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.
However you should note that choosing bankruptcy also has its advantanges. The most common reason to choose this option is that it can offer a means to protect your home. You may also be less likely to be excluded from certain employment.
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Debt Agreements - caution
Before signing any debt agreement it is important to seek advice from a financial counsellor to ensure that it will not leave you worse off. Many Debt Agreement administrators aggressively promote their services. Some charge very high fees for services that you may not need and may work to your disadvantage. So be sure to seek the advice of an independent financial counsellor who can help you choose the best option for your circumstances, and ensure that your best interests are served.
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Who can enter into a formal Debt Agreement?
To be eligible you must:
- not have been bankrupt or had a Debt Agreement in the last 10 years; and
- have unsecured debts of less than $90,326 (indexed); and
- have non-exempt assets valued at less than $90,326 (indexed); and
- expect that your after-tax income for the next 12 months will be less than $67,744.50 (indexed).
You should seek help from a financial counsellor before lodging a Debt Agreement proposal.
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.
You can find futher information at ITSA.
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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 both parties.
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Lodging a Debt Agreement proposal
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 variation.
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.
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Public record
As with bankruptcy and overdue debts, a record will be made on your credit report for five years. Overdue debts remain on your credit report for five years, however debt agreements remain on your credit report for seven years, so the difficulties you may face getting credit remain for two years longer with debt agreements and bankruptcy, than for overdue debt.
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What employment restrictions apply with Debt Agreements?
Operating a business
You will be able to operate a business unless the terms of the agreement provide otherwise. If trading under a business name or assumed name (whether alone or in partnership) the debt agreement must be disclosed to all people dealing with the business.
Director of a company
There are no restrictions on being the director of otherwise managing a company.
Other employment restrictions
Professional bodies and/or trade associations have certain conditions of membership for the duration of the agreement. There may be restrictions on holding some statutory positions during the period of the agreement.