How debt agreements work under Australian bankruptcy law

When an individual can't pay their debts, bankruptcy is not the only formal option. A debt agreement is a legally binding arrangement under Part IX of the Bankruptcy Act 1966 (Cth) (the Act) between a debtor and their unsecured creditors. Instead of being made bankrupt, the debtor negotiates to pay a percentage of what they owe over a set period, and the creditors accept that reduced amount in full satisfaction of the debt.

The scheme exists because bankruptcy is a blunt instrument. Creditors often recover more from a workable repayment arrangement than from a bankruptcy administration, and the debtor avoids the harsher consequences of a sequestration order. Debt agreements are administered by the Australian Financial Security Authority (AFSA) and are aimed at people with relatively small unsecured debts, modest incomes and few assets.

This article walks through the mechanics: who is involved, who qualifies, how a proposal becomes an agreement, what protections it gives while it runs, and how it ends.

The players and what each one does

Four sets of actors drive a debt agreement, and each has a distinct role:

The debtor: the person who owes the money and proposes the agreement. A proposal must be made by one debtor only; it cannot be given jointly by two or more people (s 185C(2E) of the Bankruptcy Act 1966 (Cth)).
The debt agreement administrator: a person registered by AFSA as a debt agreement administrator (a registered trustee or the Official Trustee can also act). The administrator helps prepare the proposal, certifies that it is workable, lodges it with AFSA, collects the debtor's payments and distributes them to creditors.
The Official Receiver (AFSA): receives the proposal, checks that it complies, runs the vote among creditors, records the outcome on the National Personal Insolvency Index (NPII) and issues the certificate when the agreement is completed.
The creditors: the unsecured creditors vote on whether to accept the proposal. If it is accepted, they are bound by it and give up their right to pursue the debts it covers.

The debtor and the administrator are aligned in one respect: both want a proposal that creditors will accept. The administrator's fee is paid out of the amounts paid under the agreement, so an unworkable proposal hurts the administrator too. Creditors, by contrast, weigh whether the offer is better than the alternative of forcing bankruptcy.

Who can propose a debt agreement

Eligibility is set out in s 185C of the Act, and the dollar limits are indexed twice a year, on 20 March and 20 September. The key requirement is that the debtor must be insolvent, meaning unable to pay debts as they fall due. Beyond that, a proposal cannot be given if any of the following applies:

Previous insolvency: the debtor has been bankrupt, has been a party to a debt agreement, or has given a personal insolvency authority under Part X of the Act at any time in the previous 10 years (s 185C(4)(a)). An annulled bankruptcy does not count.
Debt ceiling: the debtor's unsecured debts total more than the threshold amount, currently $150,950.80 (s 185C(4)(b)). Unsecured debt includes the amount by which a debt exceeds any security given for it.
Asset ceiling: the value of the debtor's property that would be divisible among creditors in a bankruptcy is more than twice the threshold, currently $301,901.60 (s 185C(4)(c)).
Income ceiling: the debtor's after-tax income for the year starting at the time of the proposal is likely to exceed three-quarters of the threshold, currently $113,213.10 (s 185C(4)(d)).

The threshold amount itself is set by reference to seven times the single pension rate (s 185C(5)), which is why the figures move over time. A proposal must also be workable within the statutory term: the agreement cannot require payments beyond three years, or five years if the debtor owns an interest in their home that counts as their principal place of residence (s 185C(2AA) and (2AB)).

Building the proposal

A debtor cannot prepare a Part IX proposal on their own. They must engage a registered debt agreement administrator, who prepares the proposal with them. The proposal must be in the approved form and signed by the debtor, with the date of signing recorded (s 185C(2)).

The Act prescribes what the proposal must contain:

It must identify the debtor's property that is to be dealt with under the agreement and specify how it is to be dealt with, and it must authorise the administrator to deal with that property in the way specified.
It must provide that all provable debts rank equally and are paid proportionately if the amounts paid are insufficient to meet them in full, and that no creditor receives more than the amount of its debt.
It must deal with secured creditors: a secured creditor who does not realise its security while the agreement is in force counts only for the amount by which the debt exceeds the security's value.

The proposal must be accompanied by a statement of affairs and an explanatory statement in the approved form (s 185C(2B)), plus a certificate signed by the proposed administrator (s 185C(2D)). The certificate confirms that the administrator consents to act, has given the debtor the prescribed information about the consequences, has reasonable grounds to believe the debtor can discharge the obligations as they fall due, and believes the statement of affairs is complete.

That certificate is the scheme's quality control. It forces an independent check, before anything is lodged, on whether the proposed payments are realistic and whether the debtor's financial picture has been truthfully disclosed. The proposal must also disclose the administrator's fees and the AFSA lodgement fee, which are paid out of the amounts the debtor pays.

Lodgement, the act of bankruptcy and the freeze

Once the debtor has signed the proposal, the administrator must give it to the Official Receiver within 14 days (s 185E(2AA) of the Act). If it is late, AFSA will not accept it for processing.

Two consequences follow from lodging, and they are worth understanding before the proposal is signed.

First, giving a debt agreement proposal is an act of bankruptcy. AFSA's guidance is explicit that proposing a debt agreement is an act of bankruptcy and that creditors can use it to apply to the court to make the debtor bankrupt. This matters because the act does not disappear if the proposal fails: a rejected or lapsed proposal still leaves creditors holding that lever.

Second, if AFSA accepts the proposal for processing and records that acceptance on the NPII, a freeze applies while the vote runs. Creditors caught by the proposal cannot enforce a remedy against the debtor's person or property in respect of the frozen debts, and a sheriff must not execute against the debtor's property (s 185F of the Act). For a debtor facing garnishees or enforcement, this protection can start as soon as the proposal is accepted for processing.

How creditors vote

AFSA writes to each affected creditor known to it, providing a copy of the proposal, the explanatory statement and the administrator's certificate, and asking the creditor to indicate in writing whether the proposal should be accepted (s 185EA of the Act). Creditors respond by lodging a claim and vote form. The voting period is normally around five weeks.

The acceptance rule is straightforward: the proposal is accepted if a majority in value of the creditors who reply before the deadline state that it should be accepted (s 185EC(1)(b) of the Act). Votes from the proposed administrator and its related entities are disregarded. If no creditor replies at all, the proposal lapses (s 185G).

If the proposal is rejected, there is no agreement and no protection. Creditors can pursue their debts in the usual way, including applying to make the debtor bankrupt where the debt exceeds $10,000. An accepted proposal becomes a debt agreement, and AFSA records it on the NPII.

What the agreement does while it is running

While a debt agreement is in force and recorded on the NPII, the Act restrains creditors. A creditor cannot present a creditor's petition against the debtor, cannot proceed further with a petition already presented, and cannot enforce a remedy against the debtor's person or property or start or take a fresh step in legal proceedings in respect of a provable debt (s 185K of the Act). A sheriff must not execute against the debtor's property. The main exceptions are maintenance obligations and liabilities under proceeds of crime laws.

The restraint is on unsecured creditors' rights in respect of provable debts. Secured creditors keep their rights over the secured asset: if the debtor falls behind on the secured loan, the secured creditor can still seize and sell the asset, and the debtor remains liable for any shortfall.

During the agreement, the debtor makes payments to the administrator, not to individual creditors. The administrator deducts its fees and AFSA charges and distributes the balance to creditors in line with the agreement, on the proportional basis the proposal set out. The debtor must inform the administrator of changes in circumstances that affect the ability to pay.

The agreement is not set in stone. It can be varied by a proposal that goes through the same process as the original: creditors vote, and the variation is accepted if a majority in value of those who reply agree (s 185MC of the Act). Extending the term to up to five years in cases of substantial and unforeseen change is one use of this variation route.

How a debt agreement ends

A debt agreement ends in one of two broad ways: it is completed, or it is terminated.

Completion

A debt agreement ends when all the obligations it created have been discharged (s 185N of the Act). On completion, the debtor is released from the provable debts from which they would have been released if discharged from bankruptcy immediately after the proposal was accepted (s 185NA). The Official Receiver must issue a certificate of the end of the agreement, and any surplus property that was subject to the agreement but not required to be distributed returns to the debtor. The release does not extend to guarantors or to people who owe the same debt jointly with the debtor, and it ceases to operate if the court later declares the agreement void.

Termination

Termination is different, and the debts are not released. The Act provides four routes:

A written proposal to terminate, made by the debtor or a creditor and accepted by a majority in value of the creditors who reply (s 185P of the Act).
An order of the court (s 185Q): The court can terminate where the debtor has failed to carry out a term of the agreement and it is in the creditors' interest to terminate, where carrying out the agreement would cause injustice or undue delay to the creditors or the debtor, or for any other reason where termination is in the creditors' interest. A creditor can combine the application with an application for a sequestration order, so the court can move straight from termination to bankruptcy.
A designated six-month arrears default: the administrator notifies AFSA, and AFSA declares the agreement terminated (s 185QA).
The debtor becoming bankrupt, which terminates the agreement automatically (s 185R).

Where it bites: the consequences to weigh

A debt agreement is not a clean slate. It has consequences that a debtor should weigh before proposing:

The NPII listing: The outcome appears on the public National Personal Insolvency Index. A completed agreement stays listed for five years from the date it was made or the date the obligations were completed, whichever is later. A terminated or void agreement is removed within one month after the later of five years after it was made or two years after the court order. Even a withdrawn, rejected, cancelled or lapsed proposal stays on the index for one year.
Credit reporting: The agreement can appear on credit reporting agency records for up to five years, and in some cases longer.
Credit limits: While subject to a debt agreement, obtaining credit above the indexed limit, currently $7,457, without disclosing the debt agreement can be a criminal offence in certain circumstances.
Business dealings: A debtor who trades under a business name that is not their own must tell the people they deal with that they are in a debt agreement.
Debts that survive: The release covers most unsecured debts but not all debts. Secured debts, and some statutory and other obligations, are not released.

Where a lawyer fits in

The decisions that determine whether a debt agreement works are made before the proposal is signed. An insolvency lawyer can assess eligibility against the current thresholds, compare the agreement with the alternatives (bankruptcy or a Part X personal insolvency agreement), and stress-test whether the proposed payment terms are realistic enough to pass both the administrator's certificate and a creditor vote.

A lawyer also has a role later in the process: advising on variations when circumstances change, dealing with disputes with the administrator or with creditor enforcement, and mapping the options when the agreement is heading for termination, including whether bankruptcy has become unavoidable and what that means for the debtor's assets, income and business.

Why the first lodgement is the one that counts

The single point where most value and most risk concentrate is the moment the proposal is signed and lodged. From that point the 14-day lodgement clock runs, the proposal becomes an act of bankruptcy, and a failed vote leaves creditors holding that act with a pathway to bankruptcy on a debt above $10,000. Every element of eligibility and every term of the offer should be checked against the current indexed thresholds and tested for realism before anything is signed.

Getting that right is not expensive relative to the consequences of getting it wrong. A free initial consultation with an insolvency lawyer, or free advice from a financial counsellor through the National Debt Helpline, can confirm whether a debt agreement is available, workable and the right choice, before the debtor commits to a course that binds them for up to five years.