Debt agreements are regulated under Part IX of the Bankruptcy Act 1966 (Cth). This part describes the debt agreement process, and includes changes that commenced on 27 June 2019.

A debt agreement is a legally binding agreement between a debtor and their creditors to reach a compromise about how debts can be paid, without the debtor going bankrupt. Creditors must agree to accept a lower amount in instalments over a period of time to ensure that they receive some of the amount owed, rather than nothing which is the case when a debtor is bankrupt.

However, entry into a debt agreement is considered an act of bankruptcy which can later be the basis for a creditor to make the debtor bankrupt.

From 27 June 2019, a debt agreement will have a maximum duration of three years where the debtor does not have an interest in their home. It may be five years if the debtor has an interest in their home.

A debt agreement is not a consolidation loan and will not necessarily cover all debts. More information about what debts are covered can be found on the Australian Financial Security Authority (AFSA) website.

Debt agreement administrators

Debt agreements must be administered by a debt agreement administrator (DAA). The DAA receives a fee for the work it does over the course of the debt agreement.

The role of the DAA is to gather information about the debtor's financial situation and prepare a proposal to put to creditors. The proposal must be affordable for the debtor. The DAA must:

Once the proposal is complete under the criteria, the DAA has 14 days to submit it to AFSA.

A DAA must have the appropriate knowledge, skills and attributes to undertake their role. They must hold appropriate insurance, and be a member of the Australian Financial Complaints Authority (AFCA). If a person has a complaint about a DAA, they can lodge their dispute with AFCA for consideration. For more information about the role of AFCA, see 'Complaints against banking, financial services, insurance companies and super funds'.

A DAA and related entities cannot vote on a proposed debt agreement for their own fees. The proposed agreement must disclose the expenses recoverable under the agreement for consideration by creditors.

If the debt agreement commenced before 27 June 2109, the DAA does not need to be registered.

Entry into a debt agreement

To be eligible to give AFSA a debt agreement proposal, the debtor must meet the criteria set out in section 185C.

The debtor must be insolvent (unable to pay debts as and when they fall due).

The debtor’s unsecured debts, property and income must all be below a certain threshold. The limit for unsecured debts is $128,528.40, the limit for the value of the debtor's property is $257,056.80 (twice the limit for unsecured debts) and the limit for income is $96,396.30 (three quarters of the limit for unsecured debts) (figures correct as at October 2022). These amounts are indexed and published every 6 months on the AFSA website.

AFSA may require information regarding the debtor’s financial circumstances or assets to ensure that the monetary limits are complied with. AFSA has no discretion to vary the monetary limits, even by a small amount.

A person who has been in a debt agreement or been bankrupt in the past 10 years is also prohibited from proposing a debt agreement.

Other requirements

A debt agreement administrator must make reasonable enquiries about and verify the debtor’s financial circumstances. Prior to submitting the proposal, the administrator is required to certify that the debtor can discharge the obligations under the agreement.

Payments cannot exceed the debtor’s income by a certain percentage, which is determined by the Minister. The formula used to calculate the prescribed percentage includes a low income debtor amount to protect vulnerable debtors.

Formula

The total income to payment ratio is set to ensure that a person can realistically complete the debt agreement within 3 years (or 5 years in limited circumstances).

AFSA may also refuse to accept a debt agreement on the basis that it would cause undue hardship to the debtor, in accordance with section 185E. This is an added protection for debtors, and is in addition to an administrator’s certification of the debtor’s financial circumstances.

Other circumstances that may result in rejection of the proposal by AFSA include:

Creditors must approve the proposal

Once the fee is paid and the proposal is approved by AFSA, it is sent to creditors for a vote. 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.

All creditors with provable debts at the time the debtor's details are entered into the National Personal Insolvency Index (NPII) are bound by the agreement, even those who voted against the proposal. It is therefore very important to ensure that all debts are included.

For debt agreements proposed after 27 June 2019, a debt agreement administrator or related entity cannot vote on the proposal.

Effect of a debt agreement

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.

After all payments are made, the debtor is released from debts owed to the creditors covered by the agreement. Debts incurred after the commencement of the debt agreement can still be recovered, and there are also certain types of debts that cannot form part of a debt agreement.

The debt agreement information about a debtor remains on the NPII for up to 5 years from the date the agreement is completed. If an agreement is proposed but is withdrawn, rejected or otherwise does not go ahead, the information remains on the NPII for one year. A terminated debt agreement is also recorded for a period of up to two years after the agreement terminates.

The information is also recorded on a person’s credit report and remains for similar time periods as the NPII.

Termination of a debt agreement

If a debtor misses payments on a debt agreement for six months, the agreement terminates automatically. Another reason to terminate the agreement is if the debtor wants to submit a debtor’s petition (go bankrupt).

Debtors can propose to vary an agreement but this requires a vote by the affected creditors and the payments must not exceed the income to payment ratio. In addition, the total length of the agreement must not exceed three years.

If a debt agreement is terminated, affected creditors are free to continue to recover the balance of any amounts owing, unless the debtor is made bankrupt.