THE EFFECTS ON THE HOME OF A BANKRUPT

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:

  • inform the debtor about the fees payable, and
  • provide the debtor with information about the consequences of the agreement.

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 and unsecured property is currently approximately $115,800, and the limit for income is approximately $87,000. These amounts are indexed and published every 6 months by AFSA on its 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.

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