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 creditor 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

Amendments to the Bankruptcy Act 1966 that came in on 16 December 1996 create a new procedure which allows people to enter into a 'debt agreement' with their creditors as an alternative to filing for bankruptcy. 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 consideration 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. People cannot enter into debt agreements if:

The indexed amounts are current as at 29 September 2005 and will alter in line with increases in the basic social security pension rate.

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.

Either a debtor or a creditor can apply to vary a debt agreement. An agreement ends once the debtor completes all the agreement's obligations. If the debtor fails to carry out a term of an agreement a creditor can apply to the court to end the agreement and can proceed to have the debtor declared bankrupt. A creditor can also apply to end an agreement if there is some other injustice or it is in the creditor's interests.

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