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Alternatives to bankruptcy

Notice of Intention to Declare a Debtor's Petition

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 a period of 21 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.

Informal Agreements

It is possible to negotiate arrangements with creditors to repay certain debts over a period of time. Dealing with debt in this way requires some skill, and it is best to consult a financial counsellor, or lawyer or accountant to put a realistic and manageable proposal to persuade creditors to accept something like a reduced lump sum or a long term instalment arrangement. Creditors may ask to be informed of your complete financial position, including other creditors, to ensure that any proposal is fair. Clearly entering into such an arrangement avoids the stigma and consequences of bankruptcy, although it is likely that creditors may make an adverse credit report which will remain on your credit file for a period of 5 years.

The Bankruptcy Act offers other alternatives that are legally binding, but do not have some of the same effects as bankruptcy.

Debt agreements

A Part IX Debt Agreement is a legally binding agreement between a debtor and their creditors. Entering into a Debt Agreement is an act of bankruptcy, but is not the same as being made bankrupt. With the assistance of a Debt Agreement administrator, a proposal needs to be submitted to Australian Financial Security Authority (AFSA) for approval before being put to a person's creditors. A debtor must be insolvent (unable to pay debts as and when they fall due) in order to put forward a proposal to enter into a Debt Agreement.

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

AFSA ensures proposals comply with the wide range of requirements such as eligibility, ensuring creditors are well informed and conducting the voting process with creditors.

AFSA also maintains the National Personal Insolvency Index (NPII) to ensure it reflects the status of the agreement. In order to be eligible to put up a Debt Agreement:

  1. A person's income must be below a certain threshold;
  2. The debts must be below a certain threshold; and
  3. The person must not have been made bankrupt in the past 10 years.

The threshold amounts are set out on the AFSA website.

Once approved by AFSA, the Debt Agreement proposal is sent to creditors to vote on. A proposal is accepted if a majority of creditors (by reference to the value of the debts) vote in favour of the debtor's proposal.

Some examples of the kinds of proposals offered are:

  • Periodic payments of amounts out of the debtor's income to creditors, equal to or less than the full amount of all the debtor's provable debts
  • Lump sum payment of less than the full amount of all the debtor's provable debts
  • A moratorium on payments of debts to allow the realisation of property to raise money to pay creditors
  • Payment from the proceeds of sale of property owned by the debtor

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 National Personal Insolvency Index (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 AFSA accepts the proposal to send to creditors for voting.

Debtors who wish to lodge a Debt Agreement must engage an administrator who will charge a fee. In addition, there is a cost to lodge the proposed agreement with Australian Financial Security Authority (formerly ITSA) for approval. A reasonable offer should be made as AFSA do not have to accept the proposal for processing unless it is in the best interests of creditors. AFSA 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 AFSA 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.

The effect of a debt agreement is:

  • During the debt agreement creditors cannot take action to recover their provable debts
  • If the debtor does not make payments the debt agreement may be terminated and the creditors can resume collection of their debts
  • The debtor's details will appear on the National Personal Insolvency Index (NPII) from the date that the debt agreement proposal was accepted by AFSA to send to creditors for their vote
  • The debtor's details are recorded by credit reporting agencies
  • The debtor's credit rating will be affected and they will find it difficult to obtain further credit
  • The debtor may have to pay bonds for insurance, electricity and telephone access
  • Secured creditors' rights are not affected and they may repossess if the debtor is in default

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

  • Present a creditor's petition against the debtor; OR
  • Proceed further with a creditor's petition presented before details of the debt agreement were entered on the NPII; OR
  • Enforce any remedy against the debtor's person or property or take a fresh step in legal proceedings in respect of a provable debt; OR
  • A sheriff must not take action to execute or sell property under a court process to enforce payment of a provable debt; OR
  • Enforce a garnishee or other law to retain or deduct money from wages.

Once an agreement has been accepted it gives the debtor the same protection as bankruptcy in relation to action by creditors. Action can still be taken in relation to the payment of child support.

Jointly owed debts are not extinguished by a debt agreement - a creditor can pursue the other joint debtor for the debt.

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

Personal Insolvency Agreements

A Personal Insolvency Agreement is similar to a Debt Agreement, except that there are no limits on income and assets owned by the debtor, and no limits on the total debt owed. The PIA is managed by a controlling trustee, and involves investigation of a debtor's financial position by the trustee, who then calls a creditors meeting to allow the creditors to vote on any proposal. If the proposal is rejected, any creditor is free to make the debtor bankrupt (through a creditors petition) or let the debtor lodge their own petition.

This alternative is more suitable for people with unmanageable debts, but a high income and a number of assets.

The effect of a PIA is similar to a debt agreement:

  • It is an act of bankruptcy which allows a person to apply to a Court for a sequestration order if the PIA fails;
  • It is recorded on a person's credit report and on the NPII
  • Requires co-operation with the controlling trustee

Further detailed information about PIAs can be found on the AFSA website.

Alternatives to bankruptcy  :  Last Revised: Thu May 8th 2014
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.