Personal Insolvency

A Debt Agreement is a legal alternative to Bankruptcy and is a mechanism that allows a debtor to propose a formal arrangement with his/her creditors to discharge the outstanding debts either over time or for a lesser amount.

A Debt Agreement is more flexible and has less restrictions and obligations on the debtor than if a formal bankruptcy was required. Further, if agreed, the agreement binds all creditors to the proposal and will protect the debtor from bankruptcy provided he/she complies with the terms of the agreement.

A Debt Agreement will usually operate over a three to five year period.

Not all creditors need to vote in favour of the proposal but at least 50% in volue of those creditors who vote by way of a postal vote, need to vote in favour of the Debt Agreement if it is to be successful.

The eligibility criteria for entering into a Debt Agreement are as follows;

Unsecured Debts less than $94,530.80; or

Assets that would be available under a bankruptcy are less than $94,530.80; or

Income in the next 12 months is not expected to exceed $70,898.10 (after tax) or $95,688.00 (before tax).

If a debtors position exceeds the figures shown above, they may be eligible Personal Insolvency Agreement.

A Debt Agreement offers a number of advantages;

• Avoidance of formal bankruptcy
• If agreed, all creditors are bound by the Debt Agreement so long as the debtor complies with the terms of the Agreement.
• Once the terms of the Debt Agreement are fulfilled, there will be no on going obligation to the creditors.
• Depending on the terms of the Debt Agreement, one monthly payment will be made and applied proportionately to creditors debts.
• Reduction in stress of having to deal with irate creditors
• Employment will probably not be affected by a Debt Agreement. In fact, your employer will not know of the Agreement unless you choose to tell them.

If a Debt Agreement fails, it is considered an act of bankruptcy and accordingly creditors will be able to rely upon that if they petition for bankruptcy.

If the Debt Agreement is rejected, a debtor still has the option of negotiating an informal arrangment with the creditors.

Credit reporting agencies will record a Debt Agreement for 7 years however, as a Debt Agreement is recorded on the National Personal Insolvency index - a permanent public record - it is possible the decision to enter into such an agreement may affect you for an extended period of time.

If your creditors agree to the DebtAgreement, you usually will not have to sell your house - but you may need to release some equity from the property to encourage the creditors to accept the proposal.

If you choose to keep your house, the regular mortgage payments must be maintained however, your house mortgage - being a secured debt - stands outside of the Debt Agreement.

Remember - if you were made bankrupt, the Trustee in bankruptcy would need to take steps to sell the equity in your property - to a spouse or a third party.