An individual experiencing financial difficulty who wishes to avoid the consequences of bankruptcy may consider proposing a compromise of their debts to creditors.
There are formal insolvency options to do this, one of which is a debt agreement pursuant to Part IX of the Bankruptcy Act 1966 (Debt Agreement).
A Debt Agreement is an alternative to bankruptcy, offering individuals with lower levels of debt, income, and assets a structured compromise with creditors. Under this process, an individual debtor proposes to pay an agreed amount (generally less than the total amount owed) over a period of time. The proposal is put to creditors, and if accepted by a majority in value of creditors who vote, it becomes binding on all provable unsecured creditors, including those who abstained from voting or voted against the proposal. Once accepted, enforcement action in respect to provable debts is stayed.
Debt Agreements are most commonly suited to individuals with relatively modest personal debt who have the capacity to contribute from income over time.
A Debt Agreement is administered by a registered debt agreement administrator or trustee who is responsible for preparing the proposal, collecting the contributions, and distributing dividends to creditors.
From a creditor’s perspective, Part IX agreements present a trade‑off. While returns are typically lower than the full amounts owed, they may exceed the likely dividend in a bankruptcy, particularly where the debtor has limited realisable assets.
To be eligible to propose a Debt Agreement, an individual must meet certain criteria, including the following:
Be insolvent, that is, unable to pay their debts as and when they fall due.
Not have been bankrupt, or a party to a debt agreement or personal insolvency agreement in the 10 years prior to making the proposal.
Have unsecured debts and assets less than the prescribed amounts (currently $148,129.80 for debts and $296,259.60 for assets, indexed periodically).
Anticipate after-tax income for the 12 months following the debt agreement to be less than the current threshold of $111,097.35
Although a Debt Agreement avoids the formal consequences of bankruptcy, it constitutes an act of bankruptcy and may be relied upon by a creditor if the agreement fails. A Debt Agreement is recorded on the National Personal Insolvency Index (NPII) and has credit reporting implications. The failure of any Debt Agreement may expose a debtor to creditor-initiated bankruptcy proceedings.
When used appropriately, a Debt Agreement can deliver certainty and value for both debtors and creditors. Where a debtor does not meet the eligibility criteria, or where debt levels or asset structures are more complex, a Personal Insolvency Agreement under Part X of the Bankruptcy Act may be more appropriate. Alternatively, they may wish to explore the options available to declare themselves bankrupt. Read more about applying for bankruptcy here.
If you have a client facing financial difficulty, Worrells can assist by reviewing their financial position and providing advice on the available options.