Last updated 30 November 2022
Cooling-off period or moratorium
If a debtor is faced with the bailiff seizing goods or is thinking about becoming a voluntary bankrupt, they can lodge a signed statement with the Australian Financial Security Authority (AFSA) stating that they intend to become bankrupt. This is called ‘a declaration of intent to present a debtor’s petition’ (also referred to as temporary debt protection). This mechanism is useful to allow debtors some time to consider their options and seek financial advice.
Under the Bankruptcy Act 1966 (Cth) (Bankruptcy Act), the debtor can apply for a 21-day period in which to decide whether or not to become bankrupt. A debtor may seek temporary relief from recovery action taken by a creditor by lodging a temporary debt protection form. Once such an application is accepted by the Official Receiver, it prevents unsecured creditors or the bailiff from enforcing their debts for a 21-day period.
A debtor may only make a declaration of intention once every 12 months (ss 54A–54L Bankruptcy Act). It is an act of bankruptcy to give an Official Receiver a declaration of intention to present a debtor’s petition. An act of bankruptcy is an action by the debtor that allows any creditor to commence bankruptcy proceedings against the debtor.
Informal arrangement with creditors
Debtors may discuss their financial difficulties with the creditors and apply for hardship assistance. The creditors might agree, especially if the debtor has a regular income, to allow the debtor to pay off the creditors over time or forego interest. However, informal arrangements will only be binding on those creditors who agree to them. Others may continue to take action to recover their debt.
For an informal arrangement to be effective, it is essential that it be entered into as a deed signed by the debtor and each creditor, and stating that the creditor releases the debtor from liability in consideration of fulfilling the terms of the deed. However, it only takes one dissenting creditor to force the debtor into bankruptcy.
Part IX debt agreement
A debt agreement is a binding agreement between a debtor and their creditors, where the creditors generally agree to accept a lesser sum of money (pt 9 Bankruptcy Act).
A debt agreement may provide for:
- weekly or monthly payments from the debtor’s income or a lump sum
- deferral of payments for an agreed period
- the sale of an asset to pay creditors.
Payment by the debtor is based on their capacity to pay having regard to all their income and household expenses.
Effect of lodging a debt agreement proposal
When a debt agreement proposal is lodged with AFSA, the creditors can continue to receive payment but cannot enforce any remedy to collect any provable debt. Once the creditors accept the proposal, which becomes a debt agreement, they must cease action to recover payment. The debtor is released from their provable debts when they complete all the payments and obligations under the debt agreement, as if they had been discharged from bankruptcy.
The agreement will be publicly recorded on the National Personal Insolvency Index, for five years from the date of the debt agreement or the date the obligations under the agreement are satisfied, whichever is later.
A debt agreement has the advantage over an informal arrangement with creditors because it is registered and leaves no doubt regarding its enforceability.
A debtor can only make a debt agreement proposal if they are insolvent and have:
- not been bankrupt and used a debt agreement or a personal insolvency agreement under pt 10 of the Bankruptcy Act in the last 10 years
- unsecured debts of no more than the indexed amount
- after-tax income of no more than the indexed amount per year
- property not exempt under bankruptcy of no more than the indexed amount.
Debt agreement procedure
Stage 1: Information
A debtor must read the prescribed information sheet about the alternatives and consequences of bankruptcy and debt agreements.
Stage 2: Debt agreement proposal is lodged
The debtor is assisted by an administrator to complete and lodge with AFSA the required forms.
There is also a fee payable to the AFSA for lodgement of a debt agreement proposal. There are certain exemptions to this fee including for individuals who have received certain emergency payments after 1 July 2011.
Stage 3: Debt agreement proposal is sent to creditors
The AFSA sends the proposal and explanatory statement to creditors with a report asking them to:
- detail their debts
- vote on the debtor’s proposal
- disclose whether they are related to the debtor.
Stage 4: Creditors assess debt agreement proposal and then vote
Creditors assess the proposal and vote over a five-week period. For a proposal to be accepted, AFSA must receive ‘yes’ votes from a majority in value of the creditors who vote. During the voting period, creditors cannot take debt recovery action against the debtor or the debtor’s property. AFSA then checks and counts the votes.
If the proposal is not accepted by creditors, it remains on the public record and creditors are able to commence recovery action including accrued interest.
If the proposal is accepted by the creditors, the debt agreement is recorded on the public record and the debtor, creditors and administrator are informed.
Stage 5: Debt agreement is carried out
The debt agreement administrator is responsible for:
- collecting payments from the debtor
- keeping creditors and debtors informed
- paying dividends equally to creditors
- telling the AFSA when the agreement is completed.
The debtor is only released from their debts when all the payments and obligations are completed by the debtor.
The release does not:
- release anyone else from a debt that is owed jointly with the debtor
- release a guarantor from a guarantee that they gave for the debtor’s debt
- prevent a secured creditor from dealing with a security to obtain payment of a secured debt.
When all payments and obligations are completed, the agreement ends. However, a debt agreement may be terminated by:
- a six-month default in payments
- the creditors voting to accept a proposal to terminate from the debtor or a creditor
- an order of the court.
It is an act of bankruptcy to lodge a proposal for a debt agreement. However, while a debt agreement is in force, a creditor cannot:
- present a creditor’s petition against the debtor or proceed further with a creditor’s petition that was presented against the debtor before the proposal
- enforce a remedy against the debtor’s personal property
- start to take fresh steps in legal proceedings in respect of a debt owing at the time of lodging the proposal.
A debt agreement is terminated if the debtor becomes bankrupt.
The debt agreement administrator’s fees
An administrator may charge a fee for giving the prescribed information and helping the debtor prepare the debt agreement proposal. The administrator charges a fee for administering the agreement as set out in the proposal as a percentage of payments made by the debtor. A realisation charge applies to all payments by the debtor to an administrator and must be paid to the Australian Government.
Part X personal insolvency agreements
Another alternative to bankruptcy is for a debtor to make a personal insolvency agreement under Part X (pt 10 Bankruptcy Act). Unlike a Part IX debt agreement, there is no upper limit on the amount of the debt owed by the debtor.
The advantage of a formal agreement under Part X is that if a proposal is accepted at a meeting of the debtor’s creditors, all creditors will be bound by the resolution of the meeting (even those who voted against it or did not attend), unless creditors are able to show to the court that the resolution was passed as a result of the meeting of creditors having been misled by the debtor, or that a better result for all creditors would be achieved by the debtor being declared bankrupt.
An agreement requires a formal resolution accepting a debtor’s proposal to be passed at a meeting of creditors. Although it is not necessary for all of a debtor’s creditors to attend the meeting, all creditors must be given formal written notice of the meeting, together with a report and certain disclosures.
A meeting of creditors is called by either an authorised solicitor or a registered trustee in bankruptcy after the debtor has executed an authority in writing for one of them to do so. Registered trustees and solicitors generally require funds in advance for payment of their fees before they agree to call a meeting.
For a resolution accepting a proposal to be passed, at least a simple majority of creditors at the meeting representing 75% in value of their debt must vote for it. Voting may be by person or by proxy.
A decision made in this way binds all creditors, whether or not they have attended and/or voted at the meeting. If a resolution has been procured by a dishonest way, a creditor may apply to the court, usually within 21 days after the meeting, to overturn the resolution passed and to have an order made declaring the debtor bankrupt.
To succeed on such an application, a creditor would need to show that there is a likely greater financial benefit to all creditors if the debtor is made bankrupt. It is not sufficient for a creditor to feel unhappy with the result of the meeting because they have been out-voted.
The main reason why creditors might agree to a Part X agreement is that it will probably cost them less than if the debtor is forced into bankruptcy.