Debt Agreements FAQ’s

Debt Agreements when done properly can change your life, from stressful to not so stressful. All this can be done by submitting a few simple forms, and organising or arranging a debt agreement with your lenders or creditors. If you are sitting there stressing out and wanting a solution to make it all go away? While we may not be able to make it all go away, we can certainly get you on the road to recovery and work with you to achieve your best possible result in the fastest time possible and at the most affordable prices we can offer. What are you waiting for, get in touch today to learn more about Debt Agreements.

What is a debt agreement?

It is a legally binding financial arrangement with all of your unsecured creditors. Once accepted, you will be released from your unsecured debts. Your Administrator will manage your debt repayment schedule with the unsecured creditors.

Benefits of an Accepted Debt Agreement are:

  1. All interest will cease 2. Action by your creditors to collect the debt will cease 3. Legal actions, wage garnishees and any other form of debt collection will cease 4. You can schedule debt repayment weekly, fortnightly or monthly based on your affordability.

What is Part X of the Bankruptcy Act?

Part X (Part 10) is a part of the Bankruptcy Act that allows a debtor to enter into an arrangement with their creditors to satisfy their debts without being made bankrupt. This arrangement is called a Personal Insolvency Agreement (PIA).

Why choose Part X?

A debtor will usually be looking to:

(i) get relief from their debts; (ii) ensure a fair distribution of their assets to creditors; (iii) provide a higher dividend than would be payable in bankruptcy; (iv) maintain their source of income; and (v) avoid the restrictions of bankruptcy.

How is the process started?

A debtor must send the following documents to the proposed controlling trustee:

  1. an authority under Section 188 requiring the proposed controlling trustee to call a meeting of creditors and giving control over their assets to the controlling trustee; 2. a Statement of Affairs detailing all assets, liabilities and other personal information: 3. a draft PIA detailing the terms of the proposal to be made.

The controlling trustee will sign a consent to act which starts the process and will forward the material to ITSA (Insolvency & Trustee Service Australia) for registration on the official record. ITSA will then give the estate an ‘estate number’.

What is a PIA?

It is the formal agreement entered into between a debtor and their creditors that sets out how the debtor will satisfy their debts. It is in the form of a deed executed by the debtor and their trustee.

What can be proposed?

The proposal can contain almost any lawful term. Usually it will provide for the payment of money over time and the sale of some assets. It will also usually contain a moratorium from creditor’s claims and payment of a sum less than the full amount in full satisfaction of claims.

How is the proposal accepted?

The controlling trustee conducts the necessary investigations and holds a meeting of creditors within 25 business days after the appointment. The creditors at this meeting will decide whether to accept the proposal or not. A majority in number of the creditors and more than 75% in value of creditors attending and voting at the meeting must vote in favor of the proposal for it to be accepted. This is called a special resolution.

If the proposal is not accepted, the creditors may resolve that the debtor make themselves bankrupt, but cannot actually bankrupt the debtor. Alternatively, creditors may resolve that the debtor be released from the control of the controlling trustee.

Is signing a section 188 authority an act of bankruptcy?

Yes. In the course of the Part X process a debtor will commit a number of acts of bankruptcy, including signing the section 188 authority, the holding of a meeting of their creditors and obtaining a special resolution by creditors. Any creditor may use these acts to apply to the court to have the debtor made bankrupt if the proposal is not accepted.

How are creditors affected?

Secured creditor’s rights under their securities remain intact. They may exercise their rights regardless of the outcome of the meeting and acceptance of the proposal.

Unsecured creditors with debts that would be provable in a bankruptcy exchange their right to enforce their claims for a right to share in the proceeds of the PIA. All unsecured creditors are bound by a PIA, whether they attended the meeting or voted in favor of the proposal or not.

How does it affect the debtor’s property?

This depends on the terms of the PIA. Only property that is included in the terms of the PIA is affected. Property that does not form part of the PIA is not available to creditors.

How does it affect income?

The debtor is only required to contribute some of their income if it is required under the PIA. The PIA may include terms requiring the debtor to make the same type of contribution out of income that they would if they were bankrupt.

Who administers a PIA?

The proposal for a PIA must include the appointment of a registered trustee or the official receiver to administer the agreement.

What does the trustee do?

The powers and obligations of the trustee will be set out in the agreement and the Bankruptcy Act. They essentially will be to enforce the terms of the agreement, sell any assets, collect any monies and make a distribution to creditors.

What happens if the debtor does not comply with the PIA?

If the terms of a PIA are not satisfied, the agreement will be considered to be in default. Usually a default notice will be issued within a few days after the default. If the default is not rectified, the agreement will be breached and may be terminated by:

(i) the provisions of the agreement, automatically terminating the agreement; (ii) the trustee terminating the agreement with the consent of creditors; (iii) the passing of a special resolution at a meeting of creditors, or (iv) an application to the Court to terminate the PIA and possibly bankrupt the debtor.

Can the trustee pay dividends?

Yes. The trustee will make distributions in accordance with the terms of the agreement.

When are dividends paid?

This will depend on the duration of the PIA and when funds become available. If the duration of the PIA is expected to be fairly short, the trustee will usually pay a dividend when all of the assets have been realized and all funds collected. If the PIA will extend over a long period, the trustee may make interim distributions as money becomes available.

Does a PIA effect a credit rating?

Yes, the fact that the debtor has signed a section 188 Authority will be noted by credit agencies. But this may be more favorable than outstanding writs, defaults and a bankruptcy on the debtor’s file.

Can a debtor continue to act as a director of a company?

No. A debtor cannot act as a director whilst under a PIA. This restriction is lifted when the agreement has ended.

When does a PIA end?

The agreement ends when the debtor fully satisfies the requirements of the deed.

Government Realisation Charge

The administration attracts a government charge. This charge is payable at the rate of 3.5% of gross monies received into the estate, less payments to secured creditors and trade on costs. It is payable in priority to any dividend to creditors.

What is a Debt Agreement?

Part IX (Part 9) is a part of the Bankruptcy Act that allows a debtor to enter into to an arrangement with their creditors to satisfy their debts without being made bankrupt. This arrangement is called a Debt Agreement.

Why choose a Debt Agreement?

A debtor will usually be looking to:

(i) get relief from their debts; (ii) ensure a controlled distribution of assets or funds to their creditors; (iii) provide creditors with a higher dividend than would be payable in bankruptcy; (iv) maintain their source of income; and (v) avoid the restrictions of bankruptcy.

Who can propose a Debt Agreement?

Not everyone can propose a Debt Agreement. A debtor cannot have been a bankrupt, a party to another debt agreement, or a debtor under Part X of the Bankruptcy Act in the previous 10 years.

For a debtor to be eligible to put forward a Debt Agreement, their:

  1. after tax income must not exceed $59,186*; 2. unsecured creditors must not exceed $78,915*; and 3. divisible property (that is, property which would be available if the debtor were to be made bankrupt) must not exceed $78,915*.

(*Note that these figures are indexed and increase every 6 months and are current at 20 September 2007. The current amounts are set out on this web page.)

How is the process started?

A debtor fills out a Debt Agreement proposal and the Part IX Statement of Affairs. The proposal must:

  1. identify the property or the funds to be available; 2. specify how the property or funds are to be dealt with; 3. specify a person to administer the debt agreement; and 4. specify how that person will be paid.

The Debt Agreement proposal and Statement of Affairs is lodged with ITSA (Insolvency & Trustee Service Australia). The proposal may contain an authority for ITSA to delegate the duties of putting forward the proposal to creditors and, if accepted by creditors, monitoring the debtor’s compliance with the agreement.

What can be proposed?

The proposal may allow for payments from the debtor’s income, or the payment of a lump sum, whether from funds of the debtor or from a third party. It may include the sale of real property, plant & equipment, stock or other assets. It may include:

(a) a moratorium from creditor’s actions; (b) payment of a sum less than the full amount in full satisfaction of claims; (c) the transfer of specified property to specified creditors; (d) periodic payments over time of a specified amount; or (e) any combination of the above.

How is the proposal accepted?

Once the proposal and Statement of Affairs have been lodged with ITSA, the nominated person will prepare a report to creditors. The report will set out the terms of the proposal and will compare the return that creditors could expect under the Debt Agreement to the return they would expect if the debtor were made bankrupt.

For the proposal to be accepted, it must be accepted by a majority in number and 75% in value of those creditors who participate in the vote. A meeting of creditors may be called, but it is more usual that voting is done by mail. Creditors have 25 working days after ITSA accepts the proposal to lodge their vote. If the proposal is accepted, it binds all creditors with debts that existed at the date of the acceptance. This includes any creditors who did not take part in the voting process.

Is lodging a proposal with ITSA an act of bankruptcy?

Yes. If the proposal is not accepted or fulfilled, a creditor may file a creditor’s petition and bankrupt the debtor.

How are creditors affected?

Secured creditor’s rights under their securities remain intact.

All creditors with debts that would be provable in a bankruptcy are bound irrespective of whether they voted or not. They can take no further action against the debtor or their property, they cannot start fresh proceedings, and cannot present or further a creditors petition. Upon acceptance of the Debt Agreement, the debtor is released from any debts that would be released in a bankruptcy.

What is the effect on the debtor’s property?

That depends on the terms of the agreement. If the agreement calls for the sale of assets or transfer of specific assets to certain creditors, then the person administering the agreement has the responsibility of realizing or transferring those assets. Otherwise there is no effect on property.

What is the effect on the debtor’s income?

The agreement will not effect the debtor’s income, unless it provides for the debtor to pay a percentage of his income to the trustee.

Who administers a Debt Agreement?

The proposal must identify at least one trustee to administer the estate.

What are the trustee’s powers?

The powers and obligations of the trustee will be set out in the Debt Agreement. They essentially will be to enforce the terms of the agreement, collect any monies to be paid under the agreement and make a distribution to creditors.

What if the debtor fails to satisfy the terms of the debt agreement?

The trustee must inform creditors of any default and provide them with the opportunity of terminating the agreement. This will reinstate the position of all of the creditors. Alternatively, a creditor may apply to the Court for an order terminating the Debt Agreement if:

(a) the creditor can show that the debtor has not carried out the terms of the agreement and that the termination is in the best interests of creditors; (b) the continuation of the agreement would cause injustice or undue delay to the creditor; or (c) there are other reasons and it is in the creditor’s interests.

Can the trustee make distributions?

Yes. The person administering the agreement will make distributions either under the terms of the agreement, or if they are silent, when practical.

What are the costs?

The fees of the person administering the agreement are set out in the proposal accepted by creditors and are usually paid from the funds paid by the debtor under the agreement.

When does a Debt Agreement end?

A debtor’s obligations end when he or she fully satisfies the requirements of the agreement or it is terminated due to a breach of any of its terms.

Does a Debt Agreement affect a credit rating?

Yes, the fact that the debtor has entered into a debt agreement will be noted by credit agencies. But this may be more favorable than outstanding writs, defaults and a bankruptcy on the debtor’s file.

Government Realization Charge

The administration attracts a government charge. This charge is payable at the rate of 3.5% of monies received into the estate, less payments to secured creditors, trade on costs and on surplus money received. It is payable in priority to any dividend to creditors.