Debtor's petitions

Subject to certain exceptions a debtor may present to the Official Receiver a declaration to present a debtor's petition [Bankruptcy Act 1966 s 54A]. Once accepted this has the effect of freezing action against the debtor by a creditor for seven days. This allows a debtor time to seek advice or make arrangements with creditors and prevent the need to become bankrupt. These arrangements have no effect on the rights of secured creditors to deal with their security. A declaration is not available to business partners and can only be filed once in any twelve month period.

Compromise agreements

Often creditors are persuaded that it is better to reach a compromise without a debtor being declared bankrupt. There are four procedures in the Act for such a compromise agreement, each involving the agreement of a majority of creditors and three-fourths in value of creditors attending and voting at a creditors' meeting and a trustee taking control of the assets of the debtor or carrying on the debtor's business in the interest of the creditors. Because the agreement binds all creditors the immediate pressure of the courts and debt collectors is removed. Anyone wishing to know more about these procedures should consult a lawyer an accountant or a financial counsellor.

Formerly only business debtors who have property and income became involved in these formal procedures, which can be expensive. In addition, when a debtor authorises a trustee, accountant or lawyer to organise a compromise arrangement, they effectively give control of their affairs to the creditors, who may still force them into bankruptcy.

Debt agreements

A Part IX 'debt agreement' is a legally binding agreement between a debtor and their creditors. Debt agreements are a flexible alternative to bankruptcy. The debt agreement system is only to be used where the debtor is insolvent (i.e. unable to pay their debts as and when they fall due). It would undermine confidence of the credit system and the debt agreement system if the debtor were solvent.

An insolvent debtor's best offer to their creditors is determined based on an analysis of their expected income from all sources, household expenses and circumstances. The debtor must prepare an achievable and sustainable offer to their creditors.

ITSA ensures proposals comply with the wide range of requirements such as eligibility, ensuring creditors are well informed and conducting the voting process with creditors. ITSA maintains the National Personal Insolvency Index (NPII) to ensure it reflects the status of the agreement.

The debt agreement proposal is sent to creditors to vote on. A proposal is accepted if a majority of creditors in value vote in favour of the debtor's proposal.

Some examples of the kinds of proposals offered are:

All creditors with provable debts at the time the debtor's details are entered into the NPII are bound by the agreement, even those who voted against the proposal. Creditor's debts are fixed at the date the proposal was entered on the NPII. Interest does not accrue and creditors cannot take or continue action against the debtor to collect their debts.

The debtor is liable for further debt incurred after ITSA accepts the proposal to send to creditors for voting.

Unlike other alternatives to bankruptcy, there are no fees for processing a debt agreement and this method may be particularly attractive for people on low incomes. There are fees where you make arrangements with an Administrator to look after your debt agreement. An initial approach should be made to the Insolvency and Trustee Service Australia (ITSA). A reasonable offer should be made as ITSA do not have to accept the proposal for processing unless it is in the best interests of creditors. ITSA looks at how much creditors will receive from the proposal and how much they would get if the debtor became bankrupt. Relevant considerations will include the debtor's income and assets, see EFFECTS OF BANKRUPTCY.

If ITSA accepts the proposal for processing, creditors are provided with a copy of the proposal and given 25 working days to accept or reject the proposal. The proposal becomes a debt agreement if accepted by a majority in number and three quarters in dollar value of creditors responding by post.

A debt agreement can be proposed by a debtor who has:

The indexed amounts are current as at 22 April 2009 and will alter in line with increases in the basic social security pension rate.

The effect of a debt agreement is:

Whilst a debt agreement is in place and details are recorded on the NPII a creditor cannot:

The effects of a debt agreement on debtors' release from their debts are changed by the amendments from 1 July 2007. The debtor will be released from their provable debts when they have completed all payments and obligations under the agreement. Debtors, who proposed a debt agreement prior to 1 July 2007, were released from their provable debts when the details of their debt agreement were recorded on the NPII.

The release does not release anyone who was jointly liable with the debtor, release a guarantor of the debt or affect the rights of a secured creditor to deal with the security. The release also ceases if the debt agreement is declared void by the court or terminated.

Once an agreement has been accepted it gives the debtor the same protection as bankruptcy in relation to action by creditors. However, it does not stop action being taken to enforce a child support order or agreement.

This alternative will be particularly attractive for people with relatively few debts, low income and few assets.