Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 56

Consider a Debt Agreement before you resort to bankruptcy

There are circumstances where a person is able to propose a ‘Debt Agreement’, which is a relatively low cost alternative to bankruptcy.

In the financial year ended 30 June 2013, just under 10,000 people filed Debt Agreements. That figure was up nearly 8% on the number in the previous financial year.

Debt Agreements enable creditors to receive a return which they may not otherwise receive in the event of a bankruptcy. A debtor can offer assets to creditors, such as funds from family members or other assets. It means that creditors can receive a higher dividend while the debtor avoids entering into bankruptcy.

Prior to 1996, there were few alternatives available to a person who was unable to pay their debts when they fell due, which resulted in insolvency. Whilst voluntary bankruptcy was available, it was often considered an undesirable outcome. Many would have preferred to enter into an agreement with their creditors. Fortunately, in 1996 some alternatives became available, including a Debt Agreement.

Four alternatives for creditors

As it stands today, if an individual is unable to pay creditors, four alternatives may be considered:

  • reach a private arrangement with all creditors
  • enter into voluntary bankruptcy
  • enter into a Personal Insolvency Agreement
  • enter into a Debt Agreement – the focus of this article.

A Debt Agreement is processed through Insolvency Trustee Service Australia’s Debt Agreement Service (DAS). It receives Debt Agreement proposals, conducts a voting of creditors and maintains records.

There are some situations when a Debt Agreement is not available, such as:

  • where a person’s unsecured debts exceed $100,664.20
  • if a person’s after-tax income for the last financial year exceeds $75,498.15 (amount indexed twice annually)
  • if a person is not insolvent.

A debtor who proposes a Debt Agreement must provide the Official Receiver with a written proposal, which must be in an approved form and:

  • properly identify the debtors to be dealt with under the Agreement
  • specify how the identified property is to be dealt with
  • authorise a nominated person to deal with the identified property in accordance with the terms of the proposal.

A person cannot propose a Debt Agreement if at any time during the past ten years, they have been bankrupt or been a party to another Debt Agreement. Any person who proposes a Debt Agreement must accept that the proposing of the Debt Agreement constitutes an act of Bankruptcy pursuant to the Bankruptcy Act.

Once a Debt Agreement is accepted for processing, the Official Receiver must provide a copy of the proposal to each creditor.

A Debt Agreement must be accepted by the majority of creditors (by value) within the ‘applicable deadline’. Following acceptance, a creditor cannot apply for alternative enforcement of the Debt. Further, a Sheriff must not take any action or further action to execute or sell property under any process issued by a Court, or to enforce the payment of any debt which is the subject of a Debt Agreement.

Once a Debt Agreement is in place, Section 185(N) of the Bankruptcy Act releases the debtor from all provable debts upon the completion of the Agreement. Completion usually occurs once the debtor has fulfilled the promise made in the Debt Agreement.

A person proposing a Debt Agreement must accept that if there is any property which is otherwise secured to a creditor, then the secured creditor is still able to deal with that property, irrespective of whether or not a Debt Agreement is approved.

Here’s another catch

There are provisions within the Bankruptcy Act which enable a Court, in certain circumstances, to declare a Debt Agreement void.

The principal advantage of a Debt Agreement is that a debtor is not required to declare bankruptcy. However, as the Debt Agreement is an act of bankruptcy, if the Debt Agreement is not accepted by the creditors, then any individual creditor is able to rely on the proposal of a Debt Agreement, as an act of bankruptcy for the purpose of applying to a Court to make the debtor bankrupt.

 

Terry Morgan is a Partner of Baker Love Lawyers.

 

  •   4 April 2014
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Is growth of zombie companies real or fiction?

banner

Most viewed in recent weeks

Australian stocks will crush housing over the next decade, 2025 edition

Two years ago, I wrote an article suggesting that the odds favoured ASX shares easily outperforming residential property over the next decade. Here’s an update on where things stand today.

Australia's retirement system works brilliantly for some - but not all

The superannuation system has succeeded brilliantly at what it was designed to do: accumulate wealth during working lives. The next challenge is meeting members’ diverse needs in retirement. 

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

The 3 biggest residential property myths

I am a professional real estate investor who hears a lot of opinions rather than facts from so-called experts on the topic of property. Here are the largest myths when it comes to Australia’s biggest asset class.

Latest Updates

Investment strategies

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Investment strategies

21 reasons we’re nearing the end of a secular bull market

Nearly all the indicators an investor would look for suggest that this secular bull market is approaching its end. My models forecast that the US is set for 0% annual returns over the next decade.

Property

13 million spare bedrooms: Rethinking Australia’s housing shortfall

We don’t have a housing shortage; we have housing misallocation. This explores why so many bedrooms go unused, what’s been tried before, and five things to unlock housing capacity – no new building required.

Investment strategies

Market entry – dip your toe or jump in all at once?

Lump sum investing usually wins, but it can hurt if markets fall. Using 50 years of Australian data, we reveal when staging your entry protects you, and when it drags on returns. 

Investment strategies

The US$21 trillion question: is AI an opportunity or excess?

It has been years since the US stock market has been so focused on a single driving theme, and AI is unquestionably that theme. This explores what it means for US and global markets in 2026.

Economy

US energy strategy holds lessons for Australia

The US has elevated energy to a national security priority, tying cheap, reliable power to economic strength, AI leadership, and sovereignty. This analyses the new framework and its implications for Australia.

Strategy

Venezuela’s democratic roots are deeper than Trump knows

Most people know Maduro was a dictator and Venezuela has oil. Few grasp the depth of suffering or the country’s democratic history - essential context as the US ousts Maduro and charts Venezuela’s future. 

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.