If you find yourself in a position where you’re unable to pay your debts, you might be considering to declare yourself bankrupt. However, the Bankruptcy Act 1966 (Cth) provides formal options to manage your funds and to avoid the consequences associated with bankruptcy. One of these options are debt agreements. In this article, we’ll explain what a debt agreement is and how it may be suitable for you.
Key points
- A debt agreement is a legally binding agreement between you and your creditors
- To be eligible for a debt agreement, you must:
- Be unable to pay your debts when they are due
- Have not been bankrupt, have had a debt agreement or personal insolvency agreement in the last 10 years
- Have unsecured debts and assets less than the set amount
- Estimate your after-tax income for the next 12 months to be less than the set amount
- Not have property valued less than the set amount that would be divisible among creditors.
What is a debt agreement?
A debt agreement is a legally binding agreement between you and your creditors. They are also known as a Part IX debt agreements. The design of debt agreements are for people with lower levels of debt and income. Debt agreements allows you to make repayments based on a percentage of what you can afford over a period of time.
However, a debt agreement does not release you from all debts. Creditors may even seize and sell any of your assets as security for credit if you’re behind on payments. While the agreement is in force and the details of it are on the National Personal Insolvency Index (NPII), a creditor cannot present a creditor’s petition, further proceed with an existing petition, enforce a remedy or initiate legal proceedings against the debtor.
Entering into a debt agreement requires you to nominate a debt agreement administrator. This person will manage the agreement and will work with you and your creditors in achieving a reasonable outcome. As a result, information about your debts in relation to the agreement, including any changes to your circumstances, must be disclosed to your administrator.
Am I eligible for a debt agreement?
A person may propose a debt agreement if they have:
- Not been bankrupt, have had a debt agreement or personal insolvency agreement in the last 10 years
- After-tax income of less than $88,457.55 (as at January 2021) for the next 12 months
- Unsecured debts and assets less than $118,063.40 (as at January 2021)
- Property that would be divisible among creditors if the debtor were bankrupt valued at less than $236,126.80 (as at January 2021).
You can check your eligibility on the Australian Financial Security Authority website here or speak to a debt lawyer for further information.
How long is the debt agreement for?
A debt agreement ends when completed or terminated.
Completed debt agreements
A debt agreement is discharged once your obligations are complete. As a result, information about your agreement will be removed from the NPII either:
- 5 years from the date the agreement was made or
- From the date the obligations are discharged, whichever date is later.
Terminated debt agreements
A debt agreement may also be terminated due to an agreement with creditors, through a court order, by the bankruptcy of the debtor or by declaration where there has been a six-month arrears default. The NPII will remove the information about your agreement either:
- 5 years from the date the agreement was made or
- 2 years from the date of termination, whichever date is later.
Property that was subject to the agreement, including property that was not required to be distributed among the creditors, is returned to the debtor.
