A debt agreement, or a Part IX agreement, can help simplify how you repay your outstanding debts. Find out just what it is and what it entails.
Anyone considering going into this kind of agreement should, first and foremost, know that this constitutes as kind of bankruptcy. A debt agreement falls under Part IX of the Bankruptcy Act 1966, and is a binding agreement between debtors and creditors where a creditor agrees to accept a given amount of money, depending on how much the debtor can pay.
This kind of debt agreement is one way to avoid bankruptcy, and can be an effective means to deal with unmanageable debt. Once you make all payments and complete all obligations as per the agreement, the debtors in question releases you from your debt. Is a Part Nine Debt Agreement right for you? Read our guide to find out what it's involved and if it's the best option for your situation.
Debt agreements: What you need to know
A debt agreement offers the same payment rate to all creditors. It requires that you meet certain eligibility criteria and offers debtors extra protection that is not present in informal or private arrangements. Such an agreement is not the same as a consolidation loan. It is not an agreement to loan or borrow money and it does not release debtors from all kinds of debts. It's important to remember that it is not ideal for everyone who has surmounting loans.
Preparing a debt agreement
When you get to the stage of preparing a proposal, it is important that you take your current circumstances into account and that you prepare for future contingencies. Consider how much you feel creditors might accept, take into account affordability, and account for alternatives should your circumstances change.
- Starting the process
To prepare a debt agreement you have to get in touch with a debt agreement administrator, and this should be one who the Inspector-General registers with the Australian Financial Security Authority (AFSA). Unless registered, an individual should not oversee more than five debt agreements at any given time.
- Preparing the agreement
Upon preparation of the debt agreement you forward it to AFSA using suitable forms. Your documents then go to the Official Receiver for approval. The Official Receiver’s office, created under the Bankruptcy Act, carries out various statutory functions, some of which include National Personal Insolvency Index (NPII) maintenance, issuing statutory notices to trustees to assist them in their functioning, and providing personal insolvency-related registry services.
- The result
After your proposal receives approval from the Official Reviewer it goes to your creditors for voting. The proposal can change into a debt agreement only after all creditors’ votes are in. The NPII then records an accepted result. If a majority of the creditors accept the proposal it becomes a debt agreement. On the other hand, if a majority of the lenders vote against it, or if the Official Reviewer cancels it, creditors can continue or commence debt recovery actions.
Before you get to making any kind of a proposal, take a good look at where you stand in terms of finances and also account for what you expect from the future. While taking into account the affordability factors of the proposal is important, you should also have an idea of what your creditors may or may not accept. Establishing what you might do in the event your circumstances change should take place at the onset of the proposal.
Remember that you have the ability to negotiate when it comes to setting terms of the offer. For instance, you could offer to pay your unsecured creditors a few cents less per dollar, which essentially means you offer to pay less than what you owe. Your creditors have the right to accept or reject your offer.
Can you propose a debt agreement?
As a debtor, you can put forward a debt agreement proposal if you meet the following criteria:
- You are insolvent. This means you don’t have the ability to pay your debts when they’re due
- You have not faced bankruptcy in the last 10 years. You should also not have given an authority under part 10 of the Bankruptcy Act or had a debt agreement in the same period. The Official Receiver verifies this at some stage
- Your equity in assets, unsecured debts, and after-tax income for the next year fall within the indexed amounts. Unsecured debts, for instance, cannot exceed $106,561.00, and after-tax income for the following year should not exceed $79,920.75.
- In addition to paying the debt agreement proposal lodgement fee, you also agree to pay the debt agreement administration fee.
Before drafting a proposal and formulating a debt agreement, it is important that you identify the consequences of the process. Read the section below on 'things you should watch out for'.
What happens when creditors accept a debt agreement proposal?
Acceptance of the proposal does not mean that the debtor is bankrupt. The debt agreement commences soon after and binds all unsecured creditors together, with them receiving payments in accordance to the proportion of their debts. Secured creditors have the right to seize and sell any asset offered as security by a debtor when they default. Unsecured creditors, on the other hand, have no such provision because their debts don’t involve security. Such an agreement does not absolve other individuals who have jointly owned debts with the debtor, and creditors are free to pursue them to recover their debts.
Making changes and terminating a debt agreement
If there is a change in your circumstances you can lodge a proposal to vary or terminate your debt agreement. You can lodge a variation proposal if you wish to continue with the agreement, but you cannot make previously agreed upon payments. Creditors get to vote on this proposal in the same way as the original voting took place, and if they don’t accept your new proposal the terms of the original debt agreement stay in place. Creditors can also put forth variations on the new proposal.
You can submit a termination proposal in the event of changed circumstances, an example of which includes you wanting to file for bankruptcy. Creditors then vote on this proposal, and if they don’t accept it, the terms on the original debt agreement stay in place. A creditor can also file a termination proposal.
Automatic termination takes place if you don’t make any payments for six months after one is due, or if you don’t make all your payments within six months of the agreement’s completion date.
End of a debt agreement
Once you make all payments and fulfil all obligations, the debt agreement comes to a close. At this point, all the creditors who are mentioned in the agreement release you from all associated debts. Your administrator follows this by notifying the Official Receiver of the same, and updating the NPII with details of the debt agreement end is next.
The end of a debt agreement can also come if a court orders declaring it void or terminating it, or if creditors wish to terminate the same. Terminating a debt agreement ahead of time can lead to creditors commencing recovery actions for unpaid debts, and in such instances they could include interest as well. Creditors can consider making you bankrupt, and the debt agreement termination stays on the NPII database forever.
Your debt agreement is part of public records
The National Personal Insolvency Index (NPII) serves as an electronic database that registers all personal insolvency proceedings, and this holds a permanent record of your debt agreement proposal along with all other steps that the process follows. Just about any individual can access the NPII database and can find basic information such as your name, address, and date of birth. People who have concerns about their safety due to their personal details making it into the public domain should visit through the National Personal Insolvency Index website.
While entering a debt agreement might seem like a good idea, make sure you discuss its pros and cons with a financial counsellor, and do this only after taking your individual circumstances into account. Here are some things you need to watch out for:
- Certain debt agreement administrators charge rather high fees for services you might not really need, or for ones that could affect you adversely. For instance, people who receive income only from Centrelink should know that it remains protected from creditors, and in case they have no assets, the high fees associated with a typical debt agreement can leave them worse off than before
- If your creditors don’t accept your proposal, any one creditor can use your proposal in court to make you bankrupt
- Details can appear on records of credit reporting agencies, and this can affect your ability to obtain credit in the future
- As mentioned, your name and other relevant details also make it to the NPII database
- Keep in mind that creditors cannot enforce remedies against debtors and their properties or take debt recovery action during the voting period.
You should really only consider taking this route only after you have considered filing for bankruptcy voluntarily, and you might also want to consider making some kind of an informal arrangement with your creditors. Once you’ve decided to go the debt agreement way, seeking advice from an independent financial counsellor is your best bet.