some of the disadvantages of debt agreements are:
• lodging a debt agreement proposal, acceptance of the agreement and breaching or terminating the agreement are all acts of bankruptcy. Therefore, a creditor may seek to bankrupt a debtor where the Official Receiver or creditors reject a proposal, or a debtor breaches or terminates the agreement;
• the debtor’s details will appear for five years on the National Personal Insolvency Index from the time that the debt agreement proposal is accepted, or the date that the obligations are complete, whichever is later; or in the case that the debt agreement is terminated, the debtor’s details will appear for five years from the date the debt agreement is accepted, or two years from the date of termination, whichever is later;
• the debtor’s ability to obtain credit may be affected. Details of the debt agreement may be recorded on the debtor’s credit file for up to seven years (see “Credit reporting” in Privacy and your rights); and
• fees charged by administrators can be expensive – with administrators taking upwards of 25 per cent of every repayment, and set-up fees costing thousands, debtors often 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 due to the creditor’s unconscionable conduct, etc.);
• a debt agreement can involve unaffordable or unsustainable 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;
• poorly informed debtors who did not understand the true cost and consequences of a debt agreement, or did not know what debt options are available, or who thought the debt agreement was a debt consolidation loan;
• a debt agreement may be of no practical benefit for a debtor (i.e. 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).
Debt agreement administrators who administer more than five debt agreements are required to be registered under the Bankruptcy Act.
An administrator’s registration can be cancelled if they are unable or fail to properly carry out their duties.
Debt agreement administrators must comply with general consumer law (e.g. they must not engage in misleading and deceptive conduct, and they must provide services with due care and skill).
Debt agreement administrators also have obligations under the Bankruptcy Act. One of these obligations is a duty to certify, under section 85C(2D), that they have reasonable grounds to believe that the debtor is able to make the repayments proposed in the debt agreement.
If you have a concern about a debt agreement administrator, you can lodge a complaint with AFSA (see “Contacts”).
Some debt agreement administrators are members of the Australian Financial Complaints Authority (see “Contacts”).
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 $113,349.60 (indexed);
• the debtor’s after-tax income in the 12 months after the beginning of the agreement is not likely to be more than $85,012.20 (indexed); or
• the debtor in the past 10 years has not been a bankrupt or a party to a debt agreement, or given a part X authority.
To commence a part IX agreement, the debtor, or their agent, gives a debt agreement proposal, an explanatory statement and a statement of affairs to the Official Receiver 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 that agreement, then they must certify that, amongst 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.
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.
Once the Official Receiver is satisfied that the proposal complies with the Bankruptcy Act, they will then write to the creditors and ask them to respond to the proposal (s 185EA). If a majority in value of the creditors who reply to the proposal accept it, then the proposal becomes binding on all creditors (s 185EC). Where 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.
Section 185C(3) 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 section 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 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.
For further information about the formal requirements of a part IX agreement, visit the AFSA website (www.afsa.gov.au) or read the Financial Rights Legal Centre’s bankruptcy toolkit (www.financialrights.org.au).
A debtor or creditor can put a written proposal in an approved form to the Official Receiver to vary a debt agreement (s 185M). 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.
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 and this is passed by the creditors in the same way as a debt agreement is passed (s 185P);
• a court order is made after an application by a debtor, creditor or the Official Receiver (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 act of bankruptcy by the debtor and may be used by creditors to bankrupt the debtor (s 40(hd)).
Personal insolvency agreements provide a way for debtors to put a proposal to creditors to settle outstanding debts. Personal insolvency agreements must be accepted by a special resolution of creditors before they are binding. Under a personal insolvency agreement a debtor can make arrangements with their creditors in return for a release from all debts. Such arrangements include:
• assigning all property to a trustee to be sold;
• arranging to pay some or all debts; and/or
• arranging for someone else to carry on the debtor’s business or for the debtor to carry on the business under supervision.
Personal insolvency agreements are usually organised by registered trustees. The AFSA website (at 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.
Part X procedures are often of little relevance to low-income earners who do not have the financial resources to bargain for an agreement. Furthermore, it will be necessary for the debtor to pay fees to a registered trustee for part X procedures. The payment of the trustee’s fees is in fact the first matter on the agenda at the meeting of creditors, who must agree to the payment of fees.