If you are not currently in the position to pay your debts and want to avoid becoming bankrupt, you can submit a Part IX Debt Agreement proposal for your creditors to consider. The Debt Agreement proposal provides details about how you will pay out your outstanding debts.
If your creditors accept your proposal and you enter a Debt Agreement, you will avoid becoming a bankrupt, though the fact of your Debt Agreement will appear on your credit report for seven years and will be viewed by creditors as an act of bankruptcy. You will usually have to pay an upfront fee to a Debt Agreement administrator to enter a Debt Agreement plus a monthly administration fee throughout the period of the Debt Agreement.
A Debt Agreement proposal becomes a formal agreement when creditors agree, either in writing or by vote at a meeting, to accept the terms of your Debt Agreement proposal.
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Reasons a Debt Agreement is preferred to bankruptcy
Debt Agreements are appealing to people who wish to work in a profession that would prohibit them if they become bankrupt. This means, for instance, that they can continue to work in a current position as they pay off their debts. Had they become bankrupt, they would have had to resign and would therefore have lost the source of income with which to pay off their debts.
Debt Agreements offer other advantages over bankruptcy. These include that you can avoid the stigma frequently associated with bankruptcy, and you will not be obliged to disclose so much about your personal life. For instance, a bankrupt has to advise their trustee of all changes of address and provide notice of any proposed overseas travel from the trustee for the entire period of bankruptcy, but somebody under a Debt Agreement does not have to do these things.
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Who can enter into a formal Debt Agreement?
Entering a Debt Agreement appeals as an alternative to bankruptcy for people who wish to work in a profession from which they would be prohibited if they were bankrupt. To be eligible you must also:
- have debts you cannot pay; and
- not have been bankrupt or had a Debt Agreement in the last 10 years; and
- have unsecured debts of less than $83,647 (indexed); and
- have non-exempt assets valued at less than $83,647 (indexed); and
- expect that your after-tax income for the next 12 months will be less than $63,735.40 (indexed).
You should seek help from a financial counsellor before lodging a Debt Agreement proposal.
You can also seek professional advice. It is essential you have a full and complete understanding of the consequences of the Debt Agreement and any other available options for dealing with your debt.
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What do you have to do under a Debt Agreement?
The details of any Debt Agreement depend on the circumstances of the applicant and the willingness of the lenders to recover their money in a way proposed. The agreement may require that you do any of the following:
- make payments from your income for an agreed period of time; or
- pay an agreed periodic payment to your creditors; or
- make a one-off lump sum payment in full and final settlement for your debts; or
- sell your assets and pay all proceeds to your creditors; or
- ask your creditors for a temporary stop on payments you owe them for a specified time.
Making an application for a Debt Agreement is an act of bankruptcy, which means your creditors can apply to bankrupt you if they do not accept the proposal.
A Debt Agreement is legally binding on the parties, and any Debt Agreement default is an act of bankruptcy.
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Lodging a Debt Agreement proposal
Applying for a Debt Agreement is an act of bankruptcy, which means your creditors can force you into bankruptcy if they don’t accept the Debt Agreement. It is therefore essential that you obtain professional advice to enable you to draft your Debt Agreement proposal in the most effective way.
You must submit a written ‘Proposal for Dealing with your Debts’ and a ‘Statement of Affairs’ to the Official Receiver, a nominated officer at the Insolvency Trustee Service of Australia (ITSA).
The Receiver will assess your proposal for completeness and your eligibility before convening a meeting where creditors will be asked to respond to your proposal.
A Debt Agreement proposal must gain the support of more than 50% of creditors, and those creditors who are owed 75% of the debts to be approved.
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Varying a Debt Agreement
Either you or the creditors with whom you have entered a Debt Agreement can apply in writing for a change to a Debt Agreement.
The creditors must use the same approval process that was used to approve the original Debt Agreement to determine the acceptability of the proposed variation.