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

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Division 296: the initial moves to make before the windows close

What if the best superannuation strategy isn't about earning more, but acting before your options disappear? Several overlooked planning windows are narrowing, with consequences that can last for decades.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

SMSF strategies

Division 296: the initial moves to make before the windows close

What if the best superannuation strategy isn't about earning more, but acting before your options disappear? Several overlooked planning windows are narrowing, with consequences that can last for decades.

Planning

Avoid unnecessary CGT with this estate planning clause

A simple estate plan can create a ticking time bomb. One overlooked clause can pit spouses against children, delay inheritances, and potentially leave a family facing an unexpected tax bill worth hundreds of thousands of dollars.

Exchange traded products

The hidden trade-off in fixed income ETFs

Some investment trade-offs are immediately visible. Others are embedded in the way a portfolio is constructed. Understanding the difference may explain why similar-looking investments can produce surprisingly different results.

Retirement

The mortgage free retirement is fading

What happens when a generation reaches retirement carrying obligations previous generations largely avoided? New research suggests we may need to rethink both how much we need in retirement and what life could look like.

Retirement

The key question to inspire a confident and purposeful retirement

Most people spend decades planning for retirement. Far fewer plan for what happens when they get there. The difference may explain why so many find the transition harder and less fulfilling than expected, despite careful preparation.

Latest from Morningstar

Making the case for a 'good enough' portfolio

Some investors spend years chasing the perfect strategy. Others choose a path that’s simply good enough and move on. Which approach is more likely to deliver both better outcomes and a happier financial life over the long run?

Investment strategies

Is the US market as expensive as CAPE says?

Many investing ideas survive for decades. But that does not make them right. A famous valuation measure implies that US shares are dangerously expensive, but the evidence may point to a very different conclusion.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 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.